<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 SEPTEMBER 30, 1997
Commission file number 0-7818
INDEPENDENT BANK CORPORATION
----------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Michigan 38-2032782
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(State or jurisdiction of (I.R.S. Employer Identification
Incorporation or Organization) Number)
230 West Main Street, P.O. Box 491, Ionia, Michigan 48846
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(Address of principal executive offices)
(616) 527-9450
(Registrant's telephone number, including area code)
NONE
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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 November 12, 1997
--------------------------- ----------------------------------------
Common stock, par value $1 4,573,969
<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
September 30, 1997 and December 31, 1996 2
Consolidated Statements of Operations
Three- and nine-month periods ended September 30, 1997 and 1996 3
Consolidated Statements of Cash Flows
Nine-month periods ended September 30, 1997 and 1996 4
Consolidated Statements of Shareholders' Equity
Nine-month periods ended September 30, 1997 and 1996 5
Notes to Interim Consolidated Financial Statements
Three- and nine-month periods ended September 30, 1997 and 1996 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7-16
PART II - Other Information
-----------------
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>
September 30, December 31,
1997 1996
------------------------- -----------------
Assets (unaudited)
------------------------- -----------------
<S> <C> <C>
Cash and Cash Equivalents
Cash and due from banks $ 23,411,000 $ 40,631,000
Federal funds sold 10,000,000
-------------- --------------
Total Cash and Cash Equivalents 23,411,000 50,631,000
-------------- --------------
Securities available for sale 121,939,000 136,852,000
Securities held to maturity (Fair value of $24,711,000 at September
30, 1997; $27,645,000 at December 31, 1996) 23,856,000 26,754,000
Federal Home Loan Bank stock, at cost 12,389,000 11,076,000
Loans held for sale 16,020,000 11,583,000
Loans
Commercial and agricultural 185,844,000 164,304,000
Real estate mortgage 407,480,000 331,150,000
Installment 126,083,000 114,250,000
-------------- --------------
Total Loans 719,407,000 609,704,000
Allowance for loan losses (7,329,000) (6,960,000)
-------------- --------------
Net Loans 712,078,000 602,744,000
Property and equipment, net 20,667,000 18,462,000
Accrued income and other assets 28,717,000 30,495,000
-------------- --------------
Total Assets $ 959,077,000 $ 888,597,000
============== ==============
Liabilities and Shareholders' Equity
Deposits
Non-interest bearing $ 80,297,000 $ 84,671,000
Savings and NOW 325,505,000 327,627,000
Time 275,331,000 260,236,000
-------------- --------------
Total Deposits 681,133,000 672,534,000
Federal funds purchased 22,050,000 1,700,000
Other borrowings 171,079,000 135,294,000
Guaranteed preferred beneficial interests in Company's
subordinated
debentures 17,250,000 17,250,000
Accrued expenses and other liabilities 9,964,000 9,983,000
-------------- --------------
Total Liabilities 901,476,000 836,761,000
-------------- --------------
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: 4,573,969 shares at September 30, 1997
and 2,861,535 shares at December 31, 1996 4,574,000 2,862,000
Capital surplus 29,779,000 23,230,000
Retained earnings 21,790,000 24,713,000
Net unrealized gain on securities available for sale, net of
related tax effect 1,458,000 1,031,000
-------------- --------------
Total Shareholders' Equity 57,601,000 51,836,000
-------------- --------------
Total Liabilities and Shareholders' Equity $ 959,077,000 $ 888,597,000
============== ==============
See notes to interim consolidated financial statements.
</TABLE>
2
<PAGE> 4
INDEPENDENT BANK CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
-------------------------------------
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
------------- --------------- --------------- -------------------
(unaudited) (unaudited)
------------------------------ ----------------------------------------
<S> <C> <C> <C> <C>
Interest Income
Interest and fees on loans $17,173,000 $ 13,498,000 $ 47,937,000 $ 35,587,000
Securities
Taxable 1,895,000 1,905,000 6,318,000 4,873,000
Tax-exempt 682,000 571,000 2,002,000 1,502,000
Other investments 251,000 287,000 745,000 636,000
----------- -------------- --------------- --------------
Total Interest Income 20,001,000 16,261,000 57,002,000 42,598,000
----------- -------------- --------------- --------------
Interest Expense
Deposits 5,699,000 4,480,000 16,749,000 11,598,000
Other borrowings 3,298,000 2,503,000 8,895,000 5,950,000
----------- -------------- --------------- --------------
Total Interest Expense 8,997,000 6,983,000 25,644,000 17,548,000
----------- -------------- --------------- --------------
Net Interest Income 11,004,000 9,278,000 31,358,000 25,050,000
Provision for loan losses 461,000 253,000 1,103,000 942,000
----------- -------------- --------------- --------------
Net Interest Income After
Provision for Loan Losses 10,543,000 9,025,000 30,255,000 24,108,000
----------- -------------- --------------- --------------
Non-interest Income
Service charges on deposit accounts 822,000 630,000 2,273,000 1,641,000
Net gains (losses) on asset sales
Real estate mortgage loans 587,000 363,000 1,423,000 1,251,000
Securities 92,000 16,000 166,000 (130,000)
Other income 660,000 403,000 1,961,000 1,219,000
----------- -------------- --------------- --------------
Total Non-interest Income 2,161,000 1,412,000 5,823,000 3,981,000
----------- -------------- --------------- --------------
Non-interest Expense
Salaries and employee benefits 5,178,000 4,240,000 14,857,000 11,404,000
Occupancy, net 700,000 563,000 2,046,000 1,458,000
Furniture and fixtures 608,000 553,000 1,656,000 1,337,000
Other expenses 3,019,000 2,278,000 8,239,000 5,605,000
----------- -------------- --------------- --------------
Total Non-interest Expense 9,505,000 7,634,000 26,798,000 19,804,000
----------- -------------- --------------- --------------
Income Before Federal Income Tax 3,199,000 2,803,000 9,280,000 8,285,000
Federal income tax expense 924,000 826,000 2,677,000 2,466,000
----------- -------------- --------------- --------------
Net Income $ 2,275,000 $ 1,977,000 $ 6,603,000 $ 5,819,000
=========== =========== ============ ==========
Net Income Per Share $ .49 $ .44 $ 1.43 $ 1.28
Dividends Per Share
Declared $ .176 $ .157 $ .529 $ .472
Paid .176 .157 .517 $ .467
See notes to interim consolidated financial statements.
</TABLE>
3
<PAGE> 5
INDEPENDENT BANK CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Nine months ended
September 30,
1997 1996
----------- -----------
(unaudited)
-------------------------------------
<S> <C> <C>
Net Income $ 6,603,000 $ 5,819,000
Adjustments to Reconcile Net Income
to Net Cash from Operating Activities
Proceeds from sales of loans held for sale 69,684,000 78,515,000
Disbursements for loans held for sale (72,698,000) (69,135,000)
Provision for loan losses 1,103,000 942,000
Deferred loan fees 454,000 158,000
Depreciation, amortization of intangible assets and premiums and
accretion of discounts on investments securities and loans 3,064,000 1,899,000
Net (gains) losses on sales of securities (166,000) 130,000
Net gains on sales of real estate mortgage loans (1,423,000) (1,251,000)
(Increase) decrease in accrued income and other assets 652,000 (7,784,000)
Increase in accrued expenses and other liabilities 327,000 1,114,000
----------- -----------
Total Adjustments 997,000 4,588,000
----------- -----------
Net Cash from Operating Activities 7,600,000 10,407,000
----------- -----------
Cash Flow from Investing Activities
Proceeds from sales of securities available for sale 49,844,000 15,907,000
Proceeds from maturity of securities available for sale 2,702,000
Proceeds from maturity of securities held to maturity 2,756,000 8,898,000
Principal payments received on securities available for sale 8,479,000 6,785,000
Principal payments received on securities held to maturity 562,000 601,000
Purchases of securities available for sale (47,283,000) (30,839,000)
Purchases of securities held to maturity (295,000)
Acquisition of bank, less cash received 9,478,000
Portfolio loans purchased (29,758,000) (1,989,000)
Principal repayments on portfolio loans purchased 2,572,000 152,000
Portfolio loans made to customers net of principle payments received (83,705,000) (61,518,000)
Capital expenditures (3,892,000) (2,607,000)
----------- -----------
Net Cash from Investing Activities (97,723,000) (55,427,000)
----------- -----------
Cash Flow from Financing Activities
Net increase (decrease) in total deposits 8,599,000 (1,378,000)
Net increase in short-term borrowings 18,635,000 20,165,000
Proceeds from Federal Home Loan Bank advances 87,000,000 45,000,000
Payments of Federal Home Bank advances (48,000,000) (17,000,000)
Proceeds from issuance of long-term borrowings 10,000,000
Retirement of long-term debt (1,500,000) (500,000)
Dividends paid (2,356,000) (1,933,000)
Proceeds from issuance of common stock 525,000 59,000
----------- ------------
Net Cash from Financing Activities 62,903,000 54,413,000
----------- -----------
Net Increase (Decrease) in Cash and Cash Equivalents (27,220,000) 9,393,000
Cash and Cash Equivalents at Beginning of Period 50,631,000 17,208,000
----------- -----------
Cash and Cash Equivalents at End of Period $23,411,000 $ 26,601,000
=========== ===========
Cash paid during the period for:
Interest 25,919,000 16,935,000
Income taxes 2,743,000 2,990,000
Transfer of loans to other real estate 344,000 808,000
See notes to interim consolidated financial statements
</TABLE>
4
<PAGE> 6
INDEPENDENT BANK CORPORATION AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
-----------------------------------------------
<TABLE>
<CAPTION>
Nine months ended
September 30
1997 1996
------------ -------------
(unaudited)
----------------------------------
<S> <C> <C>
Balance at beginning of period $ 51,836,000 $ 47,025,000
Net income 6,603,000 5,819,000
Cash dividends declared (2,413,000) (2,125,000)
Issuance of common stock 1,148,000 559,000
Net change in unrealized gain on securities
available for sale, net of related tax effect 427,000 (545,000)
--------------- -------------
Balance at end of period $ 57,601,000 $ 50,733,000
=============== =============
See notes to interim consolidated financial statements.
</TABLE>
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 September 30, 1997 and December 31,
1996, and the results of operations for the three- and nine-month periods ended
September 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 $5,324,000 at September 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 nine-month period ended September 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 Registrant's 1996 Annual Report on Form 10-K.
FINANCIAL CONDITION
SUMMARY Total assets increased to $959.1 million at September 30, 1997, from
$888.6 million at December 31, 1996. Approximately 75% of the $70.5 million
increase in total assets reflects the deployment of cash proceeds from the
purchase of the FoA Branches into higher yielding loans. (See "Acquisitions and
financing.") To manage the temporary increase in liquidity, the Banks had
initially utilized a portion of such cash proceeds from that transaction to
reduce federal funds purchased.
Total loans grew to $719.4 million at September 30, 1997. Real estate mortgage
loans account for approximately 70% of the $109.7 million increase from $609.7
million at December 31, 1996. This increase includes the purchase of seasoned
single-family real estate mortgage loans, principally adjustable rate and
balloon, totaling approximately $29.8 million that were funded with
non-maturity deposits acquired as a result of the FoA Branch purchase.
In addition to the proceeds from the sale or maturity of securities, the Banks
have relied on other borrowings and brokered certificates of deposits
("Brokered CDs") to fund a portion of the increase in total loans. The use of
non-deposit funds complements the relatively stable base of core deposits and
is an integral part of the Banks' asset/liability management efforts. (See
"Asset/liability management.")
Other borrowed funds, principally advances from the Federal Home Loan Bank (the
"FHLB"), increased to $171.1 million at September 30, 1997, from $135.3 million
at December 31, 1996. Deposits totaled $681.1 million at September 30, 1997,
compared to $672.5 million at December 31, 1996. The $8.6 million increase in
total deposits reflects the issuance of $15.0 million of Brokered CDs.
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 and the centralization of commercial loan credit services as
well as loan review functions promote compliance with such established
underwriting standards. The
7
<PAGE> 9
centralization of retail loan services also provides for consistent service
quality and facilitates compliance with consumer protection laws and
regulations.
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 $2.9 million and $1.7 million at September 30, 1997,
and December 31, 1996, respectively. The increase principally reflects an
agricultural credit that was purchased in conjunction with the FoA Branches as
well as certain other commercial credits that are in the process of
foreclosure. Management does not anticipate that the increase in non-accrual
loans will have a material impact on the Registrant's financial condition or
results of operations.
Loans 90 days or more past due and still accruing interest totaled $2,277,000
at September 30, 1997, compared to $1,994,000 at December 31, 1996. The
$283,000 increase principally reflects loans that are expected to be renewed at
substantially similar market terms subsequent to the end of the period.
<TABLE>
<CAPTION>
NON-PERFORMING ASSETS
September 30, December 31,
1997 1996
------------- --------------
<S> <C> <C>
Non-accrual loans $2,861,000 $1,711,000
Loans 90 days or more past due and
still accruing interest 2,277,000 1,994,000
Restructured loans 186,000 197,000
------------ --------------
Total non-performing loans 5,324,000 3,902,000
Other real estate 446,000 730,000
------------ --------------
Total non-performing assets $5,770,000 $4,632,000
============ ==============
As a percent of total loans
Non-performing loans 0.74% 0.64%
Non-performing assets 0.80% 0.76%
Allowance for loan losses as a percent of
non-performing loans 138% 173%
</TABLE>
Loans charged against the allowance for loan losses, net of recoveries, were
equal to .15% of average loans during the nine months ended September 30, 1997,
compared to .11% 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
<TABLE>
<CAPTION>
ALLOWANCE FOR LOAN LOSSES
Nine months ended
September 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 1,103,000 942,000
Recoveries credited to allowance 455,000 270,000
Loans charged against the allowance (1,189,000) (665,000)
----------- ----------
Balance at end of period $ 7,329,000 $6,720,000
=========== ==========
Net loans charged against the allowance to
average Portfolio Loans (annualized) 0.15% 0.11%
</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 September 30, 1997, the unallocated portion of the allowance totaled
$4,064,000, equal to 55% of the total allowance for loan losses, compared to
$3,693,000 or 53% at December 31, 1996.
Impaired loans totaled approximately $3,200,000 at September 30, 1997. At that
same date, certain impaired loans with a balance of approximately $1,600,000,
had specific allocations of the allowance for loan losses calculated in
accordance with Statement of Financial Accounting Standards #114 totaling
approximately $300,000. The Banks' average investment in impaired loans was
approximately $3,200,000, for the nine-month period ending September 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
nine-month period was approximately $125,000.
<TABLE>
<CAPTION>
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
September 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 $2,130,000 25.8% $2,176,000 26.9%
Real estate-
mortgage 315,000 56.6 257,000 54.3
Installment 820,000 17.6 834,000 18.8
Unallocated 4,064,000 3,693,000
---------- ----- ---------- -----
Total $7,329,000 100.0% $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. The Registrant's cost of capital is also an
important factor in creating shareholder value. Accordingly, Management
9
<PAGE> 11
elected to fund the 1996 Acquisitions with a combination of unsecured debt and
Preferred Securities. (See "Acquisitions and financing.")
<TABLE>
<CAPTION>
CAPITALIZATION
September 30, December 31,
1997 1996
------------- ------------
<S> <C> <C>
Unsecured debt $12,500,000 $14,000,000
Preferred Securities 17,250,000 17,250,000
Shareholders' Equity
Preferred stock, no par value
Common Stock, par value $1.00 per share 4,574,000 2,862,000
Capital surplus 29,779,000 23,230,000
Retained earnings 21,790,000 24,713,000
Net unrealized gain on securities available for
sale, net of related tax effect 1,458,000 1,031,000
------------- ------------
Total shareholders' equity 57,601,000 51,836,000
------------- ------------
Total capitalization $87,351,000 $83,086,000
============= ============
</TABLE>
To profitably deploy capital within existing markets, the Banks have
implemented balance sheet management strategies that combine effective loan
origination efforts with disciplined funding strategies. (See "Asset/liability
management.")
Management believes that its acquisition strategy is also 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.
Shareholders' equity totaled $57.6 million at September 30, 1997. The $5.8
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.
<TABLE>
<CAPTION>
CAPITAL RATIOS
September 30, December 31,
1997 1996
------------- ------------
<S> <C> <C>
Equity capital 6.01% 5.83%
Average shareholders equity to average
assets(1) 5.91 6.43
Tier 1 leverage (tangible equity capital) 5.96 5.72
Tier 1 risk-based capital 8.85 9.01
Total risk-based capital 10.00 10.26
(1) Based on year to date average balances for the respective periods
</TABLE>
Shareholders' equity was equal to 6.01% of total assets at September 30, 1997,
compared to 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.
10
<PAGE> 12
ASSET/LIABILITY MANAGEMENT The asset/liability management efforts of the
Registrant and the Banks are intended to identify and evaluate opportunities to
structure the balance sheet in a manner that is consistent with Management's
mission to maintain profitable financial leverage within established risk
parameters. Accordingly, Management's evaluation of business opportunities and
alternate strategies carefully consider the likely impact on the Bank's risk
profile as well as the anticipated contribution to earnings.
Management employs simulation analyses to evaluate the potential changes in the
Bank's net interest income and market value of portfolio equity that result
from changes in interest rates. Such analyses further anticipate the potential
change in the slope of the U.S. Treasury yield curve as well as changes in
prepayment rates on certain assets and premature withdrawals of certificates of
deposits that will accompany changes in interest rates. At September 30, 1997,
each of the Bank's interest-rate risk profiles were within established
parameters.
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, the Banks have
employed Brokered CDs in addition to FHLB advances.
FHLB ADVANCES
<TABLE>
<CAPTION>
September 30, 1997 December 31, 1996
--------------------------- ---------------------------
Average Average Average Average
Amount Maturity Rate Amount Maturity Rate
------- --------- ------- ------- --------- -------
<S> <C> <C> <C> <C> <C> <C>
Fixed rate $82,785 1.4 years 5.94% $90,000 1.6 years 5.96%
Variable rate 66,000 1.2 years 5.70 21,000 1.4 years 5.49
</TABLE>
To further mitigate exposure to rising interest rates the Bank's may employ
interest rate caps on variable rate advances. At September 30, 1997 and
December 31, 1996, the Company employed interest rate caps with a notional
amount of $28.5 million and $9.0 million, respectively.
The marginal cost of funds is a principal consideration in the implementation
of the Bank's balance sheet management strategies. Management has determined
that the retention of 15- and 30-year fixed rate mortgages is generally
inconsistent with its goal to maintain profitable leverage 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 often be profitably funded within established
risk parameters. The retention of such loans has been 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. As a result of such
11
<PAGE> 13
ongoing evaluations, the Banks sold securities with an aggregate market value
of approximately $49.8 million during the nine month period ended September 30,
1997, compared to $15.9 million during the comparable period in 1996. The
proceeds from such sales were utilized to fund increases in total loans or to
reduce non deposit funding sources. (See "Non-interest income.")
The following table sets forth certain information with respect to the
securities portfolios, including gross unrealized gains and losses.
<TABLE>
<CAPTION>
SECURITIES
Unrealized
-------------------------
Amortized Fair
Cost Gains Losses Value
--------------- ---------- ------ -----
(in thousands)
<S> <C> <C> <C> <C>
Securities available for sale
September 30, 1997 $119,730 $2,593 $384 $121,939
December 31, 1996 135,290 1,870 308 136,852
Securities held to maturity
September 30, 1997 $ 23,856 $877 $22 $24,711
December 31, 1996 26,754 929 38 27,645
</TABLE>
RESULTS OF OPERATIONS
SUMMARY Net income totaled $2,275,000 during the three months ended September
30, 1997, compared to $1,977,000 during the comparable period of 1996. During
the nine-month periods in 1997 and 1996, net income totaled $6,603,000 and
$5,819,000, respectively. The double-digit increases in earnings during both
the three- and nine-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.
12
<PAGE> 14
Key performance ratios for the three- and nine-month periods ended September
30, 1997 and 1996, are set forth below.
<TABLE>
<CAPTION>
KEY PERFORMANCE RATIOS
Three months Nine months
ended September 30, ended September 30,
1997 1996 1997 1996
-------------------------------------------- --------------------------------------------
<S> <C> <C> <C> <C>
Net income to
Average assets .94% 1.01% .95% 1.16%
Average equity 15.83 15.58 16.14 15.78
Earnings per common share $ .49 $ .44 $1.43 $ 1.28
Cash basis income to(A)
Average tangible assets 1.09% 1.11% 1.11% 1.17%
Average tangible equity 25.99 20.82 27.30 18.95
Cash basis income per
share(A) $ .56 $ .48 $1.63 $ 1.36
(A) Cash basis financial data exclude intangible assets and the related amortization expense
</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 impact of the related financing.
(See "Acquisitions and Financing.")
NET INTEREST INCOME Increases in interest income are principally the result of
increases in average earning assets. Net interest income increased by 18.6% to
$11,004,000 during the three-month period in 1997 and by 25.2% to $31,358,000
during the nine-month period. Average earning assets increased by 21.9% and
35.2% during the three- and nine-month periods, respectively. Management
attributes more than 75% of the increase in average earning assets to the 1996
Acquisitions.
<TABLE>
<CAPTION>
NET INTEREST INCOME AND SELECTED RATIOS
Three months Nine months
ended September 30, ended September 30,
1997 1996 1997 1996
--------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Average earning assets (in thousands) $887,567 $727,854 $857,029 $634,128
As a percent of average earning assets
Tax equivalent interest income 9.10% 9.05% 9.05% 9.14%
Interest expense 4.02 3.82 4.00 3.70
Tax equivalent net interest income 5.08 5.23 5.05 5.45
Average earning assets as a
percent of average assets 92.87% 93.24% 92.52% 94.25%
Free-funds ratio 9.23% 11.18% 8.72% 11.80%
</TABLE>
13
<PAGE> 15
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 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 was $461,000 during the
three months ended September 30, 1997, compared to $253,000 during the
three-month period in 1996. The provision for loan losses totaled $1,103,000
and $942,000 during the nine-month periods in 1997 and 1996, respectively. The
increase in the provision during both the three- and nine-month periods
principally reflect the increase in total loans. (See "Asset quality.")
NON-INTEREST INCOME Non-interest income totaled $2,161,000 during the three
months ended September 30, 1997, compared to $1,412,000 during the comparable
period in 1996. During the nine-month periods in 1997 and 1996, non-interest
income totaled $5,823,000 and $3,981,000, respectively. In addition to the
impact of the 1996 Acquisitions, the increase in non-interest income reflects
an increase in net gains resulting from the sale of real estate mortgage loans
and securities available for sale. Revenues associated with deposit account
promotions and the Banks' title insurance agency also contributed to the
increase in non-interest income.
Net gains on the sale of real estate mortgage loans were $587,000 during the
three months ended September 30, 1997, compared to $363,000 during the
comparable period of 1996. Net gains on the sale of such loans were $1,423,000
and 1,251,000 during the nine-month periods in 1997 and 1996, respectively. 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 Nine months ended
September 30, September 30,
1997 1996 1997 1996
-------------------------- ------------------------------------
<S> <C> <C> <C> <C>
Real estate mortgage loans
originated $77,884,000 $57,400,000 $187,419,000 $166,100,000
Real estate mortgage loan sales 28,547,000 20,700,000 68,515,000 80,000,000
Real estate mortgage loan
servicing rights sold 6,520,000 7,824,000 16,126,000 28,755,000
Net gains on the sale of real
estate mortgage loans 587,000 363,000 1,423,000 1,251,000
Net gains as a percent of real
estate mortgage loans sold 2.06% 1.75% 2.08% 1.56%
</TABLE>
The Banks capitalized approximately $340,000 and $258,000 of related servicing
rights during the nine-month periods ended September 30, 1997 and 1996,
respectively. Amortization of capitalized servicing rights for those periods
was $90,000 and $34,000, respectively. The fair value of
14
<PAGE> 16
capitalized servicing rights approximated the book value of $563,000 at
September 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 and
other loans that the Banks cannot profitably fund within established
interest-rate risk parameters. (See "Asset/liability management.") Net gains
on real estate mortgage loans are also dependent upon economic and competitive
factors as well as the Banks' ability to effectively manage exposure to changes
in interest rates.
The Banks realized net gains on the sale of securities available for sale
totaling $92,000 and $16,000 during the three months ended September 30, 1997
and 1996, respectively. During the nine-month period in 1997, the Banks
recorded net gains of $166,000 compared to net losses of $130,000 during the
comparable period of 1996. (See "Asset/liability management.")
SALES OF SECURITIES AVAILABLE FOR SALE
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
1997 1996 1997 1996
----------- ---------- ----------- ------------
<S> <C> <C> <C> <C>
Proceeds $23,422,000 $6,063,000 $49,844,000 $15,907,000
=========== ========== =========== ===========
Gross gains $ 120,000 $ 19,000 $ 234,000 $ 44,000
Gross losses (28,000) (3,000) (68,000) (174,000)
----------- ---------- ----------- -----------
Net Gains (losses) $ 92,000 $ 16,000 $ 166,000 $(130,000)
=========== ========== =========== ===========
</TABLE>
NON-INTEREST EXPENSE Non-interest expense totaled $9,505,000 during the three
months ended September 30, 1997, compared to $7,634,000 during the comparable
period in 1996. During the nine-month periods in 1997 and 1996, non-interest
expense totaled $26,798,000 and $19,804,000, 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"). Such non-equity financing has an adverse impact on
the Registrant's net interest income and its return on average assets.
Nonetheless, the
15
<PAGE> 17
after-tax cost the Credit Facility and the Preferred Securities compares
favorably with the implied cost of common equity and the non-convertible
structure of such non-equity financing eliminates potential dilution of the
common shareholders' interest in the Registrant.
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.
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 and Statement of Financial Accounting Standards, No. 130, "Reporting
Comprehensive Income", (SFAS #130) in June of 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.
SFAS #130 establishes standards for reporting and displaying comprehensive
income and its components, including but not limited to unrealized gains or
losses on securities available for sale, in the financial statements.
This statement is effective for both interim and annual periods beginning after
December 15, 1997 with earlier application permitted. SFAS #130 will require
reclassification of all prior period amounts.
16
<PAGE> 18
Item 6. Exhibits & Reports on Form 8-K
- ------- ------------------------------
(a) Exhibit Number & Description
Ex-27 Financial Data Schedule
(b) Reports on Form 8-K
During the quarter ended September 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 November 12, 1997 By /s/ William R. Kohls
------------------------ ------------------------------
William R. Kohls, Principal
Financial Officer
Date November 12, 1997 By /s/ James J. Twarozynski
------------------------ ------------------------------
James J. Twarozynski, Principal
Accounting Officer
18
<PAGE> 20
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION
- ----------- -----------
EX 27 FINANCIAL DATA
SCHEDULE
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 23,411
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 121,939
<INVESTMENTS-CARRYING> 23,856
<INVESTMENTS-MARKET> 24,711
<LOANS> 719,407
<ALLOWANCE> 7,329
<TOTAL-ASSETS> 959,077
<DEPOSITS> 681,133
<SHORT-TERM> 187,629
<LIABILITIES-OTHER> 9,964
<LONG-TERM> 22,750
0
0
<COMMON> 4,574
<OTHER-SE> 53,027
<TOTAL-LIABILITIES-AND-EQUITY> 959,077
<INTEREST-LOAN> 47,937
<INTEREST-INVEST> 8,320
<INTEREST-OTHER> 745
<INTEREST-TOTAL> 57,002
<INTEREST-DEPOSIT> 16,749
<INTEREST-EXPENSE> 25,644
<INTEREST-INCOME-NET> 31,358
<LOAN-LOSSES> 1,103
<SECURITIES-GAINS> 166
<EXPENSE-OTHER> 26,798
<INCOME-PRETAX> 9,280
<INCOME-PRE-EXTRAORDINARY> 9,280
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,603
<EPS-PRIMARY> 1.43
<EPS-DILUTED> 1.43
<YIELD-ACTUAL> 5.05
<LOANS-NON> 2,861
<LOANS-PAST> 2,277
<LOANS-TROUBLED> 186
<LOANS-PROBLEM> 3,200
<ALLOWANCE-OPEN> 6,960
<CHARGE-OFFS> 1,189
<RECOVERIES> 455
<ALLOWANCE-CLOSE> 7,329
<ALLOWANCE-DOMESTIC> 3,265
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 4,064
</TABLE>
