<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1997
Commission file number 0-7818
---------
INDEPENDENT BANK CORPORATION
------------------------------------------------------
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Michigan 38-2032782
------------------------------------ ------------------------------------
(State or jurisdiction of (I.R.S. Employer Identification
Incorporation or Organization) Number)
</TABLE>
230 West Main Street, P.O. Box 491, Ionia, Michigan 48846
----------------------------------------------------------
(Address of principal executive offices)
(616) 527-9450
----------------------------------------------------------
(Registrant's telephone number, including area code)
NONE
-------------------------------------------------------------------
Former name, address and fiscal year, if changed since last report.
Indicate by check mark whether the registrant (1) has filed all documents
and reports required to be filed by Sections 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. YES X NO
--- ---
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class Outstanding at August 11, 1997
--------------------------- --------------------------------------
Common stock, par value $1 4,347,252
<PAGE> 2
INDEPENDENT BANK CORPORATION AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Page
Number(s)
---------
<S> <C>
PART I - Financial Information
---------------------
Item 1. Consolidated Statements of Financial Condition
June 30, 1997 and December 31, 1996 2
Consolidated Statements of Operations
Three- and six-month periods ended June 30, 1997 and 1996 3
Consolidated Statements of Cash Flows
Six-month periods ended June 30, 1997 and 1996 4
Consolidated Statements of Shareholders' Equity
Six-month periods ended June 30, 1997 and 1996 5
Notes to Interim Consolidated Financial Statements
Three- and six-month periods ended June 30, 1997 and 1996 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7-15
PART II - Other Information
-----------------
Item 4. Submission of Matters to a Vote of Security-Holders 16
Item 6. Exhibits & Reports on Form 8-K 17
</TABLE>
<PAGE> 3
Part I.
INDEPENDENT BANK CORPORATION AND SUBSIDIARIES
Consolidated Statements of Financial Condition
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
----------- ------------
Assets (unaudited)
-----------
<S> <C> <C>
Cash and Cash Equivalents
Cash and due from banks $ 32,400,000 $ 40,631,000
Federal funds sold 10,000,000
----------- -----------
Total Cash and Cash Equivalents 32,400,000 50,631,000
----------- -----------
Securities available for sale 145,398,000 136,852,000
Securities held to maturity (Fair value of $26,117,000 at June
30,1997; $27,645,000 at December 31, 1996) 25,257,000 26,754,000
Federal Home Loan Bank stock, at cost 11,793,000 11,076,000
Loans held for sale 14,036,000 11,583,000
Loans
Commercial and agricultural 178,962,000 164,304,000
Real estate mortgage 387,017,000 331,150,000
Installment 121,144,000 114,250,000
----------- -----------
Total Loans 687,123,000 609,704,000
Allowance for loan losses (7,100,000) (6,960,000)
----------- -----------
Net Loans 680,023,000 602,744,000
Property and equipment, net 20,083,000 18,462,000
Accrued income and other assets 29,364,000 30,495,000
----------- -----------
Total Assets $ 958,354,000 $ 888,597,000
=========== ===========
Liabilities and Shareholders' Equity
Deposits
Non-interest bearing $ 80,570,000 $ 84,671,000
Savings and NOW 329,075,000 327,627,000
Time 257,907,000 260,236,000
----------- -----------
Total Deposits 667,552,000 672,534,000
Federal funds purchased 28,450,000 1,700,000
Other borrowings 178,710,000 135,294,000
Guaranteed preferred beneficial interests in Company's
subordinated debentures 17,250,000 17,250,000
Accrued expenses and other liabilities 10,937,000 9,983,000
----------- -----------
Total Liabilities 902,899,000 836,761,000
----------- -----------
Shareholders' Equity
Preferred stock, no par value--200,000 shares authorized; none
outstanding
Common stock, $1.00 par value--14,000,000 shares authorized;
issued and outstanding: 4,347,252 shares at June 30, 1997
and 2,861,535 shares at December 31, 1996 4,347,000 2,862,000
Capital surplus 22,696,000 23,230,000
Retained earnings 27,436,000 24,713,000
Net unrealized gain on securities available for sale, net of
related tax effect 976,000 1,031,000
----------- -----------
Total Shareholders' Equity 55,455,000 51,836,000
----------- -----------
Total Liabilities and Shareholders' Equity $ 958,354,000 $ 888,597,000
=========== ===========
</TABLE>
See notes to interim consolidated financial statements.
2
<PAGE> 4
INDEPENDENT BANK CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1997 1996 1997 1996
-------- -------- ----------- -----------
(unaudited) (unaudited)
------------------------------- ------------------------------------
<S> <C> <C> <C> <C>
Interest Income
Interest and fees on loans $ 16,001,000 $ 11,691,000 $ 30,764,000 $ 22,089,000
Securities
Taxable 2,261,000 1,643,000 4,423,000 2,968,000
Tax-exempt 677,000 476,000 1,320,000 931,000
Other investments 216,000 139,000 494,000 349,000
------------ ------------ ------------ -------------
Total Interest Income 19,155,000 13,949,000 37,001,000 26,337,000
------------ ------------ ------------ -------------
Interest Expense
Deposits 5,496,000 3,772,000 11,050,000 7,118,000
Other borrowings 3,182,000 1,776,000 5,597,000 3,447,000
------------ ------------ ------------ ------------
Total Interest Expense 8,678,000 5,548,000 16,647,000 10,565,000
------------ ------------ ------------ ------------
Net Interest Income 10,477,000 8,401,000 20,354,000 15,772,000
Provision for loan losses 321,000 482,000 642,000 689,000
------------ ------------ ------------ ------------
Net Interest Income After
Provision for Loan Losses 10,156,000 7,919,000 19,712,000 15,083,000
------------ ------------ ------------ ------------
Non-interest Income
Service charges on deposit accounts 777,000 536,000 1,451,000 1,011,000
Net gains (losses) on asset sales
Real estate mortgage loans 408,000 447,000 836,000 888,000
Securities (4,000) (95,000) 74,000 (146,000)
Other income 745,000 457,000 1,301,000 816,000
------------ ------------ ------------ ------------
Total Non-interest Income 1,926,000 1,345,000 3,662,000 2,569,000
------------ ------------ ------------ ------------
Non-interest Expense
Salaries and employee benefits 5,018,000 3,818,000 9,679,000 7,164,000
Occupancy, net 672,000 461,000 1,346,000 895,000
Furniture and fixtures 559,000 424,000 1,048,000 784,000
Other expenses 2,756,000 1,760,000 5,220,000 3,327,000
------------ ------------ ------------ ------------
Total Non-interest Expense 9,005,000 6,463,000 17,293,000 12,170,000
------------ ------------ ------------ ------------
Income Before Federal Income Tax 3,077,000 2,801,000 6,081,000 5,482,000
Federal income tax expense 883,000 849,000 1,753,000 1,640,000
------------ ------------ ------------ ------------
Net Income $ 2,194,000 $ 1,952,000 $ 4,328,000 $ 3,842,000
============ ============ ============ ============
Net Income Per Share $ .50 $ .45 $ .99 $ .89
Dividends Per Share
Declared $ .185 $ .165 $ .370 $ .330
Paid .185 .165 .358 .325
</TABLE>
See notes to interm consolidated financial statements.
3
<PAGE> 5
INDEPENDENT BANK CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Six months ended
June 30,
1997 1996
----------- -----------
(unaudited)
-------------------------------------
<S> <C> <C>
Net Income $ 4,328,000 $ 3,842,000
Adjustments to Reconcile Net Income
to Net Cash from Operating Activities
Proceeds from sales of loans held for sale 40,803,000 60,778,000
Disbursements for loans held for sale (42,420,000) (49,654,000)
Provision for loan losses 642,000 689,000
Deferred loan fees 247,000 120,000
Depreciation, amortization of intangible assets and premiums and
accretion of discounts on investments securities and loans 2,181,000 1,103,000
Net (gains) losses on sales of securities (74,000) 146,000
Net gains on sales of real estate mortgage loans (836,000) (888,000)
(Increase) decrease in accrued income and other assets 371,000 (2,761,000)
Increase in accrued expenses and other liabilities 1,551,000 3,845,000
------------ --------------
Total Adjustments 2,465,000 13,378,000
------------ --------------
Net Cash from Operating Activities 6,793,000 17,220,000
------------ --------------
Cash Flow from Investing Activities
Proceeds from sales of securities available for sale 26,570,000 9,629,000
Proceeds from maturity of securities available for sale 2,537,000
Proceeds from maturity of securities held to maturity 1,356,000 7,782,000
Principal payments received on securities available for sale 4,986,000 4,287,000
Principal payments received on securities held to maturity 323,000 378,000
Purchases of securities available for sale (43,792,000) (25,470,000)
Purchases of securities held to maturity (295,000)
Acquisition of bank, less cash received 19,011,000
Portfolio loans purchased (29,757,000) (1,989,000)
Principal repayments on portfolio loans purchased 1,151,000 153,000
Portfolio loans made to customers net of principle payments received (49,561,000) (36,070,000)
Capital expenditures (2,798,000) (1,279,000)
------------ --------------
Net Cash from Investing Activities (88,985,000) (23,863,000)
------------ --------------
Cash Flow from Financing Activities
Net increase (decrease) in total deposits (4,982,000) 7,415,000
Net increase in short-term borrowings 25,166,000 21,706,000
Proceeds from Federal Home Loan Bank advances 61,000,000 12,000,000
Payments of Federal Home Bank advances (15,000,000) (18,000,000)
Retirement of long-term debt (1,000,000)
Dividends paid (1,552,000) (1,301,000)
Proceeds from issuance of commons stock 329,000 39,000
------------ --------------
Net Cash from Financing Activities 63,961,000 21,859,000
------------ --------------
Net Increase (Decrease) in Cash and Cash Equivalents (18,231,000) 15,216,000
Cash and Cash Equivalents at Beginning of Period 50,631,000 17,208,000
------------ --------------
Cash and Cash Equivalents at End of Period $ 32,400,000 $ 32,424,000
============ == ===========
Cash paid during the period for:
Interest 17,070,000 10,830,000
Income taxes 1,773,000 1,330,000
Transfer of loans to other real estate 276,000 151,000
</TABLE>
See notes to interim consolidated financial statements
4
<PAGE> 6
INDEPENDENT BANK CORPORATION AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
<TABLE>
<CAPTION>
Six months ended
June 30,
1997 1996
---------- ----------
(unaudited)
------------------------------
<S> <C> <C>
Balance at beginning of period $ 51,836,000 $ 47,025,000
Net income 4,328,000 3,842,000
Cash dividends declared (1,606,000) (1,413,000)
Issuance of common stock 952,000 539,000
Net change in unrealized gain/loss on securities
available for sale, net of related tax effect (55,000) (588,000)
------------- -------------
Balance at end of period $ 55,455,000 $ 49,405,000
============= =============
</TABLE>
See notes to interim consolidated financial statements.
5
<PAGE> 7
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. In the opinion of management of the Registrant, the accompanying unaudited
consolidated financial statements contain all the adjustments (consisting only
of normal recurring accruals) necessary to present fairly the consolidated
financial condition of the Registrant as of June 30, 1997 and December 31,
1996, and the results of operations for the three- and six-month periods ended
June 30, 1997 and 1996.
2. Management's assessment of the allowance for loan losses is based on an
evaluation of the loan portfolio, recent loss experience, current economic
conditions and other pertinent factors. Loans on non-accrual status, past due
more than 90 days, or restructured amounted to $4,652,000 at June 30, 1997, and
$3,902,000 at December 31, 1996. (See Management's Discussion and Analysis of
Financial Condition and Results of Operations).
3. The provision for income taxes represents federal income tax expense
calculated using annualized rates on taxable income generated during the
respective periods.
4. The results of operations for the six-month period ended June 30, 1997,
are not necessarily indicative of the results to be expected for the full year.
6
<PAGE> 8
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management's discussion and analysis of financial condition and results of
operations contains forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. Actual results could differ
materially from those projected in such forward-looking statements.
The following section presents additional information that may be necessary to
assess the financial condition and results of operations of the Registrant and
its subsidiary banks (the "Banks"). This section should be read in conjunction
with the consolidated financial statements contained elsewhere in this report
as well as the Registrants 1996 Annual Report on Form 10-K.
FINANCIAL CONDITION
SUMMARY Total assets increased to $958.4 million at June 30, 1997, from $888.6
million at December 31, 1996. Approximately 75% of the $69.8 million increase
in total assets reflects the deployment of cash proceeds from the purchase of
the FoA Branches into higher yielding loans and securities. (See "Acquisitions
and financing.") To manage the temporary increase in liquidity, the Banks had
initially utilized a portion of such cash proceeds to reduce federal funds
purchased.
Total loans grew to $687.1 million at June 30, 1997. Real estate mortgage
loans account for approximately 72% of the $77.4 million increase from $609.7
million at December 31, 1996. This increase reflects the purchase of seasoned
single-family real estate mortgage loans totaling approximately $29.8 million
that were funded with non-maturity deposits acquired as a result of the FoA
Branch purchase.
The Banks have relied on other borrowings to fund a portion of the increase in
total loans. The use of such non-deposit funds complements the relatively
stable base of core deposits and is an integral part of the Banks'
asset/liability management efforts. Other borrowed funds, principally advances
from the Federal Home Loan Bank (the "FHLB"), increased to $178.7 million at
June 30, 1997, from $135.3 million at December 31, 1996. (See (Asset/liability
management.")
Deposits totaled $667.6 million at June 30, 1997, compared to $672.5 million at
December 31, 1996. The nominal decline, particularly in non-interest bearing
deposits, principally reflects the seasonal cash management needs of the Banks'
municipal customers.
ASSET QUALITY Management believes that the Registrant's decentralized structure
provides the Banks with important advantages in serving the credit needs of the
principal lending markets. Although the Management and Board of Directors of
each Bank retain authority and responsibility for credit decisions, each of the
Banks has adopted uniform underwriting standards. Further, the Registrant's
loan committee as well as the centralization of commercial loan credit services
and loan review functions promote compliance with such established underwriting
standards. The centralization of retail loan services also provides for
consistent service quality and facilitates compliance with consumer protection
laws and regulations.
7
<PAGE> 9
In addition to the communities served by the Banks' branch networks, principal
lending markets include nearby communities and metropolitan areas. Subject to
established underwriting criteria, the Banks also participate in commercial
lending transactions with certain non-affiliated banks and purchase real estate
mortgage loans from third-party originators.
Non-accrual loans totaled $2.6 million and $1.7 million at June 30, 1997, and
December 31, 1996, respectively. The increase principally reflects an
agricultural credit that was purchased in conjunction with the FoA Branches, of
which Management does not anticipate a material impact on the Registrant's
financial condition or results of operations. Largely as a result of a decline
in other real estate, however, total non-performing assets increased by only
$357,000 and declined to .73% of total loans at June 30, 1997, from .76% at
December 31, 1996.
NON-PERFORMING ASSETS
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
---------- ------------
<S> <C> <C>
Non-accrual loans $ 2,589,000 $ 1,711,000
Loans 90 days or more past due and
still accruing interest 1,874,000 1,994,000
Restructured loans 189,000 197,000
----------- -----------
Total non-performing loans 4,652,000 3,902,000
Other real estate 337,000 730,000
----------- -----------
Total non-performing assets $4,989,000 $ 4,632,000
=========== ===========
As a percent of total loans
Non-performing loans 0.68% 0.64%
Non-performing assets 0.73% 0.76%
Allowance for loan losses as a percent of
non-performing loans 153% 173%
</TABLE>
Loans charged against the allowance for loan losses, net of recoveries, were
equal to .16% of average loans during the six months ended June 30, 1997,
compared to .08% during the comparable period of 1996. The increase in net
losses principally reflects loans acquired as a result of the purchase of NBC.
(See "Acquisitions and financing.") Net loan losses for the year ended
December 31, 1996, were equal to .13% of average loans.
8
<PAGE> 10
ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
Six months ended
June 30,
1997 1996
----------- -----------
<S> <C> <C>
Balance at beginning of period $ 6,960,000 $ 5,243,000
Additions (deduction)
Allowance on loans acquired 930,000
Provision charged to operating expense 642,000 689,000
Recoveries credited to allowance 353,000 174,000
Loans charged against the allowance (855,000) (359,000)
----------- ----------
Balance at end of period $ 7,100,000 $6,677,000
=========== ==========
Net loans charged against the allowance to
average Portfolio Loans (annualized) 0.16% 0.08%
</TABLE>
Management's assessment of the allowance for loan losses is based on the
composition of the loan portfolio, an evaluation of specific credits,
historical loss experience as well as the level of non-performing and impaired
loans. At June 30, 1997, approximately 46% of the allowance for loan losses
was allocated to specific loans or loan portfolios compared to 47% at December
31, 1996.
Impaired loans totaled approximately $3,000,000 at June 30, 1997. At that same
date, certain impaired loans with a balance of approximately $1,500,000 had
specific allocations of the allowance for loan losses calculated in accordance
with Statement of Financial Accounting Standards #114 totaling approximately
$300,000. The Banks' average investment in impaired loans was approximately
$3,200,000, for the six-month period ending June 30, 1997. Cash receipts on
impaired loans on non-accrual status are generally applied to the principal
balance. Interest recognized on impaired loans for that six-month period was
approximately $74,000.
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
June 30, 1997 December 31, 1996
------------------------ ------------------------
Percent of Percent of
Allowance Loans to Allowance Loans to
Amount Total Loans Amount Total Loans
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Commercial and
agricultural $ 2,171,000 26.1% $2,176,000 26.9%
Real estate mortgage 300,000 56.3 257,000 54.3
Installment 769,000 17.6 834,000 18.8
Unallocated 3,860,000 3,693,000
----------- ------ ---------- ------
Total $ 7,100,000 100.0% $6,960,000 100.0%
=========== ====== ========== ======
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES The ability to maintain appropriate financial
leverage is critical to Management's mission to create value for the
Registrant's shareholders. To profitably deploy capital within existing
markets, the Banks have implemented balance sheet management
strategies
9
<PAGE> 11
that combine effective loan origination efforts with disciplined funding
strategies. (See "Asset/liability management.")
Management further believes that its acquisition strategy is consistent with
its goal to create shareholder value. Although the Banks' balance sheet
management strategies provide profitable opportunities to leverage the balance
sheet, the franchise value associated with core deposits and other customer
relationships may provide greater value to the Registrant's shareholders.
The Registrant's cost of capital is also a critical factor in creating
shareholder value. Accordingly, Management elected to fund the purchase of the
FoA Branches by issuing the Preferred Securities. (See "Acquisitions and
financing.") In addition to annual tax benefits totaling more than $500,000,
the non-convertible structure of the Preferred Securities eliminates potential
dilution of the common shareholders' interest in the Registrant.
Shareholders' equity totaled $55.5 million at June 30, 1997. The $3.7 million
increase from $51.8 million at December 31, 1996, reflects the retention of
earnings and the issuance of common stock pursuant to various equity-based
incentive compensation plans.
CAPITAL RATIOS
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
--------- ------------
<S> <C> <C>
Equity capital 5.79% 5.83%
Average shareholders equity to average assets(1) 5.89 6.43
Tier 1 leverage (tangible equity capital) 5.84 5.72
Tier 1 risk-based capital 8.88 9.01
Total risk-based capital 10.04 10.26
</TABLE>
(1) Based on year to date average balances for the respective periods
Shareholders' equity was equal to 5.79% of total assets at June 30, 1997,
virtually unchanged from 5.83% at December 31, 1996. The decline in the
Registrant's average shareholders' equity as a percent of average assets
reflects the increase in average assets that resulted from the purchase of the
FoA Branches on December 13, 1996.
ASSET/LIABILITY MANAGEMENT The Banks' competitive position within many of the
markets served by the branch networks limits the ability to materially increase
deposits without adversely impacting the weighted-average cost of core
deposits. Accordingly, Management employs pricing tactics that are intended to
enhance the value of core deposits and the Banks rely on non-deposit sources of
funds to finance increases in loans. To further diversify the Banks' funding
sources, Management is evaluating the use of brokered deposits.
The marginal cost of funds is a principal consideration in the implementation
of the Bank's balance sheet management strategies. Management has determined
that the retention of 15- and 30-year fixed rate mortgages is generally
inconsistent with its goal to maintain profitable leverage or the Banks'
interest-rate risk profiles. Accordingly, the majority of such loans are sold
to mitigate exposure to changes in interest rates. Adjustable-rate and balloon
real estate mortgage loans may,
10
<PAGE> 12
however, be profitably funded within established risk parameters. The retention
of such loans is a principal focus of the Banks' balance sheet management
strategies. (See "Non-interest income.")
The Banks maintain diversified securities portfolios that include obligations of
the U.S. Treasury and government-sponsored agencies as well as securities issued
by states and political subdivisions, corporate notes and mortgage-backed
securities. Management continually evaluates the Banks' asset/liability
management needs and attempts to maintain a portfolio structure that provides
sufficient liquidity and cash flow. The sale of securities available for sale
is dependent upon Management's assessment of reinvestment opportunities and the
Banks' asset/liability management needs. (See "Non-interest income.")
The following table sets forth certain information with respect to the
securities portfolios, including gross unrealized gains and losses.
SECURITIES
<TABLE>
<CAPTION>
Unrealized
--------------------
Amortized Fair
Cost Gains Losses Value
--------------- ----------- ------ --------
(in thousands)
<S> <C> <C> <C> <C>
Securities available for sale
June 30, 1997 $143,919 $2,227 $748 $ 145,398
December 31, 1996 135,290 1,870 308 136,852
Securities held to maturity
June 30, 1997 $ 25,257 $ 873 $ 13 $ 26,117
December 31, 1996 26,754 929 38 27,645
</TABLE>
RESULTS OF OPERATIONS
SUMMARY Net income totaled $2,194,000 during the three months ended June 30,
1997, compared to $1,952,000 during the comparable period of 1996. During the
six-month periods in 1997 and 1996, net income totaled $4,328,000 and
$3,842,000, respectively. The double-digit increases in earnings during both
the three- and six-month periods are principally the result of increases in net
interest income and non-interest income that were partially offset by increases
in non-interest expense and federal income tax expense.
11
<PAGE> 13
Key performance ratios for the three- and six-month periods ended June 30, 1997
and 1996, are set forth below.
KEY PERFORMANCE RATIOS
<TABLE>
<CAPTION>
Three months Six months
ended June 30, ended June 30,
1997 1996 1997 1996
------------------- ------------------
<S> <C> <C> <C> <C>
Return on
Average assets .94% 1.20% .96% 1.24%
Average equity 16.32 15.93 16.30 15.84
Earnings per common share $ .50 $ .45 $.99 $ .89
</TABLE>
The increase in the Registrant's return on average equity, relative to the
decline in its return on average assets, reflects the increase in leverage that
resulted from the 1996 Acquisitions and the related financing.
NET INTEREST INCOME Increases in interest income are principally the result of
increases in average earning assets. Net interest income increased by 24.7% to
$10,477,000 during the three-month period in 1997 and by 29.1% to $20,354,000
during the six-month period. Average earning assets increased by 41.0% and
43.0% during the three- and six-month periods, respectively. Management
attributes more than 75% of the increase in average earning assets to the 1996
Acquisitions.
NET INTEREST INCOME AND SELECTED RATIOS
<TABLE>
<CAPTION>
Three months Six months
ended June 30, ended June 30,
1997 1996 1997 1996
--------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Average earning assets (in thousands) $ 863,009 $ 612,256 $ 841,505 $ 588,303
As a percent of average earning assets
Tax equivalent interest income 9.06% 9.34% 9.03% 9.15%
Interest expense 4.03 3.64 3.99 3.60
Tax equivalent net interest income 5.03 5.70 5.04 5.55
Average earning assets as a
percent of average assets 92.65% 93.76% 92.52% 94.71%
Free-funds ratio 7.71% 12.00% 7.67% 12.11%
</TABLE>
In addition to the impact of the cash proceeds received from the purchase of the
FoA Branches, the decline in net interest income as a percent of average earning
assets reflects the cost of the Credit Facility and the Preferred Securities.
(See "Acquisitions and financing.") The relative cost of non-deposit sources of
funds that have been employed to implement the Banks' balance sheet management
strategies also contributed to the decline in net interest income as a percent
of average
12
<PAGE> 14
earning assets. The decline in average earning assets as a percent of average
assets principally reflects the intangible assets associated with the 1996
Acquisitions.
PROVISION FOR LOAN LOSSES The provision for loan losses declined to $321,000
during the three months ended June 30, 1997 from $482,000 during the comparable
period in 1996. The provision for loan losses totaled $642,000 and $689,000
during the six-month periods in 1997 and 1996, respectively. Based upon the
application of its allocation methodology, management elected to fund the
allowance for loan losses relating to loans associated with the NBC acquisition
during the second quarter of 1996. (See "Asset quality.")
NON-INTEREST INCOME Non-interest income totaled $1,926,000 during the three
months ended June 30, 1997, compared to $1,345,000 during the comparable period
in 1996. During the six-month periods in 1997 and 1996, non-interest income
totaled $3,662,000 and $2,569,000, respectively. The majority of the increase
in non-interest income reflects the impact of the 1996 Acquisitions. In
addition to the 1996 acquisitions, the increase in non-interest income reflects
revenues associated with deposit account promotions and the Banks' title
insurance agency.
Notwithstanding a decline in loans sold, net gains on the sale of real estate
mortgage loans during the three- and six-month periods in 1997 were largely
unchanged from the comparable periods in 1996. In addition to favorable
economic conditions, Management attributes the increase in net gains as a
percent of real estate mortgage loans sold to an increase in the percentage of
loans sold that have been underwritten pursuant to government guarantees.
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
1997 1996 1997 1996
---------------------------- -----------------------------------
<S> <C> <C> <C> <C>
Real estate mortgage loans
originated $65,284,000 $64,952,000 $109,535,000 $108,694,000
Real estate mortgage loan sales 21,490,000 30,372,000 39,967,000 59,890,000
Real estate mortgage loan
servicing rights sold 4,449,000 11,760,000 9,606,000 20,931,000
Net gains on the sale of real
estate mortgage loans 408,000 447,000 836,000 888,000
Net gains as a percent of real
estate mortgage loans sold 1.90% 1.47% 2.09% 1.48%
</TABLE>
The Banks capitalized approximately $197,000 and $181,000 of related servicing
rights during the six-month periods ended June 30, 1997 and 1996, respectively.
Amortization of capitalized servicing rights for those periods was $56,000 and
$17,000, respectively. The fair value of capitalized servicing rights
approximated the book value of $431,000 at June 30, 1997, and therefore, no
valuation allowance was considered necessary.
The volume of loans sold is dependent upon the Banks' ability to originate real
estate mortgage loans as well as the demand for fixed-rate obligations. (See
"Asset/liability management.") Net gains on real estate mortgage loans are also
dependent upon economic and competitive factors as well as the Banks' ability to
effectively manage exposure to changes in interest rates.
13
<PAGE> 15
The Banks realized net losses on the sale of securities available for sale
totaling $4,000 and $95,000 during the three months ended June 30, 1997 and
1996, respectively. During the six-month period in 1997, the Banks recorded net
gains of $74,000 compared to net losses of $146,000 during the comparable period
of 1996. (See "Asset/liability management.")
SALES OF SECURITIES AVAILABLE FOR SALE
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
1997 1996 1997 1996
------------ ----------- ----------- ---------------
<S> <C> <C> <C> <C>
Proceeds $15,514,000 $6,063,000 $26,422,000 $9,629,000
=========== ========== =========== ==========
Gross gains $ 27,000 $ 31,000 $ 114,000 $ 31,000
Gross losses (31,000) (126,000) (40,000) (177,000)
----------- ---------- ----------- ----------
Net Gains (losses) $ (4,000) $ (95,000) $ 74,000 $ (146,000)
=========== ========== =========== ==========
</TABLE>
NON-INTEREST EXPENSE Non-interest expense totaled $9,005,000 during the three
months ended June 30, 1997, compared to $6,463,000 during the comparable period
in 1996. During the six-month periods in 1997 and 1996, non-interest expense
totaled $17,293,000 and $12,170,000, respectively. The 1996 Acquisitions,
including the amortization of the associated intangible assets, account for the
majority of the increase in non-interest expense. Costs associated with the
origination of real estate mortgage loans and the Banks' title insurance agency
as well as, marketing costs related with certain promotions also contributed to
the increase in non-interest expense.
ACQUISITIONS AND FINANCING
The Registrant acquired North Bank Corporation ("NBC") effective May 31, 1996,
and on December 13, 1996, one of the Banks purchased eight branch offices from
First of America Bank - Michigan, N.A. (the "FoA Branches"). These acquisitions
(the "1996 Acquisitions") were financed with a $17.0 million unsecured credit
facility (the "Credit Facility") and the issuance of $17.25 million of
non-convertible, cumulative trust preferred securities (the "Preferred
Securities"). (See "Capital Resources.")
NBC was acquired for cash consideration totaling $15.8 million. On the
effective date of the transaction, NBC's assets and shareholders' equity totaled
$152.0 million and $9.5 million, respectively, and the Registrant recorded $7.5
million of goodwill.
On the date of the transaction the FoA Branches had deposits totaling $121.9
million, and the acquiring Bank recorded intangible assets totaling $8.8
million. The Bank also purchased loans totaling $22.1 million as well as
certain real and personal property. Net cash proceeds from the transaction
totaled $90.5 million.
14
<PAGE> 16
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS
The Financial Accounting Standards Board adopted Statement of Financial
Accounting Standards, No. 128, "Earnings Per Share", ("SFAS #128") in February
1997.
SFAS #128 replaces primary earnings per share ("Primary") and fully diluted
earnings per share ("Fully Diluted") with basic earnings per share ("Basic")
and diluted earnings per share ("Diluted"). This statement will require a dual
presentation and reconciliation of Basic and Diluted. Basic, unlike Primary,
excludes any dilution of common stock equivalents, while Diluted, like Fully
Diluted, reflects the potential dilution of all common stock equivalents.
This statement is effective for both interim and annual periods ending after
December 15, 1997, with earlier application not permitted. SFAS #128 will be
retroactively applied to all prior periods. Management does not expect the
implementation of this statement to have a material impact on current and prior
year earnings per share.
15
<PAGE> 17
Item 4. Submission of Matters to a Vote of Security-Holders
The Registrant's Annual Meeting of Shareholders was held on April 15,
1997. As described in the Registrant's proxy statement, dated March 14,
1997, matters to be considered at that meeting were:
(1) Election of two incumbent nominees to the board of directors
Both nominees were nominated to serve three-year terms expiring in 2000.
Tabulation in the election of directors is set forth below.
Broker Non-Votes
----------------
Nominee Votes FOR Votes AGAINST and Abstentions
------------------------ --------- ------------- ----------------
Robert J. Leppink 2,186,335 0 64,082
Arch V. Wright, Jr. 2,183,570 0 66,848
Directors whose term of office as a director continued after the meeting
were Charles A. Palmer, Charles C. Van Loan, Keith E. Bazaire, Terry L.
Haske, and Thomas F. Kohn.
(2) Proposal to make an additional 100,000 shares of the Company's common
stock available for issuance under the Non Employee Director Stock
Option Plan. Tabulation of the voting for this proposal was as follows:
Votes FOR 1,688,012
Votes AGAINST 261,802
Broker Non-Votes
and Abstentions 300,603
(3) Proposal to make an additional 125,000 shares of the Company's
common stock available for issuance under the Employee Stock Option
Plan. Tabulation of the voting for this proposal was as follows:
Votes FOR 1,745,390
Votes AGAINST 201,824
Broker Non-Votes
and Abstentions 303,204
(4) Proposal to make and additional 100,000 shares of the Company's common
stock available for issuance under the Incentive Share Grant Plan.
Tabulation of the voting for this proposal was as follows:
Votes FOR 1,582,002
Votes AGAINST 350,662
Broker Non-Votes
and Abstentions 317,753
16
<PAGE> 18
Item 6. Exhibits & Reports on Form 8-K
(a) Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K
During the quarter ended June 30, 1997, there were no reports filed on
Form 8-K.
17
<PAGE> 19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date August 11, 1997 By s/William R. Kohls
--------------- -----------------------------
William R. Kohls, Principal
Financial Officer
Date August 11, 1997 By s/James J. Twarozynski
--------------- -----------------------------
James J. Twarozynski, Principal
Accounting Officer
18
<PAGE> 20
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C>
EX-27 FINANCIAL DATA
SCHEDULE
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 32,400
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 145,398
<INVESTMENTS-CARRYING> 25,257
<INVESTMENTS-MARKET> 26,117
<LOANS> 687,123
<ALLOWANCE> 7,100
<TOTAL-ASSETS> 958,354
<DEPOSITS> 667,552
<SHORT-TERM> 201,160
<LIABILITIES-OTHER> 10,937
<LONG-TERM> 23,250
0
0
<COMMON> 4,347
<OTHER-SE> 51,108
<TOTAL-LIABILITIES-AND-EQUITY> 958,354
<INTEREST-LOAN> 30,764
<INTEREST-INVEST> 5,743
<INTEREST-OTHER> 494
<INTEREST-TOTAL> 37,001
<INTEREST-DEPOSIT> 11,050
<INTEREST-EXPENSE> 16,647
<INTEREST-INCOME-NET> 20,354
<LOAN-LOSSES> 642
<SECURITIES-GAINS> 74
<EXPENSE-OTHER> 17,293
<INCOME-PRETAX> 6,081
<INCOME-PRE-EXTRAORDINARY> 6,081
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,328
<EPS-PRIMARY> 0.99
<EPS-DILUTED> 0.99
<YIELD-ACTUAL> 5.04
<LOANS-NON> 2,589
<LOANS-PAST> 1,874
<LOANS-TROUBLED> 189
<LOANS-PROBLEM> 3,000
<ALLOWANCE-OPEN> 6,960
<CHARGE-OFFS> 855
<RECOVERIES> 353
<ALLOWANCE-CLOSE> 7,100
<ALLOWANCE-DOMESTIC> 3,240
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 3,860
</TABLE>
