-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, BtnlHbRA8ybgWALxlm+JgT/ioFQVsU/2PzSBuWVGCq0115/C9dljAjDe0uAAw90n uERBf6+yxxY8Ai79BSLy7A== 0000928385-97-001845.txt : 19971113 0000928385-97-001845.hdr.sgml : 19971113 ACCESSION NUMBER: 0000928385-97-001845 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971113 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: ALLIANCE BANCORP CENTRAL INDEX KEY: 0000885638 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTION, FEDERALLY CHARTERED [6035] IRS NUMBER: 363811768 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-20082 FILM NUMBER: 97716062 BUSINESS ADDRESS: STREET 1: ONE GRANT SQUARE CITY: HINSDALE STATE: IL ZIP: 60521 BUSINESS PHONE: 7083231780 MAIL ADDRESS: STREET 1: ONE GRANT SQUARE CITY: HINSDALE STATE: IL ZIP: 60522 FORMER COMPANY: FORMER CONFORMED NAME: HINSDALE FINANCIAL CORPORATION DATE OF NAME CHANGE: 19930328 10-Q 1 FORM 10-Q FOR 9/30/1997 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q (Mark One) (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 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 0-20082 ALLIANCE BANCORP ------------------------------------------------------ (Exact name of registrant as specified in its charter) DELAWARE 36-3811768 ------------------------------- ------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) ONE GRANT SQUARE, HINSDALE, ILLINOIS 60521 ---------------------------------------- ---------- (Address of principal executive offices) (Zip Code) (630) 323-1776 ---------------------------------------------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all the 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 ----- ----- Indicate the number of shares outstanding of each of the issuer's classes of stock, as of the latest practicable date. Common Stock, $0.01 par value -8,021,235 shares outstanding as of November 3, 1997. FORM 10-Q Index -----
PART I. FINANCIAL INFORMATION Page - ------- --------------------- ---- Item 1. Financial Statements (unaudited) Consolidated Statements of Financial Condition as of September 30, 1997 and December 31, 1996 1 Consolidated Statements of Income for the Three and Nine Months Ended September 30, 1997 and 1996 2 Consolidated Statements of Changes in Stockholders' Equity for the Nine Months Ended September 30, 1997 and 1996 3 Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 1997 and 1996 4 Notes to Consolidated Financial Statements 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 7 PART II. OTHER INFORMATION - -------- ----------------- Item 1. Legal Proceedings 18 Item 2. Changes in Securities 18 Item 3. Defaults upon Senior Securities 18 Item 4. Submission of Matters to a Vote of Security Holders 18 Item 5. Other Information 18 Item 6. Exhibits and Reports on Form 8-K 19 Signature Page 20
ALLIANCE BANCORP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
September 30, December 31, (In thousands, except share data) 1997 1996 ------------- ------------- (unaudited) Assets Cash and due from banks $ 11,202 7,645 Interest-bearing deposits 25,432 19,596 Investment securities available for sale, at fair value 92,176 1,998 Mortgage-backed securities available for sale, at fair value 196,888 5,140 Loans, net of allowance for losses of $5,435 at September 30, 1997 and $2,272 at December 31, 1996 996,854 609,371 Accrued interest receivable 9,880 3,522 Real estate 2,669 1,586 Premises and equipment, net 7,354 6,592 Stock in Federal Home Loan Bank of Chicago, at cost 12,855 7,445 Other assets 15,874 5,069 ------------- ------------- $ 1,371,184 667,964 ============= ============= Liabilities and Stockholders' Equity Liabilities: Deposits $ 998,051 462,869 Borrowed funds 222,725 131,900 Collateralized mortgage obligations 1,392 2,243 Advances by borrowers for taxes and insurance 4,043 7,919 Accrued expenses and other liabilities 15,883 6,407 ------------- ------------- Total liabilities 1,242,094 611,338 ------------- ------------- Stockholders' Equity: Preferred stock, $.01 par value; authorized 1,500,000 shares; none outstanding - - Common stock, $.01 par value; authorized 11,000,000 shares; 8,174,435 shares issued and 8,020,348 outstanding at September 30, 1997 4,185,128 shares issued and 4,042,628 outstanding at December 31, 1996 82 27 Additional paid-in capital 86,519 21,066 Retained earnings, substantially restricted 42,206 37,117 Treasury stock, at cost; 154,087 shares at September 30, 1997 and 142,500 at December 31, 1996 (1,502) (1,284) Common stock purchased by Employee Stock Ownership Plan - (428) Unrealized gain on securities available for sale, net of tax 1,785 128 ------------- ------------- Total stockholders' equity 129,090 56,626 ------------- ------------- Commitments and contingencies ------------- ------------- $ 1,371,184 667,964 ============= =============
See accompanying notes to unaudited consolidated financial statements. All share amounts reflect the 50% stock dividend declared on August 22, 1997. 1 ALLIANCE BANCORP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended Nine Months Ended September 30, September 30, (In thousands, except per share amounts) 1997 1996 1997 1996 ------------- ------------- ------------- ------------- (unaudited) Interest Income: Loans $ 20,663 10,649 55,913 32,240 Mortgage-backed securities 3,401 131 8,030 442 Investment securities 2,107 149 3,925 469 Interest-bearing deposits 336 191 777 767 Commercial paper - - 37 - Federal funds sold - - 15 - ------------- ------------- ------------- ------------- Total interest income 26,507 11,120 68,697 33,918 ------------- ------------- ------------- ------------- Interest Expense: Deposits 12,044 4,875 32,631 14,710 Borrowed funds 3,427 1,929 8,509 6,242 Collateralized mortgage obligations 43 81 154 301 ------------- ------------- ------------- ------------- Total interest expense 15,514 6,885 41,294 21,253 ------------- ------------- ------------- ------------- Net interest income 10,993 4,235 27,403 12,665 Provision for loan losses - - - - ------------- ------------- ------------- ------------- Net interest income after provision for loan losses 10,993 4,235 27,403 12,665 ------------- ------------- ------------- ------------- Noninterest Income: Gain (loss) on sales of loans and mortgage-backed securities 76 152 (238) 354 Gain on sales of other assets - 61 - 61 Income (loss) from real estate operations (97) 52 (38) 226 Servicing fee income 113 116 327 344 Fees and commissions 4,389 2,993 11,284 8,800 Other 26 4 79 184 ------------- ------------- ------------- ------------- Total noninterest income 4,507 3,378 11,414 9,969 ------------- ------------- ------------- ------------- Noninterest Expense: Compensation and benefits 5,700 3,314 14,995 9,934 Occupancy expense 1,142 796 3,246 2,282 Federal deposit insurance premiums 159 277 447 803 Federal deposit insurance special assessment - 2,829 - 2,829 Computer services 305 135 1,006 397 Other 2,741 1,398 7,044 4,155 ------------- ------------- ------------- ------------- Total noninterest expense 10,047 8,749 26,738 20,400 ------------- ------------- ------------- ------------- Income (loss) before income taxes 5,453 (1,136) 12,079 2,234 Income tax expense (benefit) 2,113 (855) 4,674 182 ------------- ------------- ------------- ------------- Net income (loss) $ 3,340 (281) 7,405 2,052 ============= ============= ============= ============= Primary earnings (loss) per share $ 0.39 (0.07) 0.93 0.49 Fully diluted earnings (loss) per share $ 0.39 (0.07) 0.92 0.49 ============= ============= ============= =============
See accompanying notes to unaudited consolidated financial statements. All share amounts reflect the 50% stock dividend declared on August 22, 1997. 2 ALLIANCE BANCORP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Additional Common Paid-in Retained Treasury (In Thousands) Stock Capital Earnings Stock ------------ ------------ ------------ ------------ (unaudited) Nine Months Ended September 30, 1996 Balance at December 31, 1995 $ 27 20,881 33,986 (1,284) Net income - - 2,052 - Proceeds from exercise of stock options - 109 - - Tax benefit from stock related compensation - 76 - - Principal payment on ESOP loan - - - - Distribution of BRP awards - - - - Change in unrealized gain (loss) on securities available for sale, net of tax - - - - ------------ ------------ ------------ ------------ Balance at September 30, 1996 $ 27 21,066 36,038 (1,284) ============ ============ ============ ============ Nine Months Ended September 30, 1997 Balance at December 31, 1996 $ 27 21,066 37,117 (1,284) Net income - - 7,405 - Issuance of 3,930,405 shares for merger of Liberty Bancorp 26 65,106 - - Cash dividends declared, $0.285 per share - - (2,284) - Purchase of treasury stock - - - (218) Proceeds from exercise of stock options 2 327 - - Tax benefit from stock related compensation - 20 - - Principal payment on ESOP loan - - - - Stock split effected in the form of a stock dividend 27 - (27) - Fractional shares related to stock split - - (5) - Change in unrealized gain (loss) on securities available for sale, net of tax - - - - ------------ ------------ ------------ ------------ Balance at September 30, 1997 $ 82 86,519 42,206 (1,502) ============ ============ ============ ============
Unrealized Common Common Gain (Loss) Stock Stock on Securities Purchased Purchased Available (In thousands) By ESOP By BRPs for Sale Total ------------ ------------ ------------ ------------ (unaudited) Nine Months Ended September 30, 1996 Balance at December 31, 1995 (643) (86) 227 53,108 Net income - - - 2,052 Proceeds from exercise of stock options - - - 109 Tax benefit from stock related compensation - - - 76 Principal payment on ESOP loan 172 - - 172 Distribution of BRP awards - 86 - 86 Change in unrealized gain (loss) on securities available for sale, net of tax - - (132) (132) ------------ ------------ ------------ ------------ Balance at September 30, 1996 (471) - 95 55,471 ============ ============ ============ ============ Nine Months Ended September 30, 1997 Balance at December 31, 1996 (428) - 128 56,626 Net income - - - 7,405 Issuance of 3,930,405 shares for merger of Liberty Bancorp - - - 65,132 Cash dividends declared, $0.285 per share - - - (2,284) Purchase of treasury stock - - - (218) Proceeds from exercise of stock options - - - 329 Tax benefit from stock related compensation - - - 20 Principal payment on ESOP loan 428 - - 428 Stock split effected in the form of a stock dividend - - - - Fractional shares related to stock split - - - (5) Change in unrealized gain (loss) on securities available for sale, net of tax - - 1,657 1,657 ------------ ------------ ------------ ------------ Balance at September 30, 1997 - - 1,785 129,090 ============ ============ ============ ============
See accompanying notes to unaudited consolidated financial statements. All share amounts reflect the 50% stock dividend declared on August 22, 1997. 3 ALLIANCE BANCORP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30, (In thousands) 1997 1996 ----------- ----------- (unaudited) Cash Flows From Operating Activities: Net income $ 7,405 2,052 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 913 878 Distribution of BRP awards - 86 Amortization of premiums, discounts, and deferred loan fees 1,210 314 Additions to deferred loan fees 26 (386) Amortization of collateralized mortgage obligations discount 48 108 Originations of loans held for sale (390,905) (371,501) Sale of loans originated for sale 368,484 381,283 (Gain) loss on sales of loans and mortgage-backed securities 238 (354) Gain on sales of real estate - (61) Decrease in Stock in Federal Home Loan Bank of Chicago - 1,770 (Increase) decrease in accrued interest receivable (2,248) 26 (Increase) decrease in other assets 3,013 (682) Decrease in accrued expenses and other liabilities (3,409) (249) ----------- ----------- Net cash provided by (used in) operating activities (15,225) 13,284 ----------- ----------- Cash Flows From Investing Activities: Proceeds from sales of loans 60,028 4,803 Proceeds from sale of real estate held for development and sale 227 805 Loans originated or purchased for investment (95,234) (52,606) Purchases of: Mortgage-backed securities available for sale (90,354) - Investment securities available for sale (90,039) - Purchase of premises and equipment (1,725) (1,766) Net assets acquired through merger, net of cash acquired 16,973 - Maturities of investment securities available for sale 24,000 - Principal collected on loans 165,331 69,401 Principal collected on mortgage-backed securities 18,336 1,172 ----------- ----------- Net cash provided by investing activities 7,543 21,809 ----------- ----------- Cash Flows From Financing Activities: Net increase (decrease) in deposits 20,162 (6,715) Proceeds from borrowed funds 236,853 21,000 Repayment of borrowed funds (229,400) (42,156) Repayment of collateralized mortgage obligations (899) (1,528) Net decrease in advance payments by borrowers for taxes and insurance (8,848) (6,012) Purchase of treasury stock (143) - Cash dividends paid (1,402) - Cash paid in lieu of fractional shares related to stock split (5) - Payment on ESOP loan 428 172 Proceeds from options exercised 329 109 ----------- ----------- Net cash provided by (used in) financing activities 17,075 (35,130) ----------- ----------- Net increase (decrease) in cash and cash equivalents 9,393 (37) Cash and cash equivalents at beginning of period 27,241 29,030 ----------- ----------- Cash and cash equivalents at end of period $ 36,634 28,993 =========== =========== Supplemental Disclosures of Cash Flow Information: Cash paid during the period for: Interest $ 41,188 21,365 Income taxes 3,126 2,133 Supplemental Disclosures of Noncash Activities: Loans exchanged for mortgage-backed securities $ 54,589 28,678 Additions to real estate acquired in settlement of loans 272 353 ----------- -----------
See accompanying notes to unaudited consolidated financial statements. 4 ALLIANCE BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Three and Nine Months Ended September 30, 1997 and 1996 (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 (consisting of only normal recurring accruals) necessary for a fair presentation have been included. The unaudited consolidated financial statements include the accounts of Alliance Bancorp ("the Company"), its wholly-owned subsidiaries: Liberty Lincoln Service Corporation II and Liberty Federal Bank ("the Bank"), and the Bank's wholly-owned subsidiaries: Preferred Mortgage Associates, Ltd. ("Preferred"), Liberty Financial Services, Inc., Liberty Lincoln Service Corporation and NASCOR II Corporation. All material intercompany balances and transactions have been eliminated. (2) Acquisition On February 10, 1997, Hinsdale Financial Corporation, the holding company for Hinsdale Federal Bank for Savings, and Liberty Bancorp, Inc., the holding company for Liberty Federal Savings Bank, consummated their merger in a stock- for-stock exchange. The resulting organization was renamed Alliance Bancorp. Liberty Federal Savings Bank was merged into Hinsdale Federal Bank for Savings, and the resulting Bank operates under the name Liberty Federal Bank. The transaction was accounted for under the purchase method of accounting and 1.054 shares of Hinsdale Financial Corporation common stock was exchanged for each share of Liberty Bancorp outstanding common stock. There were 3,930,405 shares of Hinsdale Financial Corporation shares issued for 3,733,013 shares of Liberty Bancorp. Liberty Bancorp had total assets of $680 million and deposits of $516 million at the date of the merger. The fair value of the net assets acquired approximated the purchase price, accordingly; no goodwill was recorded. The nine-month period ended September 30, 1997 includes the earnings of Liberty Bancorp from the date of merger. The following unaudited pro forma financial information presents the combined results of operations of Hinsdale Financial Corporation and Liberty Bancorp, Inc. as if the acquisition had occurred as of the beginning of 1997 and 1996. The pro forma financial information does not necessarily reflect the results of operations that would have occurred had the companies constituted a single entity during such periods.
Three Months Ended September 30, Nine Months Ended September 30, (In thousands, except per share amounts) 1997 1996 1997 1996 ---------- ---------- ---------- ---------- Net Interest Income $ 10,993 8,861 28,836 26,077 Net Income (Loss) $ 3,340 (896) 7,427 3,324 Primary Earnings (Loss) Per Share $ 0.39 (0.11) 0.94 0.39 Fully Diluted Earnings (Loss) Per Share $ 0.39 (0.11) 0.93 0.39
(3) Change in Fiscal Year As a result of the merger with Liberty Bancorp, Inc., the Company has changed its fiscal year end from September 30 to December 31. Therefore, the current quarter ended September 30, 1997 represents the third quarter for the year ending December 31, 1997. 5 ALLIANCE BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Three and Nine Months Ended September 30, 1997 and 1996 (4) Earnings per Share Earnings per share of common stock have been determined by dividing net income for the period by the weighted average number of common and common equivalent shares outstanding. Stock options are regarded as common share equivalents and are therefore considered in both primary and fully diluted earnings per share calculations. Common stock equivalents are computed using the treasury stock method. On August 22, 1997, the Company announced a 50% stock dividend payable September 26, 1997 to shareholders of record on September 12, 1997. Each shareholder received three new shares of common stock for every two shares they owned as of the record date. Cash was paid in lieu of fractional shares. All share amounts have been adjusted to reflect the dividend. (5) Commitments and Contingencies At September 30, 1997, the Company had outstanding commitments to originate and purchase loans of $50.2 million, of which $22.2 million were fixed-rate and $28.0 million were adjustable-rate commitments. Unused equity lines of credit available to customers were $78.3 million at September 30, 1997. As a result of the merger, the Bank assumed two credit enhancement agreements with local municipalities to guarantee the repayment of an aggregate of $4.0 million on municipal revenue bonds ( the "Bonds"), which are secured by first mortgages on apartment building projects. To secure the guarantees of the Bonds, the Bank has pledged mortgage-backed securities issued by the Government National Mortgage Association ("GNMA"). The Bank's obligations on these Bonds expire in the year 1998 or the dates the Bonds are repaid, if earlier. In the event of default on the Bonds, the Bank's maximum liability would be its pro rata amount of the credit guaranty and if the Bank does not act to meet its agreed upon obligations, the collateral pledged as security for the Bank's guarantee may be liquidated and the proceeds used to repay the defaulted Bonds. The Bank's position in such case would be secured by a first mortgage lien on the underlying apartment properties and a lien against all income derived therefrom. At September 30, 1997, there remains one credit enhancement agreement outstanding in the amount of $2.0 million. The Bank's obligation on this Bond expires in the year 1998 or the date the Bond is repaid, if earlier. (6) Reclassifications Certain reclassifications of prior year amounts have been made to conform with current year presentation. 6 ALLIANCE BANCORP AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations GENERAL On February 10, 1997, Hinsdale Financial Corporation ("Hinsdale Financial") completed a merger of equals with Liberty Bancorp Inc. of Chicago, Illinois ("Liberty Bancorp"). Liberty Bancorp was merged with and into Hinsdale Financial. Concurrent with the merger, Hinsdale Financial changed its name to Alliance Bancorp ("the Company"), and 3,930,405 shares of the Company's common stock were exchanged for all of the outstanding shares of Liberty Bancorp. Additionally in connection with the merger, the wholly-owned subsidiary of Liberty Bancorp, Liberty Federal Savings Bank ("Liberty Federal Savings"), was merged with and into the wholly-owned subsidiary of Hinsdale Financial, Hinsdale Federal Bank for Savings ("Hinsdale Federal"), which then changed its name to Liberty Federal Bank ("Liberty Federal", or the "Bank"). The merger of Liberty Bancorp with and into the Company was recorded as a purchase, in which all of Liberty Bancorp's assets and liabilities were recorded at fair value at the closing date. The fair value of net assets acquired approximated the purchase price; accordingly, no goodwill was recorded. Liberty Bancorp had total assets of $680 million and deposits of $516 million at the date of the merger. The Company is a registered savings and loan holding company incorporated under the laws of the state of Delaware and is engaged in the business of providing financial service products to the public through its wholly-owned subsidiary, Liberty Federal Bank. The Bank, a Federal savings bank chartered under the authority of the Office of Thrift Supervision ("OTS"), originally was organized in 1934, and changed its charter from a federal savings and loan association to a federal savings bank in 1991. The Bank is a member of the Federal Home Loan Bank ("FHLB") System and its deposit accounts are insured to the maximum allowable amount by the Federal Deposit Insurance Corporation ("FDIC"). The Bank is regulated by the OTS and the FDIC and is further regulated by the Board of Governors of the Federal Reserve System as to reserves required to be maintained against deposits and certain other matters. The Bank is a community-oriented company providing financial services through 14 retail banking facilities in Chicago, north and western Cook County and DuPage County in Illinois. The Bank offers a variety of deposit products in an attempt to attract funds from the general public in the highly competitive market areas surrounding its offices. In addition to deposit products, the Bank also offers its customers financial advice and security brokerage services through INVEST Financial Corporation ("INVEST"). The Bank invests its retail deposits in mortgage and consumer loans, investment securities and mortgage- backed securities, secured primarily by one-to four-family residential loans. The earnings of the Bank are primarily dependent on its net interest income, which is the difference between the interest income earned on its loan, mortgage-backed securities, and investment portfolios, and its cost of funds, consisting of the interest paid on its deposits and borrowings. The Bank has determined to place additional emphasis on expanding its portfolio of home equity lines of credit, the interest rates on which adjust with the prime rate, multi-family mortgage loans and commercial real estate loans. The Bank's earnings are also affected by noninterest income, including income related to loan origination fees contributed by the Bank's wholly-owned subsidiary, Preferred Mortgage Associates, Ltd. ("Preferred") and the noncredit consumer related financial services offered by the Bank, such as net commissions received by the Bank from securities brokerage services, commissions from the sale of insurance products, loan servicing income, fee income on transaction accounts, and interchange fees from its shared ATMs. The Bank's noninterest income has also been affected by gains from the sale of various assets, including loans and mortgage-backed securities. Noninterest expense consists principally of employee compensation, occupancy expense, federal deposit insurance premiums, and other general and administrative expenses of the Bank and Preferred. The Bank'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. 7 LIQUIDITY/CAPITAL RESOURCES The Company's primary sources of funds are deposits, borrowings, proceeds from principal and interest payments on loans and mortgage-backed securities and the sale of securitized loans. While maturities and scheduled amortization of loans and mortgage-backed securities are a predictable source of funds, deposit flows and mortgage prepayments are greatly influenced by interest rate cycles and economic conditions. The Bank is required by regulation to maintain specific minimum levels of liquid investments. Regulations currently in effect require the Bank to maintain liquid assets at least equal to 5.0% of the sum of its average daily balance of net withdrawable accounts and short-term borrowed funds. This regulatory requirement may be changed from time to time by the OTS to reflect current economic conditions and deposit flows. The Bank's average liquidity ratio was 6.85% for the quarter ended September 30, 1997. The Company's most liquid assets are cash and cash equivalents, which include investments in highly liquid, short-term investments and interest-bearing deposits. The levels of these assets are dependent on the Company's operating, financing, lending and investing activities during any given period. At September 30, 1997, cash and cash equivalents totaled $36.6 million. Liquidity management for the Company is both a daily and long-term function of the Company's management strategy. Excess funds are generally invested in short-term investments and interest-bearing deposits. In the event that the Company should require funds beyond its ability to generate them internally, additional sources of funds are available through the use of Federal Home Loan Bank of Chicago ("FHLB") advances. The Company's cash flows are comprised of three classifications: cash flows from operating activities, cash flows from investing activities, and cash flows from financing activities. Cash flows used in operating activities, consisting primarily of interest and dividends received less interest paid on deposits, and the origination and sale of loans, were $15.2 million for the nine months ended September 30, 1997. Net cash provided by investing activities, consisting primarily of disbursements for loans originated or purchased for investment, purchases of mortgage-backed and investment securities, offset by principal collections on loans and mortgage-backed securities was $7.5 million for the nine months ended September 30, 1997. Net cash provided by financing activities, consisting primarily of net activity in deposit and escrow accounts, net proceeds from borrowed funds and the repayment of collateralized mortgage obligations, totaled $17.1 million for the nine months ended September 30, 1997. In connection with the Company's loan origination activities, the Company's interest rate risk management policy specifies the use of certain hedging activities in an attempt to reduce exposure to changes in loan market prices from the time of commitment until securitization. The Company will engage in hedging transactions as a method of reducing its exposure to interest rate risk present in the secondary market. The Company's hedging transactions are generally forward commitments to sell fixed-rate mortgage-backed securities at a specified future date. The loans securitized through the Federal National Mortgage Association ("FNMA") are generally used to satisfy these forward commitments. The sale of fixed-rate mortgage-backed securities for future delivery presents a risk to the Company that, if the Company is not able to deliver the mortgage-backed securities on the specified delivery date, it may be required to repurchase the forward commitment to sell at the then current market price. At September 30, 1997 the Company had $2.0 million forward commitments to sell FNMA mortgage-backed securities. The Bank's tangible capital ratio at September 30, 1997 was 8.13%. This exceeded the tangible capital requirement of 1.5% of adjusted assets by $90.3 million. The Bank's leverage capital ratio at September 30, 1997 was 8.24%. This exceeded the leverage capital requirement of 3.0% of adjusted assets by $71.4 million. The Bank's risk-based capital ratio was 15.93% at September 30, 1997. The Bank currently exceeds the risk-based capital requirement of 8.0% of risk-weighted assets by $58.1 million. CHANGES IN FINANCIAL CONDITION The Company had total assets of $1.4 billion at September 30, 1997, an increase of $703 million, or 105.3%, from December 31, 1996, primarily as a result of the merger. Liberty Bancorp's assets at date of merger were 8 comprised of: commercial paper, $1.7 million; investment securities, $22.6 million; mortgage-backed securities, $118.7 million; and loans, $497.4 million. Deposits totaled $1.0 billion at September 30, 1997, an increase of $535.2 million, or 115.6%, of which $515.6 million was due to the merger. Borrowed funds totaled $222.7 million at September 30, 1997, an increase of $90.8 million, or 68.9% from December 31, 1996, of which $83.3 million was due to the merger. Borrowed funds primarily consist of $191.1 million in FHLB advances and $17.9 million in reverse repurchase agreements collateralized by mortgage-backed securities. Stockholders' equity totaled $129.1 million at September 30, 1997, an increase of $72.5 million, or 128%. As a result of the merger, 3,930,405 additional shares of common stock were issued and exchanged for Liberty Bancorp common stock. At September 30, 1997, the number of common shares outstanding was 8,020,348 and the book value per common share outstanding was $16.10 per share. On August 22, 1997, the Company declared an $0.11 per share cash dividend payable October 20, 1997 to shareholders of record on September 30, 1997. In addition, on August 22, 1997, the Company announced a three-for-two stock split in the form of a dividend payable September 26, 1997 to shareholders of record on September 12, 1997. RECENT AND PROPOSED CHANGES IN ACCOUNTING RULES In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No. 130, "Reporting Comprehensive Income," which is effective for fiscal years beginning after December 15, 1997. This statement establishes standards for reporting and display of comprehensive income and its components (revenues, expenses, gains and losses) in a full set of general-purpose financial statements. This statement requires that all items that are required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. In June 1997, FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," which is effective for fiscal years beginning after December 15, 1997. This statement establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports issued to shareholders. It also establishes standards for related disclosures about products and services, geographic areas, and major customers. In February 1997, FASB issued SFAS No. 128, "Earnings Per Share." SFAS 128 is effective for financial statements for both interim and annual periods ending after December 15, 1997. Statement 128 supersedes APB Opinion No. 15, Earnings Per Share and specifies the computation, presentation and disclosure requirements for earnings per share ("EPS") for entities with publicly held common stock or potential common stock. Statement 128 was issued to simplify the computation of EPS and to make the U.S. standard more compatible with the EPS standards of other countries and that of the International Accounting Standards Committee. It replaces Primary EPS and Fully Diluted EPS with Basic EPS and Diluted EPS, respectively. It also requires dual presentation of Basic EPS and Diluted EPS on the face of the income statement for all entities with complex capital structures and requires a reconciliation of the numerator and denominator of the Basic EPS computation to the numerator and denominator of the Diluted EPS computation. Basic EPS, unlike Primary EPS, excludes all dilution while Diluted EPS, like Fully Diluted EPS, reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in earnings of the entity. For many entities Basic EPS will be higher than Primary EPS and Diluted EPS will be approximately the same as Fully Diluted EPS. Management believes that the result of adopting this statement will result in higher Basic EPS and will remain approximately the same for Fully Diluted EPS. 9 ASSET QUALITY NON-PERFORMING ASSETS The following table sets forth information as to non-accrual loans and real estate owned at the dates indicated. The Company discontinues the accrual of interest on loans ninety days or more past due, at which time all accrued but uncollected interest is reversed. There were no loans at September 30, 1997 nor during the nine months ended September 30, 1997, which met the definition of an impaired loan. A loan is considered impaired when it is probable that a creditor will be unable to collect contractual principal and interest due according to the contractual terms of the loan agreement. Loans considered for impairment do not include residential mortgage and consumer installment loans.
Quarter Ended ---------------------------------------------------------------------------------- September 30, June 30, March 31, December 31, September 30, (Dollars in thousands) 1997 1997 1997 1996 1996 -------------- -------------- -------------- -------------- -------------- Non-accrual mortgage loans 90 days or more past due $ 2,218 1,601 1,761 1,163 932 Non-accrual consumer loans 90 days or more past due 39 26 - - - -------------- -------------- -------------- -------------- -------------- Total non-performing loans 2,257 1,627 1,761 1,163 932 Total foreclosed real estate 687 496 553 545 207 -------------- -------------- -------------- -------------- -------------- Total non-performing assets $ 2,944 2,123 2,314 1,708 1,139 -------------- -------------- -------------- -------------- -------------- Total non-performing loans to total loans 0.23% 0.16 0.16 0.18 0.15 Total non-performing assets to total assets 0.21% 0.15 0.18 0.26 0.17
CLASSIFICATION OF ASSETS The Company regularly reviews the assets in its portfolio to determine whether any assets require classification in accordance with applicable regulations. As of September 30, 1997, the Company had total classified assets of $811,000, of which $687,000 were classified as "substandard" and $124,000 were classified as "doubtful". Classified assets consisted of single family residential loans and foreclosed single family residential loans (real estate owned). 10 ASSET/LIABILITY MANAGEMENT The Company manages its exposure to interest rate risk by emphasizing the origination and purchase of adjustable-rate mortgage ("ARM") loans. Management believes that investing in ARM loans, short-term profits are possibly sacrificed compared to the yields obtainable through investment in fixed-rate loans, however, the Company's exposure to the risk of interest rate fluctuations is reduced, thereby enhancing long-term profitability. The fixed-rate mortgage loans the Bank originates are securitized and sold into the secondary market, with servicing retained, as part of its operation and interest rate risk management strategy. More recently, the Company has placed additional emphasis on origination of home equity lines of credit, the interest rates on which adjust with the prime rate. An increase in home equity lines of credit should enhance the Bank's interest rate spread and its interest rate risk management. The Bank seeks to lengthen the maturities of its deposits by emphasizing savings certificates with maturities of three months or more. At September 30, 1997, savings certificates with original maturities of three months or more totaled $698.6 million, or 70%, of total deposits. The Bank seeks to reduce its risk of early withdrawals from its longer term savings certificates by requiring early withdrawal penalties on all certificates. The Bank does not actively solicit high-rate jumbo certificates of deposit or brokered funds. Matching of assets and liabilities may be analyzed by examining the extent to which such assets and liabilities are interest rate sensitive by monitoring an institution's interest rate sensitivity gap. An asset or liability is considered interest rate sensitive within a specific time period if it will mature or reprice within that time period. The interest rate sensitivity gap is defined as the difference between the amount of interest-earning assets anticipated, based upon certain assumptions, to mature or reprice within a specific time period and the amount of interest-bearing liabilities anticipated, based upon certain assumptions, to mature or reprice within that time period. A gap is considered positive when the amount of interest rate sensitive assets exceeds the amount of interest rate sensitive liabilities. A gap is considered negative when the amount of interest rate sensitive liabilities exceeds the amount of interest rate sensitive assets. During a period of rising interest rates, a negative gap would tend to adversely affect net interest income while a positive gap would tend to result in an increase in net interest income. During a period of falling interest rates, a negative gap would tend to result in an increase in net interest income while a positive gap would tend to adversely affect net interest income. The Company's one-year interest sensitivity gap as a percent of total assets was a negative 10.74% at September 30, 1997. The following table sets forth the amounts of interest-earning assets and interest-bearing liabilities outstanding at September 30, 1997, which are anticipated by the Company to reprice or mature in each of the future time periods shown. Except as stated below, the amounts of assets and liabilities shown which reprice or mature during a particular period were based upon the contractual terms of the asset or liability or certain assumptions concerning the amortization and prepayment of such assets and liabilities. Regular savings accounts, NOW accounts and money market accounts, which collectively totaled $253 million at September 30, 1997, were assumed to be withdrawn at annual percentage rates of 17%, 37% and 79%, respectively. The collateralized mortgage obligations were assumed to prepay at the same rate used for the mortgage-backed securities collateralizing these obligations. Management believes that these assumptions approximate actual experience and considers them reasonable, although the actual amortization and repayment of assets and liabilities may vary substantially. 11 INTEREST RATE SENSITIVITY GAP ANALYSIS
At September 30, 1997 ------------------------------------------------------------- More Than More Than 1 Year 1 Year 3 Years More Than (Dollars in thousands) Or Less To 3 Years To 5 Years 5 Years Total ---------- ---------- ---------- ---------- ---------- Interest-Earning Assets: Mortgage loans (1) $ 383,057 308,961 85,588 104,725 882,331 Equity lines of credit (1) 79,995 - - - 79,995 Consumer loans and leases (1) 7,726 20,924 6,042 3,012 37,704 Mortgage-backed securities (2) 88,293 25,227 19,093 62,448 195,061 Interest-bearing deposits 25,432 - - - 25,432 Investment securities (2) 76,645 18,523 1,541 7,444 104,153 ---------- ---------- ---------- ---------- ---------- Total interest-earning assets 661,148 373,635 112,264 177,629 1,324,676 Interest-Bearing Liabilities Regular savings accounts 22,148 33,641 21,931 52,565 130,285 NOW interest-bearing accounts 17,638 16,146 4,320 9,567 47,671 Money market accounts 59,117 8,233 3,920 3,562 74,832 Certificate accounts 523,652 146,200 28,413 364 698,629 Borrowed funds 184,175 38,550 - - 222,725 Collateralized mortgage obligations 1,392 - - - 1,392 ---------- ---------- ---------- ---------- ---------- Total interest-bearing liabilities 808,122 242,770 58,584 66,058 1,175,534 ---------- ---------- ---------- ---------- ---------- Interest sensitivity gap $ (146,974) 130,865 53,680 111,571 149,142 ========== ========== ========== ========== ========== Cumulative interest sensitivity gap $ (146,974) (16,109) 37,571 149,142 ========== ========== ========== ========== ========== Cumulative interest sensitivity gap as a percentage of total assets (10.74)% (1.18) 2.75 10.90 Cumulative net interest-earning assets as a percentage of interest-bearing liabilities 81.81% 98.47 103.39 112.69 ---------- ---------- ---------- ---------- ----------
(1) For purposes of the gap analysis, mortgage, equity and consumer loans and leases are not reduced by the allowance for loan losses and are reduced for non-performing loans. (2) Mortgage-backed and investment securities are not increased (decreased) by unrealized gains (losses) resulting from the adoption of FASB No. 115. Certain shortcomings are inherent in the method of analysis presented in the foregoing table. For example, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in different degrees to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market rates. Additionally, certain assets, such as ARM loans, have features which restrict changes in interest rates on a short-term basis and over the life of the asset. Further, in the event of a change in interest rates, prepayment and early withdrawal levels would likely deviate significantly from those assumed in calculating the table. Finally, the ability of many borrowers to service their debt may decrease in the event of an interest rate increase. ANALYSIS OF NET INTEREST INCOME Net interest income represents the difference between income on interest- earning assets and expense on interest-bearing liabilities. Net interest income depends upon the volume of interest-earning assets and interest-bearing liabilities and the interest rate earned or paid on them. 12 AVERAGE BALANCE SHEETS The following table sets forth certain information relating to the Company's Consolidated Statements of Financial Condition and reflects the average yield on assets and the average cost of liabilities for the periods indicated. Such yields and costs are derived by dividing income or expense by the average balance of assets or liabilities, respectively, for the periods shown. Average balances are derived from average daily balances and include non-performing loans. The yields and costs include fees which are considered adjustments to yields.
Three Months Ended September 30, -------------------------------------------------------------------------------------------- 1997 1996 -------------------------------------------- -------------------------------------------- Average Average Average Yield/ Average Yield/ (Dollars in thousands) Balance Interest Cost Balance Interest Cost ------------ ------------ ------------ ------------ ------------ ------------ Assets: Interest-earning assets: Mortgage loans, net 891,856 $ 18,332 8.23% $ 540,305 $ 9,650 7.14% Equity lines of credit 78,873 1,577 7.93 44,560 880 7.84 Consumer loans and leases 35,377 754 8.53 5,316 119 8.95 Mortgage-backed securities 200,987 3,401 6.77 6,218 131 8.43 Interest-bearing deposits 24,426 336 5.38 24,121 191 3.10 Federal funds sold - - - - - - Commercial paper - - - - - - Investment securities 112,222 2,107 7.51 9,017 149 6.57 ------------ ------------ ------------ ------------ ------------ ------------ Total interest-earnings assets 1,343,741 26,507 7.88 629,537 11,120 7.06 Noninterest-earning assets 56,720 21,629 ------------ ------------ ------------ ------------ ------------ ------------ Total assets $ 1,400,461 $ 651,166 ============ ============ ============ ============ ============ ============ Liabilities and Stockholders' Equity: Interest-bearing liabilities: Deposits: Savings accounts $ 839,537 $ 11,214 5.30% $ 345,595 $ 4,354 5.00% NOW noninterest-bearing accounts 43,672 - - 35,029 - - NOW interest-bearing accounts 52,885 190 1.43 22,687 89 1.56 Money market accounts 77,959 640 3.26 53,106 432 3.23 ------------ ------------ ------------ ------------ ------------ ------------ Total deposits 1,014,053 12,044 4.71 456,417 4,875 4.24 Funds borrowed: Borrowed funds 226,225 3,427 5.93 119,275 1,929 6.33 Collateralized mortgage obligations 1,388 43 12.39 2,534 81 12.79 ------------ ------------ ------------ ------------ ------------ ------------ Total funds borrowed 227,613 3,470 5.97 121,809 2,010 6.46 ------------ ------------ ------------ ------------ ------------ ------------ Total interest-bearing liablities 1,241,666 15,514 4.94 578,226 6,885 4.71 Other liabilities 32,393 17,261 ------------ ------------ ------------ ------------ ------------ ------------ Total liabilities 1,274,059 595,487 Stockholders' equity 126,402 55,679 ------------ ------------ ------------ ------------ ------------ ------------ Total liabilities and stockholders' equity $ 1,400,461 $ 651,166 ============ ============ ============ ============ ============ ============ Net interest income/ interest rate spread $ 10,993 2.94% $ 4,235 2.35% ============ ============ ============ ============ ============ ============ Net interest-earning assets/net interest margin $ 102,075 3.27% $ 51,311 2.69% ============ ============ ============ ============ ============ ============ Interest-earning assets to interest-bearing liabilities 1.08 X 1.09 X ============ ============ ============ ============ ============ ============
Nine Months Ended September 30, -------------------------------------------------------------------------------------------- 1997 1996 -------------------------------------------- -------------------------------------------- Average Average Average Yield/ Average Yield/ (Dollars in thousands) Balance Interest Cost Balance Interest Cost ------------ ------------ ------------ ------------ ------------ ------------ Assets: Interest-earning assets: Mortgage loans, net $ 877,658 $ 49,763 7.56% $ 555,064 $ 29,567 7.10% Equity lines of credit 71,989 4,310 8.00 37,001 2,257 8.16 Consumer loans and leases 31,980 1,840 7.67 6,610 416 8.40 Mortgage-backed securities 155,476 8,030 6.89 7,179 442 8.20 Interest-bearing deposits 18,836 777 5.44 30,116 767 3.36 Federal funds sold 356 15 5.56 - - - Commercial paper 892 37 5.47 - - - Investment securities 71,947 3,925 7.28 9,664 469 6.47 ------------ ------------ ------------ ------------ ------------ ------------ Total interest-earnings assets 1,229,134 68,697 7.45 645,634 33,918 7.00 Noninterest-earning assets 51,463 21,388 ------------ ------------ ------------ ------------ ------------ ------------ Total assets $ 1,280,597 $ 667,022 ============ ============ ============ ============ ============ ============ Liabilities and Stockholders' Equity: Interest-bearing liabilities: Deposits: Savings accounts $ 775,739 $ 30,180 5.20% $ 347,103 $ 13,128 5.06% NOW noninterest-bearing accounts 40,555 - - 36,158 - - NOW interest-bearing accounts 48,421 600 1.66 22,852 268 1.57 Money market accounts 79,057 1,851 3.13 54,246 1,314 3.24 ------------ ------------ ------------ ------------ ------------ ------------ Total deposits 943,772 32,631 4.62 460,359 14,710 4.27 Funds borrowed: Borrowed funds 187,793 8,509 5.98 129,545 6,242 6.35 Collateralized mortgage obligations 1,684 154 12.19 2,983 301 13.44 ------------ ------------ ------------ ------------ ------------ ------------ Total funds borrowed 189,477 8,663 6.03 132,528 6,543 6.51 ------------ ------------ ------------ ------------ ------------ ------------ Total interest-bearing liablities 1,133,249 41,294 4.86 592,887 21,253 4.77 Other liabilities 30,759 19,511 ------------ ------------ ------------ ------------ ------------ ------------ Total liabilities 1,164,008 612,398 Stockholders' equity 116,589 54,624 ------------ ------------ ------------ ------------ ------------ ------------ Total liabilities and stockholders' equity $ 1,280,597 $ 667,022 ============ ============ ============ ============ ============ ============ Net interest income/ interest rate spread $ 27,403 2.59% $ 12,665 2.23% ============ ============ ============ ============ ============ ============ Net interest-earning assets/net interest margin $ 95,885 2.97% $ 52,747 2.62% ============ ============ ============ ============ ============ ============ Interest-earning assets to interest-bearing liabilities 1.08 X 1.09 X ============ ============ ============ ============ ============ ============
At September 30, 1997 ------------------------------ Yield/ Balance Cost ------------ ------------ Assets: Interest-earning assets: Mortgage loans, net $ 879,116 7.60% Equity lines of credit 79,995 8.12 Consumer loans and leases 37,743 8.03 Mortgage-backed securities 196,888 7.23 Interest-bearing deposits 25,432 6.03 Federal funds sold - - Commercial paper - - Investment securities 105,031 7.45 ------------ ------------ Total interest-earnings assets 1,324,205 7.55 Noninterest-earning assets 46,979 ------------ ------------ Total assets 1,371,184 ============ ============ Liabilities and Stockholders' Equity: Interest-bearing liabilities: Deposits: Savings accounts $ 828,914 5.50% NOW noninterest-bearing accounts 46,634 - NOW interest-bearing accounts 47,671 1.47 Money market accounts 74,832 3.32 ------------ ------------ Total deposits 998,051 4.89 Funds borrowed: Borrowed funds 222,725 5.97 Collateralized mortgage obligations 1,392 12.80 ------------ ------------ Total funds borrowed 224,117 6.01 ------------ ------------ Total interest-bearing liablities 1,222,168 5.09 Other liabilities 19,926 ------------ ------------ Total liabilities 1,242,094 Stockholders' equity 129,090 ------------ ------------ Total liabilities and stockholders' equity 1,371,184 ============ ============ Net interest income/ interest rate spread 2.46% ============ ============ Net interest-earning assets/net interest margin ============ ============ Interest-earning assets to interest-bearing liabilities ============ ============
13 RATE/VOLUME ANALYSIS The following table presents the extent to which changes in interest rates and changes in the volume of interest-earning assets and interest-bearing liabilities have affected the Company's interest income and interest expense during the periods indicated. Information is provided in each category with respect to (i) changes attributable to changes in volume (changes in volume multiplied by prior rate), (ii) changes attributable to changes in rate (changes in rate multiplied by prior volume), and (iii) the net change. The changes attributable to the combined impact of volume and rate have been allocated proportionately to the changes due to volume and the changes due to rate.
Three Months Ended September 30, 1997 Nine Months Ended September 30, 1997 Compared To Compared To Three Months Ended September 30, 1996 Nine Months Ended September 30, 1996 -------------------------------------- -------------------------------------- Increase (Decrease) Increase (Decrease) In Net Interest Income In Net Interest Income Due To Due To -------------------------------------- -------------------------------------- (In thousands) Volume Rate Net Volume Rate Net ---------- ---------- ---------- ---------- ---------- ---------- Interest-Earning Assets: Mortgage loans, net $ 7,032 1,650 8,682 18,170 2,026 20,196 Equity lines of credit 687 10 697 2,098 (45) 2,053 Consumer loans and leases 641 (6) 635 1,463 (39) 1,424 Mortgage-backed securities 3,301 (31) 3,270 7,670 (82) 7,588 Interest-bearing deposits 2 143 145 (350) 360 10 Federal funds sold - - - 15 - 15 Commercial paper - - - 37 - 37 Investment securities 1,934 24 1,958 3,390 66 3,456 ---------- ---------- ---------- ---------- ---------- ---------- Total 13,597 1,790 15,387 32,493 2,286 34,779 ---------- ---------- ---------- ---------- ---------- ---------- Interest-Bearing Liabilities: Deposits 6,573 596 7,169 16,624 1,297 17,921 Funds borrowed 1,617 (157) 1,460 2,624 (504) 2,120 ---------- ---------- ---------- ---------- ---------- ---------- Total 8,190 439 8,629 19,248 793 20,041 ---------- ---------- ---------- ---------- ---------- ---------- Net change in net interest income $ 5,407 1,351 6,758 13,245 1,493 14,738 ========== ========== ========== ========== ========== ==========
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1997 AND SEPTEMBER 30, 1996 GENERAL Net income totaled $3,340,000, or $0.39 per fully diluted share for the three months ended September 30, 1997, as compared to a net loss of ($281,000), or ($0.07) per fully diluted share reported for the quarter ended September 30, 1996. The September 1996 quarter included a charge of $2.8 million for the Federal Deposit Insurance Corporation ("FDIC") special assessment. Net income without this one time charge, would have been $1.4 million, or $0.35 per fully diluted share. Net interest income for the three months ended September 30, 1997 was $11 million, an increase of $6.8 million from the September 30, 1996 quarter of $4.2 million. All share amounts have been adjusted to reflect the 50% common stock dividend declared August 22, 1997. INTEREST INCOME Interest income for the quarter ended September 30, 1997 totaled $26.5 million, an increase of $15.4 million, or 138.4%, from the prior year's quarter. Interest income on mortgage loans increased $8.7 million, or 90%, to $18.3 14 million from the September 1996 quarter. The average balance of the mortgage portfolio increased $351.6 million, or 65.1%, primarily as a result of the merger. The annualized average yield on the mortgage loan portfolio increased to 8.23% for the three months ended September 30, 1997 from 7.14% for the 1996 period. The increase in yield was primarily due to additional interest income of $1.7 million received on two large loans that were settled and paid off. Interest income on equity lines of credit increased $697,000, or 79.2%, to $1.6 million from the prior year's quarter, primarily as a result of the Bank's promotion of this product. The average balance of equity lines of credit increased $34.3 million, or 77%, to $78.9 million from $44.6 million from the September 1996 quarter. Interest income on consumer loans and commercial leases increased $635,000 to $754,000 for the three months ended September 30, 1997. The average balance of the consumer loans and commercial leases increased $30.1 million from the 1996 period, primarily as a result of the merger. Interest income on mortgage-backed securities for the three months ended September 30, 1997 increased $3.3 million to $3.4 million from the September 1996 quarter. The average balance of the mortgage-backed securities portfolio increased $194.8 million from the 1996 period, primarily as a result of the merger. The average balance of the investment securities portfolio increased $103.2 million from the 1996 period, due to the merger and additional purchases. INTEREST EXPENSE Interest expense on deposit accounts increased $7.2 million, or 147.1%, to $12.0 million, for the quarter ended September 30, 1997 compared to the prior year's quarter. The annualized average cost of deposits for the three months ended September 30, 1997 was 4.71%, an increase from the annualized average cost of 4.24% for the September 1996 period. The average deposit base increased $557.6 million to $1.0 billion during the 1997 period, primarily as a result of the merger. For the quarter ended September 30, 1997, the Company recorded interest expense on borrowed funds of $3.4 million on an average balance of $226.2 million at an annualized cost of 5.93% primarily related to FHLB advances and reverse repurchase agreements. The average balance of the Collateralized Mortgage Obligations ("CMO") bonds outstanding decreased $1.1 million, or 45.2%, to $1.4 million for the three months ended September 30, 1997 compared to the 1996 period, due to payments and prepayments of the mortgage-backed securities held as collateral for the bonds. The interest expense on the CMO bonds for the 1997 period decreased $38,000 to $43,000 compared to the three months ended September 30, 1996. The annualized average cost on the CMO bonds decreased to 12.39% for the 1997 quarter from 12.79% for the three months ended September 30, 1996, due to adjustments to the discount on the bonds for changes in the estimated average maturities of the collateral. NET INTEREST INCOME Net interest income for the three months ended September 30, 1997 increased $6.8 million or 159.6%, to $11 million from the 1996 period. The annualized average yield on interest-earning assets increased from 7.06% to 7.88% when comparing the 1996 and 1997 quarters. The yield on interest-earning assets would have been 7.37% after adjusting for the $1.7 million interest received on two large loans that were settled and paid off during the current quarter. The annualized average cost of interest-bearing liabilities increased to 4.94% from 4.71%. This resulted in an annualized average net interest rate spread of 2.94% for the three-month period ended September 30, 1997 compared to 2.35% for the prior year's period. Both the average balance of interest-earning assets and interest-bearing liabilities increased during the quarter ended September 30, 1997 compared to the 1996 quarter primarily as a result of the merger. PROVISION FOR LOAN LOSSES Based on management's evaluation of the loan portfolio, no provision for loan losses was recorded during the quarter ended September 30, 1997 and 1996. The amount of non-performing loans at September 30, 1997, was $2,257,000, or 0.23% of total loans, compared to $932,000 or 0.15% of total loans at September 30, 1996. The ratio of the allowance for loan losses to non-performing loans was 240.81% and 258.80% at September 30, 1997 and 1996, respectively. NONINTEREST INCOME Total noninterest income for the three months ended September 30, 1997 was $4.5 million, an increase of $1.1 million over the 1996 period. Fees and commissions for the quarter ended September 30, 1997 increased $1.4 15 million to $4.4 million over the comparable 1996 quarter. Included in the current quarter are ATM transaction fees of $489,000. This is an increase of $200,000 over the prior year's quarter, primarily related to charging non- customers using the Bank's shared ATM network. The remaining increase in fees and commissions is primarily due to origination fees generated by Preferred. NONINTEREST EXPENSE Noninterest expense for the quarter ended September 30, 1997 totaled $10.0 million, an increase of $1.3 million, or 14.8% from the prior year's quarter. Excluding the FDIC special assessment of $2.8 million charged in 1996, the increase would have been $4.1 million, or 69.7%. This quarter included a charge of $806,000 of non-recurring expenses, that includes employment expense, retirement costs and additional costs pertaining to the merger. The remaining increase is primarily related to the combination of the operations of the two companies. INCOME TAX PROVISION The provision for income taxes for the three months ended September 30, 1997 was $2.1 million. The effective tax rate for the three months ended September 30, 1997 was 38.7% compared to an effective income tax benefit for the three months ended September 30, 1996. The effective income tax benefit rate for the 1996 period was primarily due to the reversal of the valuation allowance on deferred tax assets which was no longer deemed necessary. COMPARISON OF OPERATING RESULTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND SEPTEMBER 30, 1996 GENERAL The operating results for the nine months ended September 30, 1997 include the combined entities from the date of merger (February 10, 1997). Net income totaled $7,405,000, or $0.92 per fully diluted share for the nine months ended September 30, 1997, as compared to $2,052,000, or $0.49 per fully diluted share reported for the comparable nine months ended September 30, 1996. The nine months ended September 30, 1996, included a charge of $2.8 million for the FDIC special assessment. Net income without this one time charge, would have been $3,784,000, or $0.90 per fully diluted share. Net interest income for the nine months ended September 30, 1997 was $27.4 million, an increase of $14.7 million from the comparable 1996 period of $12.7 million. All share amounts have been adjusted to reflect the 50% common stock dividend declared August 22, 1997. INTEREST INCOME Interest income for the nine months ended September 30, 1997 totaled $68.7 million, an increase of $34.8 million, or 102.5%, from the prior year's nine months. Interest income on mortgage loans increased $20.2 million, or 68.3%, to $49.8 million from the comparable nine months of 1996. The average balance of the mortgage portfolio increased $322.6 million, or 58.1%, primarily as a result of the merger. The annualized average yield on the mortgage loan portfolio increased to 7.56% for the nine months ended September 30, 1997 from 7.10% for the 1996 period. The increase in yield was primarily due to additional interest income of $1.7 million received on two large loans that were settled and paid off. Interest income on equity lines of credit increased $2.1 million, or 91%, to $4.3 million from the prior year's period, primarily as a result of the Bank's promotion of this product. The average balance of equity lines of credit increased $35 million, or 94.6%, to $72 million from $37 million from the comparable period of 1996. Interest income on consumer loans and commercial leases increased $1.4 million to $1.8 million for the nine months ended September 30, 1997. The average balance of the consumer loans and commercial leases increased $25.4 million from the 1996 period, primarily as a result of the merger. Interest income on mortgage-backed securities for the nine months ended September 30, 1997 increased $7.6 million to $8.0 million from the comparable nine months of 1996. The average balance of the mortgage-backed securities portfolio increased $148.3 million from the 1996 period, primarily as a result of the merger. The average balance of the investment securities portfolio increased $62.3 million from the 1996 period, due to the merger and additional purchases. 16 INTEREST EXPENSE Interest expense on deposit accounts increased $17.9 million, or 121.8%, to $32.6 million, for the nine months ended September 30, 1997 compared to the prior year's period. The annualized average cost of deposits for the nine months ended September 30, 1997 was 4.62%, an increase from the annualized average cost of 4.27% for the comparable 1996 period. The average deposit base increased $483.4 million to $943.8 million during the 1997 period, primarily as a result of the merger. For the nine months ended September 30, 1997, the Company recorded interest expense on borrowed funds of $8.5 million on an average balance of $187.8 million at an annualized cost of 5.98% primarily related to FHLB advances and reverse repurchase agreements. The average balance of the Collateralized Mortgage Obligations ("CMO") bonds outstanding decreased $1.3 million, or 43.6%, to $1.7 million for the nine months ended September 30, 1997 compared to the 1996 period, due to payments and prepayments of the mortgage-backed securities held as collateral for the bonds. The interest expense on the CMO bonds for the 1997 period decreased $147,000 to $154,000 compared to the nine months ended September 30, 1996. The annualized average cost on the CMO bonds decreased to 12.19% for the 1997 period from 13.44% for the nine months ended September 30, 1996, due to adjustments to the discount on the bonds for changes in the estimated average maturities of the collateral. NET INTEREST INCOME Net interest income for the nine months ended September 30, 1997 increased $14.7 million or 116.4%, to $27.4 million from the 1996 period. The annualized average yield on interest-earning assets for nine months increased from 7.00% to 7.45% when comparing the 1996 and 1997 periods. The yield on interest-earning assets would have been 7.27% after adjusting for the $1.7 million interest received on two large loans that were settled and paid off during the current nine months ended. The annualized average cost of interest-bearing liabilities for nine months increased to 4.86% from 4.77%. This resulted in an annualized average net interest rate spread of 2.59% for the nine-month period ended September 30, 1997 compared to 2.23% for the prior year's period. Both the average balance of interest-earning assets and interest-bearing liabilities increased during the nine months ended September 30, 1997 compared to the 1996 period primarily as a result of the merger. PROVISION FOR LOAN LOSSES Based on management's evaluation of the loan portfolio, no provision for loan losses was recorded during the nine months ended September 30, 1997 and 1996. The amount of non-performing loans at September 30, 1997, was $2,257,000, or 0.23% of total loans, compared to $932,000 or 0.15% of total loans at September 30, 1996. The ratio of the allowance for loan losses to non-performing loans was 240.81% and 258.80% at September 30, 1997 and 1996, respectively. NONINTEREST INCOME Total noninterest income for the nine months ended September 30, 1997 was $11.4 million, an increase of $1.4 million from the 1996 period. The nine month period ended September 30, 1997 included losses of $238,000 on mortgage loan sales compared to gains of $354,000 recorded for the 1996 period. The current period included a loss of $391,000 on sales of $59 million of adjustable rate mortgage loans. The loan sale loss and subsequent reinvestment of the proceeds was completed to enhance the Bank's asset and liability mix. Fees and commissions for the nine months ended September 30, 1997 increased $2.5 million to $11.3 million over the comparable 1996 period. Included in the current nine- month period are ATM transaction fees of $1.3 million. This is an increase of $659,000 over the prior year's period, primarily related to charging non- customers using the Bank's shared ATM network. Also included in fees and commissions for the current nine-month period are additional fees on deposit accounts of $295,000, primarily related to the additional accounts added in the merger. The remaining increase in fees and commissions is primarily due to origination fees generated by Preferred. Other noninterest income for the nine months ended September 30, 1997 decreased $105,000 to $79,000 primarily related to a $104,000 tax refund and $53,000 from the redemption of an equity investment included in the 1996 period. 17 NONINTEREST EXPENSE Noninterest expense for the nine months ended September 30, 1997 totaled $26.7 million, an increase of $6.3 million, or 31.1% from the prior year's comparable period. Excluding the FDIC special assessment of $2.8 million charged in 1996, the increase would have been $9.2 million, or 52.2% The current year's period includes $1.4 million in non-recurring merger related expenses, which occurred in the first and third quarters. The remaining increases are primarily related to the combination of the operations of the two companies. INCOME TAX PROVISION The provision for income taxes for the nine months ended September 30, 1997 was $4.7 million. The effective tax rate for the nine months ended September 30, 1997 was 38.7% compared to 8.1% for the nine months ended September 30, 1996. The effective tax rate for the 1996 period was primarily due to the reversal of the valuation allowance on deferred tax assets which was no longer deemed necessary. PART II - OTHER INFORMATION Item 1. Legal Proceedings Not Applicable. Item 2. Changes in Securities Not Applicable. Item 3. Defaults Upon Senior Securities Not Applicable. Item 4. Submission of Matters to a Vote of Security Holders Not Applicable Item 5. Other Information Not Applicable. 18 Item 6. Exhibits and Reports on Form 8-K. (a) Exhibit No. 11 Statement re: Computation of Per Share Earnings
Three Months Nine Months Ended Ended September 30, September 30, 1997 1997 ------------- ------------- Net income $ 3,340,000 7,405,000 ------------- ------------- Weighted average common shares outstanding 8,019,357 7,417,521 Common stock equivalents due to dilutive effect of stock options 542,968 516,941 ------------- ------------- Total weighted average common shares and equivalents outstanding 8,562,325 7,934,462 ------------- ------------- Primary earnings per share $ 0.39 0.93 ------------- ------------- Total weighted average common shares and equivalents outstanding 8,019,357 7,417,521 Additional dilutive shares using end of period market value versus average market value for the period when utilizing the treasury stock method regarding stock options 600,668 601,009 ------------- ------------- Total weighted average common shares and equivalents outstanding for fully diluted computation 8,620,025 8,018,530 ------------- ------------- Fully diluted earnings per share $ 0.39 0.92 ------------- -------------
(b) Reports on Form 8-K. none. 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. Alliance Bancorp Dated: November 7, 1997 /s/ Kenne P. Bristol ---------------- ---------------------------- Kenne P. Bristol President and Chief Executive Officer Dated: November 7, 1997 /s/ Richard A. Hojnicki ---------------- ---------------------------- Richard A. Hojnicki Executive Vice President and Chief Financial Officer 20 EX-27 2 FINANCIAL DATA SCHEDULE
9 1,000 9-MOS DEC-31-1997 SEP-30-1997 11,202 25,432 0 0 289,064 0 0 996,854 5,435 1,371,184 998,051 160,397 19,926 0 0 0 82 129,008 1,371,184 55,913 11,955 829 68,697 32,631 41,294 27,403 0 0 26,738 12,079 12,079 0 0 7,405 0.93 0.92 2.59 2,257 0 0 124 5,475 46 6 5,435 0 0 5,435
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