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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
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COMMISSION FILE NUMBER 0-20082
ALLIANCE BANCORP
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(Exact name of registrant as specified in its charter)
DELAWARE 36-3811768
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
ONE GRANT SQUARE, HINSDALE, ILLINOIS 60521
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(Address of principal executive offices) (Zip Code)
(630) 323-1776
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(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
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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
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PART I. FINANCIAL INFORMATION Page
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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
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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 $2,272 at December 31, 1996 996,854 609,371
Accrued interest receivable 9,880 3,522
Real estate 2,669 1,586
Premises and equipment, net 7,354 6,592
Stock in Federal Home Loan Bank of Chicago, at cost 12,855 7,445
Other assets 15,874 5,069
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$ 1,371,184 667,964
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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
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Total liabilities 1,242,094 611,338
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Stockholders' Equity:
Preferred stock, $.01 par value; authorized 1,500,000 shares; none outstanding - -
Common stock, $.01 par value; authorized 11,000,000 shares;
8,174,435 shares issued and 8,020,348 outstanding at September 30, 1997
4,185,128 shares issued and 4,042,628 outstanding at December 31, 1996 82 27
Additional paid-in capital 86,519 21,066
Retained earnings, substantially restricted 42,206 37,117
Treasury stock, at cost; 154,087 shares at September 30, 1997 and
142,500 at December 31, 1996 (1,502) (1,284)
Common stock purchased by Employee Stock Ownership Plan - (428)
Unrealized gain on securities available for sale, net of tax 1,785 128
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Total stockholders' equity 129,090 56,626
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Commitments and contingencies
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$ 1,371,184 667,964
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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
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(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 -
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Total interest income 26,507 11,120 68,697 33,918
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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
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Total interest expense 15,514 6,885 41,294 21,253
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Net interest income 10,993 4,235 27,403 12,665
Provision for loan losses - - - -
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Net interest income after provision for loan losses 10,993 4,235 27,403 12,665
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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
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Total noninterest income 4,507 3,378 11,414 9,969
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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
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Total noninterest expense 10,047 8,749 26,738 20,400
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Income (loss) before income taxes 5,453 (1,136) 12,079 2,234
Income tax expense (benefit) 2,113 (855) 4,674 182
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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
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(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)
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Net cash provided by (used in) operating activities (15,225) 13,284
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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
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Net cash provided by investing activities 7,543 21,809
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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
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Net cash provided by (used in) financing activities 17,075 (35,130)
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Net increase (decrease) in cash and cash equivalents 9,393 (37)
Cash and cash equivalents at beginning of period 27,241 29,030
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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
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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
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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.
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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.
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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.
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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