SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
__X__ Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934 for the
Quarterly Period Ended December 31, 1997
or
_____ Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934 for the
transition period from ________ to __________.
Commission File Number 0-19794
Advantage Bancorp, Inc.
(Exact name of registrant as specified in its charter)
Wisconsin 39-1714425
(State of Incorporation) (I.R.S. Employer
Identification No.)
5935 7th Avenue
Kenosha, Wisconsin 53140
(Address of principal executive offices) (Zip Code)
Registrant's telephone number: (414) 658-4861
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that
the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No
The number of shares outstanding of the issuer's common stock, par value
$.01 per share, was 3,239,912 at January 26, 1998.
<PAGE>
ADVANTAGE BANCORP, INC. AND SUBSIDIARIES
FORM 10-Q
Part I. Financial Information
Item 1 Financial Statements (unaudited):
Consolidated Statements of Financial Condition as of
December 31, 1997 and September 30, 1997 . . . . . . . 3
Consolidated Statements of Income for the Three Months
ended December 31, 1997 and 1996 . . . . . . . . . . . 4
Consolidated Statements of Cash Flows for the Three
Months ended December 31, 1997 and 1996 . . . . . . . . 5
Notes to Consolidated Financial Statements . . . . . . 7
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . 8
Item 3 Quantitative and Qualitative Disclosures About Market
Risk . . . . . . . . . . . . . . . . . . . . . . . . . 13
Part II. Other Information
Item 1 Legal Proceedings . . . . . . . . . . . . . . . . . . . 13
Item 2 Changes in Securities and Use of Proceeds . . . . . . . 13
Item 3 Defaults Upon Senior Securities . . . . . . . . . . . . 13
Item 4 Submission of Matters to a Vote of Security Holders . . 13
Item 5 Other Information . . . . . . . . . . . . . . . . . . . 13
Item 6 Exhibits and Reports on Form 8-K . . . . . . . . . . . 13
Signature Page . . . . . . . . . . . . . . . . . . . . 13
<PAGE>
<TABLE>
ADVANTAGE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(unaudited)
<CAPTION>
December 31 September 30
ASSETS 1997 1997
<S> <C> <C>
Cash and cash equivalents (includes interest-earning deposits of $10,850,839-
Dec. 31, 1997; $17,714,761 - Sept. 30, 1997) . . . . . . . . . . . . . . . . $ 26,794,882 $42,908,363
Certificates of deposit (approximates market value) . . . . . . . . . . . . . 9,202 508,664
U.S. government and agency securities available for sale (at market value) . . 25,973,144 19,956,301
Mortgage-backed securities available for sale (at market value) . . . . . . . . 109,881,844 117,332,556
Mortgage-backed securities held to maturity (market value of $6,840,926
- Dec. 31, 1997; $8,421,309 - Sept. 30, 1997) . . . . . . . . . . . . . . . 6,787,473 8,321,934
Mortgage-related securities available for sale (at market value) . . . . . . . 13,617,418 14,105,718
Mortgage-related securities held to maturity (market value of $243,714,573
- Dec. 31,1997; $222,150,681 - Sept. 30, 1997) . . . . . . . . . . . . . . 239,810,336 218,450,643
Marketable equity securities (at market value) . . . . . . . . . . . . . . . . 11,022,904 9,281,261
Loans held for sale (at lower of cost or market) . . . . . . . . . . . . . . . 5,321,503 4,907,212
Loans receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 545,512,057 560,352,039
Foreclosed properties and properties subject to foreclosure . . . . . . . . . . 2,006,215 1,792,677
Investments in and advances to unconsolidated partnerships . . . . . . . . . . 7,110,814 7,204,387
Office properties and equipment . . . . . . . . . . . . . . . . . . . . . . . 12,604,428 12,756,398
Federal Home Loan Bank stock at cost . . . . . . . . . . . . . . . . . . . . 9,368,000 8,918,000
Accrued interest on investments and mortgage-related securities . . . . . . . . 2,648,396 2,515,698
Intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,590,731 5,860,052
Prepaid expenses and other assets . . . . . . . . . . . . . . . . . . . . . . . 2,466,917 2,290,536
-------------- --------------
$1,026,526,264 $1,037,462,439
============== ==============
LIABILITIES
Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $660,760,664 $ 670,775,364
Notes payable to Federal Home Loan Bank . . . . . . . . . . . . . . . . . . . 186,360,000 176,360,000
Securities sold under agreements to repurchase . . . . . . . . . . . . . . . . 62,485,435 72,115,303
Advance payments by borrowers for taxes and insurance . . . . . . . . . . . . . 1,371,448 7,187,361
Accrued interest on deposit accounts . . . . . . . . . . . . . . . . . . . . . 1,696,185 2,825,851
Accrued interest on notes payable and other borrowings . . . . . . . . . . . . 2,851,745 2,607,869
Deferred income tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,786,218 2,226,660
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,922,551 2,898,434
Accrued income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,422,218 1,461,468
------------- -------------
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . 923,656,464 938,458,310
STOCKHOLDERS' EQUITY
Serial preferred stock, $.01 par value; authorized 5,000,000 shares; none
outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - -
Common stock, $.01 par value; authorized 10,000,000 shares;
issued 4,124,780 shares; outstanding shares: 3,235,653 - Dec. 31, 1997;
3,235,830 - Sept. 30, 1997 . . . . . . . . . . . . . . . . . . . . . . . . . 33,000 33,000
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . 38,536,160 38,536,160
Loan to Employee Stock Ownership Plan . . . . . . . . . . . . . . . . . . . . . (1,372,470) (1,405,470)
Unearned restricted stock awarded . . . . . . . . . . . . . . . . . . . . . . . (791,827) (839,055)
Treasury stock, at cost (889,127 shares - Dec. 31, 1997; 888,950 shares -
Sept. 30, 1997) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (21,361,387) (21,319,434)
Unrealized gain on securities available for sale - net . . . . . . . . . . . . 3,518,652 2,667,084
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84,307,672 81,331,844
------------- -------------
Total stockholders' equity . . . . . . . . . . . . . . . . . . . . . . . . 102,869,800 99,004,129
------------- -------------
$1,026,526,264 $1,037,462,439
============= =============
See accompanying notes to unaudited consolidated financial statements.
</TABLE>
<PAGE>
ADVANTAGE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
Three Months Ended December 31
1997 1996
Interest income:
Interest on loans . . . . . . . . . . . . . $12,069,133 $12,047,448
Interest on mortgage-related securities . . 6,384,690 6,109,856
Interest and dividends on investment
securities . . . . . . . . . . . . . . . . 653,156 663,013
Other interest income . . . . . . . . . . . 354,618 330,392
--------- ----------
Total interest income . . . . . . . . . . . 19,461,597 19,150,709
Interest expense:
Interest on deposits . . . . . . . . . . . 7,550,951 7,899,191
Interest on notes payable and other
borrowings . . . . . . . . . . . . . . . . 3,995,954 3,553,533
---------- ----------
Total interest expense . . . . . . . . . . 11,546,905 11,452,724
---------- ----------
Net interest income . . . . . . . . . . . . . 7,914,692 7,697,985
Provision for losses on loans . . . . . . . . 100,000 80,000
---------- ----------
Net interest income after provision for
losses on loans . . . . . . . . . . . . . . 7,814,692 7,617,985
Non-interest income:
Loan fees and service charges . . . . . . . 111,082 170,420
Mortgage brokerage commissions . . . . . 514,374 471,137
Service charges on deposit accounts . . . . 763,488 699,247
Gain on sales of loans net . . . . . . . 390,459 203,691
Gain on sale of securities available for
sale . . . . . . . . . . . . . . . . . . . 479,821 218,116
Equity in net income of unconsolidated
partnerships . . . . . . . . . . . . . . . 76,017 44,500
Other . . . . . . . . . . . . . . . . . . . 356,885 266,126
---------- ----------
Total non-interest income . . . . . . . . . 2,692,126 2,073,237
Non-interest expenses:
Compensation and employee benefits . . . . 2,684,686 2,708,882
Occupancy . . . . . . . . . . . . . . . . . 766,643 814,668
Data processing . . . . . . . . . . . . . . 177,175 181,154
Advertising . . . . . . . . . . . . . . . . 157,389 210,608
Federal deposit insurance premiums . . . . 105,322 315,963
Amortization of intangible assets . . . . . 269,321 266,625
Professional services . . . . . . . . . . . 258,291 113,668
Other . . . . . . . . . . . . . . . . . . . 913,773 1,182,356
---------- ----------
Total non-interest expenses . . . . . . . . 5,332,600 5,793,924
---------- ----------
Income before income taxes . . . . . . . . . 5,174,218 3,897,298
Income taxes . . . . . . . . . . . . . . . . 1,870,295 1,444,199
---------- ----------
Net income . . . . . . . . . . . . . . . . . $3,303,923 $2,453,099
========== ==========
Basic earnings per share . . . . . . . . . . $1.04 $0.77
========== ==========
Diluted earnings per share. . . . . . . . . . $0.98 $0.72
========== ==========
See accompanying notes to unaudited consolidated financial statements.
<PAGE>
<TABLE>
ADVANTAGE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<CAPTION>
Three Months Ended December 31,
1997 1996
<S> <C> <C>
Operating activities:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,303,923 $2,453,099
Provision for losses on loans . . . . . . . . . . . . . . . . . 100,000 80,000
Provision for depreciation . . . . . . . . . . . . . . . . . . 370,152 328,712
Amortization of intangible assets . . . . . . . . . . . . . . . 269,321 266,625
Equity in net income of unconsolidated partnerships . . . . . . (76,017) (44,500)
Net loss on sale or writedown of foreclosed property . . . . . 15,255 -
Net amortization of mortgage-related securities discounts and
premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . (138,969) (185,912)
Increase in accrued income taxes . . . . . . . . . . . . . . . 960,750 1,505,451
Increase in interest receivable . . . . . . . . . . . . . . . . (120,667) (411,476)
Decrease in accrued FDIC SAIF special assessment . . . . . . . - (4,434,589)
Decrease in interest payable . . . . . . . . . . . . . . . . . (885,790) (389,380)
Loans originated for sale . . . . . . . . . . . . . . . . . . . (32,881,785) (11,367,545)
Proceeds from sales of loans . . . . . . . . . . . . . . . . . 32,467,494 10,861,805
Amortization of cost of restricted stock benefit plan . . . . . 47,228 -
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (576,916) (1,018,373)
----------- ----------
Net cash provided by (used in) operating activities . . . . . . . 2,853,979 (2,356,083)
Investing activities:
Proceeds from maturities of certificates of deposit . . . . . . 500,000 -
Proceeds from sales and maturities of U.S. government and
agency securities available for sale . . . . . . . . . . . . . 2,000,000 3,500,000
Proceeds from sales of marketable equity securities . . . . . . 507,271 488,711
Purchases of FHLB stock . . . . . . . . . . . . . . . . . . . . (450,000) -
Loans transferred to held for sale and sold . . . . . . . . . . 14,347,993 -
Purchases of U.S. agency securities available for sale . . . . (7,993,750) -
Purchases of mortgage-related securities held to maturity . . . (34,822,995) (6,697,476)
Principal repayments on mortgage-related securities held to
maturity . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,627,283 4,025,226
Principal repayments on mortgage backed securities held to
maturity . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,588,762 483,353
Loan principal repayments . . . . . . . . . . . . . . . . . . . 58,332,638 59,897,014
Loans originated . . . . . . . . . . . . . . . . . . . . . . . (57,851,347) (67,768,809)
Purchases of marketable equity securities . . . . . . . . . . . (1,009,546) (871,716)
Principal repayments on mortgage-backed securities available
for sale . . . . . . . . . . . . . . . . . . . . . . . . . . 7,643,415 6,432,972
Principal repayments on mortgage-related securities available
for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . 364,947 385,854
Proceeds from sale of foreclosed properties . . . . . . . . . . 126,990 500
Principal repayments on loans to unconsolidated partnership . . 63,765 32,609
Cash distributions from unconsolidated partnerships . . . . . . 105,825 107,263
Additions to office properties and equipment . . . . . . . . . (218,182) (79,007)
--------- ----------
Net cash used in investing activities . . . . . . . . . . . . . . (3,136,931) (63,506)
Financing activities:
Net increase (decrease) in deposits . . . . . . . . . . . . . . (10,014,700) 9,647,924
Proceeds from notes payable to the Federal Home Loan Bank . . . 11,000,000 5,000,000
Repayment of notes payable to the Federal Home Loan Bank . . . (1,000,000) (27,400,000)
Net increase (decrease) in securities sold under agreements to
repurchase . . . . . . . . . . . . . . . . . . . . . . . . . . (9,629,868) 32,562,404
Net decrease in advance payments by borrowers for taxes and
insurance . . . . . . . . . . . . . . . . . . . . . . . . . . (5,815,913) (2,550,587)
Purchases of treasury stock . . . . . . . . . . . . . . . . . . (52,915) (2,300,950)
Dividends paid . . . . . . . . . . . . . . . . . . . . . . . . (323,583) (263,117)
Proceeds from exercise of stock options . . . . . . . . . . . . 6,450 169,385
---------- ----------
Net cash provided by (used in) financing activities . . . . . . . (15,830,529) 14,865,059
---------- ----------
Increase (decrease) in cash and cash equivalents . . . . . . . . (16,113,481) 12,445,470
Cash and cash equivalents:
At beginning of period . . . . . . . . . . . . . . . . . . . . 42,908,363 35,445,646
---------- ----------
At end of period . . . . . . . . . . . . . . . . . . . . . . . $26,794,882 $47,891,116
========== ==========
Supplemental disclosures of cash flow information:
Interest paid (including amounts credited to deposits) . . . . $ 12,432,695 $ 11,503,997
Income taxes paid (refunded) . . . . . . . . . . . . . . . . . 909,545 (61,252)
Supplemental schedule of noncash investing activities:
Loans receivable transferred to foreclosed properties . . . . . 355,703 1,020,328
See accompanying notes to unaudited consolidated financial statements.
</TABLE>
<PAGE>
ADVANTAGE BANCORP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
Three Months Ended December 31, 1997
(1) Basis of Presentation
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles
("GAAP") for interim financial information and with the instructions to
Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not
include all of the information and footnotes required by GAAP for complete
financial statements. In the opinion of management, all adjustments
necessary for a fair presentation have been included. All adjustments are
of a normal recurring nature. The unaudited consolidated financial
statements presented herein should be read in conjunction with the audited
consolidated financial statements and related notes thereto for the fiscal
year ended September 30, 1997 included in the Annual Report on Form 10-K
as filed by Advantage Bancorp, Inc. (the "Company") with the Securities
and Exchange Commission.
The results of operations and other data for the three months ended
December 31, 1997 are not necessarily indicative of results that may be
expected for the entire fiscal year ending September 30, 1998.
The unaudited consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiary, Advantage Bank, FSB (the
"Bank"), and the Bank's wholly-owned subsidiaries, Advantage Financial
Center, Inc. (dissolved and liquidated into the Bank as of October 31,
1996), Advantage Real Estate Services, Inc., Advantage Investments, Inc.
and Advantage Financial Services and Insurance, Inc.. All material
intercompany accounts and transactions have been eliminated in
consolidation.
(2) Earnings Per Share Information
Earnings per share of common stock have been computed based on the
consolidated net income and weighted average shares of outstanding stock
of the Company.
Three Months Ended December 31
1997 1996
Net income . . . . . . . . . . . . $ 3,303,923 $2,453,099
=========== ==========
Weighted average shares outstanding
(denominator for basic earnings per
share) . . . . . . . . . . . . . . 3,178,264 3,192,788
Net effect of dilutive stock options
based on the treasury stock method
using average market price . . . . 194,497 193,692
----------- ----------
Total weighted average common shares
and equivalents (denominator for
dilutive earnings per share) . . . 3,372,761 3,386,480
=========== ==========
Basic earnings per share . . . . . $1.04 $0.77
=========== ==========
Diluted earnings per share . . . . $0.98 $0.72
=========== ==========
(3) Commitments and Contingencies
Commitments to originate mortgage loans of $6.5 million at December 31,
1997 represent amounts which the Bank plans to fund within the normal
commitment period of thirty to ninety days. Commitments to sell fixed-
rate mortgage loans were $3.0 million as of December 31, 1997. The Bank
had unissued credit under existing home equity line-of-credit loans and
commercial line-of-credit loans of $37.3 million and $29.0 million,
respectively, as of December 31, 1997.
(4) Stockholders' Equity
Under federal law and regulations, the Bank is required to meet certain
tangible, core, and risk-based capital requirements. Tangible capital
generally consists of stockholders' equity minus certain intangible assets
and investments in and advances to "nonincludable" subsidiaries and joint
ventures. Core capital generally consists of tangible capital plus
qualifying intangible assets. The risk-based capital requirements address
credit risk related to both recorded assets and off-balance sheet
commitments and obligations. Risk-weighted assets, for regulatory
measurement purposes, at December 31, 1997, totaled $479,100,000.
The following table summarizes the Bank's capital amounts and capital
ratios, and the capital ratios required by federal law and regulations at
December 31, 1997 (dollars in thousands):
<TABLE>
<CAPTION>
Actual Required Actual Required
Amount Amount Excess Ratio Ratio Excess
<S> <C> <C> <C> <C> <C> <C>
Tangible capital $65,925 $15,035 $50,890 6.58% 1.50% 5.08%
Core capital 65,925 30,070 35,855 6.58 3.00 3.58
Risk-based capital 71,743 38,328 33,415 14.97 8.00 6.97
</TABLE>
The Bank's regulatory capital as of December 31, 1997 was as follows (in
thousands):
Tangible Core Risk-Based
Capital Capital Capital
Total consolidated stockholders'
equity . . . . . . . . . . . . . . . $102,870 $102,870 $102,870
Deduct unrealized gain on securities
available for sale (Bank only) . . . . (242) (242) (242)
Less parent company stockholders'
equity not includable
in regulatory capital . . . . . . . . (33,028) (33,028) (33,028)
Loan loss allowances (limited to 1% of
loans) . . . . . . . . . . . . . . . - - 5,818
Nonallowable intangibles . . . . . . . (5,742) (5,742) (5,742)
Income tax effect of intangibles . . . 2,067 2,067 2,067
--------- -------- --------
Regulatory capital . . . . . . . . . $65,925 $65,925 $71,743
========= ======== ========
(5) Reclassifications
Certain amounts in the prior year consolidated financial statements have
been reclassified to conform with the fiscal 1998 presentation.
ADVANTAGE BANCORP, INC. AND SUBSIDIARIES
Item 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations
Pending Merger
On November 3, 1997, the Company entered into an Agreement and Plan of
Merger (the "Merger Agreement") with Marshall & Ilsley Corporation, a
Wisconsin corporation ("M&I"), providing for the merger of the Company
with and into M&I (the "Merger"). The Merger Agreement provides that each
outstanding share of common stock, $.01 par value, of the Company
("Company Common Stock"), will be converted (other than certain shares
that will be cancelled as specified in the Merger Agreement) into the
right to receive 1.2 shares of common stock, $1.00 par value, of M&I ("M&I
Common Stock"), subject to adjustment in the event that the average
closing price of M&I Common Stock for the ten consecutive trading days
preceding the fifth business day prior to the effective time of the Merger
is above $61.67 per share or below $46.67 per share. The Merger is
structured as a pooling-of-interests for financial accounting purposes and
as a tax-free reorganization for shareholders of the Company. Completion
of the Merger is subject to certain conditions, including approval by the
shareholders of the Company, approval by the Federal Reserve Board, and
other conditions to closing customary in transactions of this type.
Management currently anticipates that the Merger will be completed on or
about April 1, 1998. A special meeting of Company shareholders to approve
the Merger Agreement is scheduled for February 5, 1998.
General
The Company's only active business is the business of the Bank. The
Bank's principal business is attracting retail deposits from the general
public and using such deposits to originate residential loans in its
primary market area. The Bank also originates commercial real estate,
multi-family, construction, consumer and commercial business loans. In
addition, the Bank also invests in mortgage-related securities, investment
securities, certificates of deposit, short-term liquid assets and real
estate. Finally, the Bank offers, on an agency basis, certain securities
brokerage services and insurance products to its customers. The Bank
operates out of 15 locations. It has seven full service offices located
in Kenosha, Wisconsin and full service branch offices located in Lake
Geneva, Paddock Lake, and Racine, Wisconsin; and Burbank, Waukegan, North
Chicago, Tinley Park and Zion, Illinois. The Bank also operates loan
origination facilities in Kenosha, Racine and Wauwatosa, Wisconsin and
Grayslake and Naperville, Illinois. The Bank owns three service
corporations, Advantage Real Estate Services, Inc., which owns interests
in three real estate partnerships, Advantage Investments, Inc., which
invests in mortgage-related securities and Advantage Financial Services
and Insurance, Inc., which is engaged in the business of selling non-
insured investments and insurance and providing financial planning.
Deposits of the Bank are insured up to the maximum allowable amount by the
Federal Deposit Insurance Corporation (the "FDIC"). The Bank is subject
to regulation by the Office of Thrift Supervision ("OTS") and the FDIC.
The Company's results of operations are dependent primarily on net
interest income, which is the difference between the interest income
earned on its loan, mortgage-related securities and investment portfolios
and its cost of funds, consisting of interest paid on its deposits and
borrowings. When interest-bearing liabilities mature or reprice more
quickly than interest-earning assets in a given period, a significant
increase in market rates of interest could adversely affect net interest
income. Conversely, when interest-earning assets mature or reprice more
quickly than interest-bearing liabilities, falling interest rates could
result in a decrease in net interest income. In managing its asset-
liability mix, the Company intends to continue to emphasize, subject to
future conditions, the origination of adjustable rate mortgage loans and
the purchase of short-term and intermediate-term mortgage-related
securities and other assets.
The Company's results of operations are also significantly affected by
general economic and competitive conditions,
particularly changes in market interest rates, government policies and
actions of regulatory authorities.
Liquidity and Capital Resources
The Company's most liquid assets are cash and cash equivalents, which
include investments in highly liquid, short-term investments. The level
of these assets is dependent on the Company's operating, financing and
investing activities during any given period. Cash and cash equivalents
totalled $26.8 million and $47.9 million as of December 31, 1997 and 1996,
respectively.
The Company's primary sources of funds are deposits, proceeds from
principal and interest payments on loans and mortgage-related securities,
notes payable to Federal Home Loan Bank of Chicago ("FHLB") and reverse
repurchase agreements. While maturities and scheduled amortization of
loans and mortgage-related securities are a predictable source of funds,
deposit flows and mortgage prepayments are greatly influenced by general
interest rates, economic conditions and competition.
The primary investing activity of the Company is the origination of
mortgage and other loans. During the three months ended December 31, 1997
and 1996, the Company originated and purchased loans (including loans
originated for sale) in the amounts of $90.7 million and $79.1 million,
respectively. Other investing activities include the purchase of
mortgage-related securities (including securities available for sale)
which totalled $34.8 million and $6.7 million for the three months ended
December 31, 1997 and 1996, respectively.
During the three months ended December 31, 1997 and 1996, these activities
were funded primarily by (1) principal repayments on loans and mortgage-
related securities totalling $81.6 million and $71.3 million,
respectively, (2) proceeds from sales of loans of $47.2 million and $11.4
million, respectively, and (3) net proceeds from borrowings of $400,000
and $10.2 million, respectively. For the three months ended December 31,
1996, these activities were also funded by an increase of $9.6 million in
deposits (deposits decreased by $10.0 million for the three months ended
December 31, 1997).
The Bank is required to maintain minimum levels of liquid assets as
defined by OTS regulations. This requirement, which may be varied at the
direction of the OTS depending upon economic conditions and deposit flows,
is based upon a percentage of deposits and short-term borrowings. The
current required ratio is 4.0%. The Bank's liquidity ratio was 6.7% for
the month of December 1997. Excess funds are generally invested in short-
term investments such as federal funds. In the event that the Bank should
require funds beyond its ability to generate them internally, additional
sources of funds are available through the use of FHLB advances,
repurchase agreements, and brokered deposits.
As of December 31, 1997, the Bank's capital exceeded all capital
requirements of the OTS as mandated by federal law and regulations. See
Note 4 of the Notes to Unaudited Consolidated Financial Statements.
Changes in Financial Condition
Total assets decreased $10.0 million from $1.037 billion at September 30,
1997 to $1.027 billion at December 31, 1997.
Loans receivable decreased $14.9 million from $560.4 million as of
September 30, 1997 to $545.5 million as of December 31, 1997. This
decrease was due primarily to a decline in market interest rates which
resulted in a decrease in the origination of adjustable-rate mortgages
(which are held in the Company's loan portfolio) and an increase in the
origination of fixed rate loans (which are sold by the Company). The
decline in market interest rates has also resulted in an increase in the
number of customers exercising their option to convert their adjustable-
rate mortgages to fixed rate loans which are thereafter sold by the
Company.
Mortgage-related securities increased $11.9 million from $358.2 million as
of September 30, 1997 to $370.1 million at December 31, 1997. This
increase relates to purchases of mortgage-related securities using funds
generated by the repayment of oustanding loans receivable.
Deposits decreased $10.0 million from $670.8 million at September 30, 1997
to $660.8 million at December 31, 1997. This decrease relates to
increased competition for deposits and a decrease in brokered deposits
from $74.6 million as of September 30, 1997 to $69.7 million as of
December 31, 1997.
Notes payable to the FHLB Increased $10.0 million from $176.4 million as
of September 30, 1997 to $186.4 million as of December 31, 1997. This
increase was offset by a $9.6 million decrease in securities sold under
agreements to repurchase during the same period.
Stockholders' equity increased from $99.0 million as of September 30, 1997
to $102.9 million as of December 31, 1997. Stockholders' equity increased
during this period as a result of: (1) net income of $3.3 million, and
(2) an increase of $852,000 in the unrealized gain (net of income tax
effect) relating to securities available for sale. The increase in
stockholders' equity was offset by the payment of $324,000 in cash
dividends. The Company suspended its repurchase program indefinitely
during the quarter ended June 30, 1997 due to its consideration of
various strategic alternatives including the possible sale of the Company.
The acquisition of treasury stock during the quarter ended December 31, 1997
relates only to the reacquisition of stock from employees to cover payroll
tax withholding due from these employees upon vesting of this stock under
the Company's Bank Incentive Plan.
Asset Quality
The Company and the Bank regularly review assets to determine proper
valuation. Management's monitoring of the asset portfolio includes a
review of historical loss experience, known and inherent risks in the
portfolio, the value of any underlying collateral, and prospective
economic conditions. Loans are placed on nonaccrual status when loans are
contractually delinquent more than 90 days or earlier if warranted based
on management's assessment of the loan. When loans are placed on
nonaccrual status, interest previously accrued is reversed with a charge
to interest income.
The following table sets forth information regarding the Company's
nonaccrual loans and foreclosed properties at the dates indicated (dollars
in thousands). All loans which are contractually past due more than 90
days are included in nonaccrual loans.
<TABLE>
<CAPTION>
Dec.31 Sept. 30 June 30 Mar. 31 Dec. 31
1997 1997 1997 1997 1996
<S> <C> <C> <C> <C> <C>
Nonperforming loans:
One- to four-family . . . $1,797 $1,796 $1,376 $2,463 $1,851
Commercial real estate . . 795 646 486 469 1,138
Construction and land . - 283 - - -
Commercial business . . . 69 51 24 23 23
Consumer and other . . . . 131 385 94 121 271
------- ------ ------- ------ ------
Total non-performing loans . $2,792 $3,161 $1,980 $3,076 $3,283
======= ====== ======= ====== ======
Foreclosed properties:
One-to four-family . . . . $1,166 $954 $1,715 $1,771 $1,452
Commercial real estate . . 840 839 840 835 971
Construction and land . . - - - - -
------- ------- ------ ------ -------
Total foreclosed
properties . . . . . . . . $2,006 $1,793 $2,555 $2,606 $2,423
======= ======= ====== ====== =======
Total non-performing assets . $4,798 $4,954 $4,535 $5,682 $5,706
======= ======= ====== ====== =======
Non-performing loans to total
loans . . . . . . . . . . . . 0.51% 0.48% 0.35% 0.54% 0.57%
======= ======= ====== ====== =======
Non-performing assets to
total assets . . . . . . . . 0.47% 0.56% 0.44% 0.56% 0.55%
======= ======= ====== ====== =======
Allowance for Losses on Loans
The following table sets forth an analysis of the Company's allowance for
losses on loans (dollars in thousands):
Three Months Year Year
Ended Ended Ended
Dec 31, Sept. 30, Sept. 30,
1997 1997 1996
Balance at beginning of period . . . . . . $5,797 $ 5,773 $ 5,271
Additions charged to operations: -
One- to four-family . . . . . . . . . . - - -
Multi-family and commercial real estate - - -
Consumer . . . . . . . . . . . . . . . . 100 150 -
Commercial business . . . . . . . . . . - 210 480
------- ------- --------
100 360 480
Recoveries:
One- to four-family. . . . . . . . . . . 24 26 40
Consumer . . . . . . . . . . . . . . . . 16 1 21
Commercial business . . . . . . . . . . - 444 1
-------- ------- --------
40 471 62
Charge-offs:
One- to four-family . . . . . . . . . . (14) (447) (29)
Multi-family and commercial real estate . - - -
Consumer . . . . . . . . . . . . . . . . (66) (261) (8)
Commercial business . . . . . . . . . . (24) (99) (3)
-------- ------ -------
(104) (807) (40)
-------- ------ -------
Net recoveries (charge-offs) . . . . . . . (64) (336) 22
-------- ------- -------
Balance at end of period . . . . . . . . . $5,833 $5,797 $5,773
======== ======= =======
Ratio of net charge-offs to average loans
outstanding during the period (annualized) 0.05% 0.06% 0.00%
======== ======= =======
Allowance for losses on loans to non-
performing loans at end of the period . . . 208.9% 183.4% 169.1%
======== ======= =======
Allowance for losses on loans to total
loans at end of the period . . . . . . . . 1.06% 1.03% 1.03%
======== ======= =======
While management believes that it uses the best information available to
determine the allowance for losses on loans, unforeseen changes in market
conditions could result in adjustments and net earnings could be
significantly affected if circumstances differ substantially from the
assumptions used in determining the allowance.
Results of Operations - Comparison of the Three Months Ended December 31,
1997 and 1996
General
Net income for the three months ended December 31, 1997 increased 35% to
$3.30 million from $2.45 million for the comparable 1996 quarter.
Net Interest Income
The following table presents certain information related to net interest
income (dollars in thousands):
For the Three Months
Ended December 31
1997 1996
Average interest-earning assets . . . . . . . . . . . $992,312 $ 977,136
Total interest income . . . . . . . . . . . . . . . . 19,462 19,151
Average yield on interest-earning assets . . . . . . 7.85% 7.84%
Average interest-bearing liabilities . . . . . . . . $918,372 $ 918,558
Total interest expense . . . . . . . . . . . . . . . 11,547 11,453
Average rate on interest-bearing liabilities . . . . 5.03% 4.99%
Average net earning assets . . . . . . . . . . . . . $73,940 $58,578
Net interest income before provision for loan losses 7,915 7,698
Net interest rate spread . . . . . . . . . . . . . . 2.82% 2.85%
Net interest margin (net interest income divided
by average interest-earning assets) . . . . . . . 3.19% 3.15%
Net interest income before provision for loan losses was $7.92 million for
the three months ended December 31, 1997, compared with $7.70 million for
the comparable 1996 quarter, an increase of $200,000. This increase was
primarily due to a $15.4 million increase in average net earning assets
for the 1997 quarter compared to the 1996 quarter.
The net interest rate spread decreased from 2.85% for the 1996 quarter to
2.82% for the 1997 quarter. This decrease represents the offsetting
effects of (1) a decrease in spread relating to an increase in competition
for first mortgage residential loans and deposit accounts, and (2) an
increase in spread relating to the Company's strategy of increasing its
commercial and consumer loans. Total consumer loans (which are primarily
second mortgage residential loans which carry higher interest rates than
first mortgage residential loans) increased by 40% from $58.88 million as
of December 31, 1996 to $82.44 million as of December 31, 1997. Net
interest rate spread could continue to decrease in the future but it is
the Company's strategy to maintain its interest rate margin by increasing
its higher-yielding commercial and consumer loans and decreasing its first
mortgage residential loans and mortgage-related securities. While
commercial and consumer loans earn higher yields than mortgage-related
securities, they also have higher credit risk. While the Company's credit
losses on these loans have been minimal in the past, there can be no
assurance that such losses will remain minimal in the future.
Provision for Losses on Loans
The provision for losses on loans was $100,000 for the three months ended
December 31, 1997 compared to $80,000 for the comparable 1996 quarter. The
Company's ratio of allowance for losses on loans to nonperforming loans
increased to 208.9% as of December 31, 1997 compared to 175.6% as of
December 31, 1996.
Non-interest Income
Non-interest income increased 30% to $2.69 million for the three months
ended December 31, 1997 compared to $2.07 million for the comparable 1996
quarter. This increase was due to a $262,000 increase in gain on sale of
securities available for sale and a $186,000 increase in gains on sales of
loans. The increase in gains on sales of loans relates primarily to a
decline in market interest rates which resulted in an increase in
origination of fixed rate loans which are sold by the Company and an
increase in the number of customers exercising their option to convert
their adjustable-rate mortgages to fixed rate loans which are sold by the
Company. Excluding the gains on sales of loans and securities, non-
interest income increased 10% during the 1997 quarter compared to the 1996
quarter.
Non-interest Expense
Non-interest expenses decreased 8% to $5.33 million for the 1997 quarter
compared to $5.79 million for the 1996 quarter. The largest single reason
for the decrease was a $211,000 reduction in FDIC premiums relating to a
decrease in the FDIC premium rate from 0.23% to 0.065% as of January 1,
1997.
Income Taxes
The Company's effective income tax rate was 36.1% for the quarter ended
December 31, 1997 compared to 37.1% for the quarter ended December 31,
1996.
Item 3 Quantitative and Qualitative Disclosures About Market Risk
There are no material changes to be reported pursuant to this Item.
<PAGE>
Part II - Other Information
Item 1 Legal Proceedings
From time to time the Company (through the Bank) is a party to legal
proceedings arising out of its lending activities and other operations.
However, there are no pending legal proceedings to which the Bank is a
party which, if determined adversely to the Bank, would have a material
adverse effect on the consolidated financial position of the Company.
Item 2 Changes in Securities
Not applicable.
Item 3 Default upon Senior Securities
Not applicable.
Item 4 Submission of Matters to a Vote of Security Holders
Not applicable.
Item 5 Other information
Not applicable
Item 6 Exhibits and Reports on Form 8-K
(a) Reference is made to the Exhibit Index with respect to the
exhibits filed with this Form 10-Q. In addition, see Note 2 to
the Unaudited Consolidated Financial Statements for the
information required by Exhibit 11 - Computation of Earnings Per
Share
(b) The Company filed a Form 8-K, dated November 3, 1997, reporting
(pursuant to Item 5) that the Company had entered into an
Agreement and Plan of Merger with Marshall & Ilsley Corporation
("M&I"), a Wisconsin corporation, providing for the merger of the
Company with and into M&I. See Part I, Item 2 - " Management's
Discussion and Analysis of Financial Condition and Results of
Operations - Pending Merger."
<PAGE>
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.
Advantage Bancorp, Inc.
(registrant)
Date: February 4, 1998 By: \s\ Paul P. Gergen
Paul P. Gergen
Chairman of the Board
Chief Executive Officer
By: \s\ John Stampfl
John Stampfl
Chief Financial Officer
<PAGE>
EXHIBIT INDEX
ADVANTAGE BANCORP, INC.
FORM 10-Q
Quarterly Period Ended December 31, 1997
Exhibit No. Exhibit
2.1 Agreement and Plan of Merger, dated as of November 3, 1997,
between Marshall & Ilsley Corporation and Advantage Bancorp,
Inc. (incorporated by reference to Advantage Bancorp Inc.'s
Current Report on Form 8-K, dated November 3, 1997)
2.2 Stock Option Agreement, dated as of November 3, 1997, between
Marshall & Ilsley Corporation and Advantage Bancorp, Inc.
(incorporated by reference to Exhibit 2.2 to Advantage
Bancorp, Inc.'s Current Report on Form 8-K, dated November 3,
1997)
10.1 Amendment of Employment Agreement, dated as of November 3,
1997, between Advantage Bancorp, Inc., Advantage Bank,
F.S.B., Paul P. Gergen and Marshall & Ilsley Corporation
(incorporated by reference to Exhibit 99.1 to Advantage
Bancorp, Inc.'s Current Report on Form 8-K, dated November 3,
1997)
10.2 Amendment of Employment Agreement, dated as of November 3,
1997, between Advantage Bancorp, Inc., Advantage Bank,
F.S.B., John Stampfl and Marshall & Ilsley Corporation
(incorporated by reference to Exhibit 99.2 to Advantage
Bancorp, Inc.'s Current Report on Form 8-K, dated November 3,
1997)
27 Financial Data Schedule [Edgar version only]
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 26,795
<INT-BEARING-DEPOSITS> 9
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 160,495
<INVESTMENTS-CARRYING> 246,597
<INVESTMENTS-MARKET> 250,556
<LOANS> 556,607
<ALLOWANCE> 5,773
<TOTAL-ASSETS> 1,026,526
<DEPOSITS> 660,761
<SHORT-TERM> 62,485
<LIABILITIES-OTHER> 14,051
<LONG-TERM> 186,360
0
0
<COMMON> 38,569
<OTHER-SE> 64,301
<TOTAL-LIABILITIES-AND-EQUITY> 1,026,526
<INTEREST-LOAN> 12,069
<INTEREST-INVEST> 7,038
<INTEREST-OTHER> 355
<INTEREST-TOTAL> 19,462
<INTEREST-DEPOSIT> 7,551
<INTEREST-EXPENSE> 11,547
<INTEREST-INCOME-NET> 7,915
<LOAN-LOSSES> 100
<SECURITIES-GAINS> 480
<EXPENSE-OTHER> 5,333
<INCOME-PRETAX> 5,174
<INCOME-PRE-EXTRAORDINARY> 5,174
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,304
<EPS-PRIMARY> 1.04
<EPS-DILUTED> 0.98
<YIELD-ACTUAL> 7.85
<LOANS-NON> 2,792
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 5,797
<CHARGE-OFFS> 104
<RECOVERIES> 40
<ALLOWANCE-CLOSE> 5,833
<ALLOWANCE-DOMESTIC> 5,833
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
