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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
18 EXHIBIT INDEX Exhibit Number Description 27 Financial Data Schedule