<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, 2000
Commission file number 0-7818
--------------
INDEPENDENT BANK CORPORATION
--------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Michigan 38-2032782
--------------------------------------- ---------------------------------
(State or jurisdiction of (I.R.S. Employer Identification
Incorporation or Organization) Number)
230 West Main Street, P.O. Box 491, Ionia, Michigan 48846
--------------------------------------------------------------------------------
(Address of principal executive offices)
(616) 527-9450
--------------
(Registrant's telephone number, including area code)
NONE
--------------------------------------------------------------------------------
Former name, address and fiscal year, if changed since last report.
Indicate by check mark whether the registrant (1) has filed all documents
and reports required to be filed by Sections 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. YES X NO
----- -----
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class Outstanding at August 10, 2000
------------------------------- ----------------------------------------
Common stock, par value $1 11,271,494
<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, 2000 and December 31, 1999 2
Consolidated Statements of Operations
Three- and six-month periods ended June 30, 2000 and 1999 3
Consolidated Statements of Cash Flows
Six-month periods ended June 30, 2000 and 1999 4
Consolidated Statements of Shareholders' Equity
Six-month periods ended June 30, 2000 and 1999 5
Notes to Interim Consolidated Financial Statements
Three- and six-month periods ended June 30, 2000 and 1999 6-8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9-18
Item 3. Quantitative and Qualitative Disclosures about Market Risk 19
PART II - Other Information
Item 4. Submission of Matters to a Vote of Security-Holders 20
Item 6. Exhibits & Reports on Form 8-K 20
</TABLE>
<PAGE> 3
Part I.
INDEPENDENT BANK CORPORATION AND SUBSIDIARIES
Consolidated Statements of Financial Condition
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
----------------- -----------------
Assets (unaudited)
----------------- -----------------
<S> <C> <C>
Cash and due from banks $ 50,630,000 $ 58,646,000
Securities available for sale 214,126,000 195,300,000
Securities held to maturity (Fair value of $54,048,000 at June
30,2000; $70,486,000 at December 31, 1999) 55,311,000 71,115,000
Federal Home Loan Bank stock, at cost 19,612,000 19,612,000
Loans held for sale 18,188,000 12,950,000
Loans
Commercial 368,948,000 334,212,000
Real estate mortgage 764,610,000 757,019,000
Installment 208,506,000 199,410,000
---------------- ----------------
Total Loans 1,342,064,000 1,290,641,000
Allowance for loan losses (13,406,000) (12,985,000)
---------------- ----------------
Net Loans 1,328,658,000 1,277,656,000
Property and equipment, net 35,677,000 37,582,000
Accrued income and other assets 50,027,000 52,344,000
---------------- ----------------
Total Assets $ 1,772,229,000 $ 1,725,205,000
================ ================
Liabilities and Shareholders' Equity
Deposits
Non-interest bearing $ 137,658,000 $ 135,868,000
Savings and NOW 572,679,000 567,108,000
Time 659,675,000 607,626,000
---------------- ----------------
Total Deposits 1,370,012,000 1,310,602,000
Federal funds purchased 46,400,000 42,350,000
Other borrowings 198,033,000 224,570,000
Guaranteed preferred beneficial interests in Company's subordinated
debentures 17,250,000 17,250,000
Accrued expenses and other liabilities 20,739,000 16,687,000
---------------- ----------------
Total Liabilities 1,652,434,000 1,611,459,000
---------------- ----------------
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: 11,238,345 shares at June 30, 2000
and 11,235,088 shares at December 31, 1999 11,238,000 11,235,000
Capital surplus 71,320,000 71,672,000
Retained earnings 39,674,000 33,921,000
Accumulated other comprehensive loss (1,638,000) (2,283,000)
Unearned employee stock ownership plan shares (799,000) (799,000)
---------------- ----------------
Total Shareholders' Equity 119,795,000 113,746,000
---------------- ----------------
Total Liabilities and Shareholders' Equity $ 1,772,229,000 $ 1,725,205,000
================ =================
</TABLE>
See notes to interim consolidated financial statements.
2
<PAGE> 4
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
2000 1999 2000 1999
------------- ------------- ------------- ---------------
(unaudited) (unaudited)
---------------------------- ------------------------------
<S> <C> <C> <C> <C>
Interest Income
Interest and fees on loans $ 29,624,000 $ 26,274,000 $ 58,110,000 $ 52,208,000
Securities
Taxable 2,533,000 3,540,000 4,998,000 7,145,000
Tax-exempt 1,590,000 851,000 3,253,000 1,674,000
Other investments 389,000 229,000 780,000 646,000
-------------- ------------ ------------- --------------
Total Interest Income 34,136,000 30,894,000 67,141,000 61,673,000
-------------- ------------- ------------- --------------
Interest Expense
Deposits 12,482,000 10,710,000 24,223,000 21,486,000
Other borrowings 4,098,000 3,632,000 8,204,000 7,459,000
-------------- ------------ ------------- --------------
Total Interest Expense 16,580,000 14,342,000 32,427,000 28,945,000
-------------- ------------ ------------- --------------
Net Interest Income 17,556,000 16,552,000 34,714,000 32,728,000
Provision for loan losses 1,392,000 655,000 1,949,000 1,321,000
-------------- ------------ ------------- --------------
Net Interest Income After
Provision for Loan Losses 16,164,000 15,897,000 32,765,000 31,407,000
-------------- ------------ ------------- --------------
Non-interest Income
Service charges on deposit accounts 1,710,000 1,363,000 3,211,000 2,570,000
Net gains (losses) on asset sales
Real estate mortgage loans 534,000 1,251,000 914,000 2,782,000
Securities (16,000) 15,000
Other income 2,580,000 2,214,000 4,859,000 4,208,000
-------------- ------------ ------------- --------------
Total Non-interest Income 4,824,000 4,828,000 8,968,000 9,575,000
-------------- ------------ ------------- --------------
Non-interest Expense
Salaries and employee benefits 8,297,000 8,711,000 16,689,000 17,156,000
Occupancy, net 1,119,000 1,117,000 2,297,000 2,267,000
Furniture and fixtures 1,092,000 994,000 2,233,000 1,962,000
Other expenses 4,253,000 4,925,000 8,253,000 9,952,000
-------------- ------------ ------------- --------------
Total Non-interest Expense 14,761,000 15,747,000 29,472,000 31,337,000
-------------- ------------ ------------- --------------
Income Before Federal Income Tax 6,227,000 4,978,000 12,261,000 9,645,000
Federal income tax expense 1,591,000 1,477,000 3,139,000 2,873,000
-------------- ------------ ------------- --------------
Net Income $ 4,636,000 $ 3,501,000 $ 9,122,000 $ 6,772,000
============== ============ ============= ==============
Net Income Per Share
Basic $ .41 $ .31 $ .81 $ .60
Diluted .41 .30 .81 .59
Dividends Per Common Share
Declared $ .15 $ .09 $ .30 $ .18
Paid .15 .09 .29 .17
</TABLE>
See notes to interim consolidated financial statements.
3
<PAGE> 5
INDEPENDENT BANK CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Six months ended
June 30,
2000 1999
--------------- ---------------
(unaudited)
-------------------------------
<S> <C> <C>
Net Income $ 9,122,000 $ 6,772,000
---------------- --------------
Adjustments to Reconcile Net Income
to Net Cash from Operating Activities
Proceeds from sales of loans held for sale 69,804,000 183,132,000
Disbursements for loans held for sale (74,128,000) (162,033,000)
Provision for loan losses 1,949,000 1,321,000
Deferred loan fees 232,000 (32,000)
Depreciation and amortization of premiums and accretion of
discounts on securities and loans 2,846,000 2,625,000
Net gains on sales of real estate mortgage loans (914,000) (2,782,000)
Net (gains) losses on sales of securities 16,000 (15,000)
Increase (decrease) in accrued income and other assets 1,882,000 (2,101,000)
Increase in accrued expenses and other liabilities 3,647,000 3,965,000
---------------- --------------
Total Adjustments 5,334,000 24,080,000
---------------- --------------
Net Cash from Operating Activities 14,456,000 30,852,000
---------------- --------------
Cash Flow from Investing Activities
Proceeds from the sale of securities available for sale 5,830,000 267,000
Proceeds from the maturity of securities available for sale 1,430,000 11,805,000
Proceeds from the maturity of securities held to maturity 3,079,000 321,654,000
Principal payments received on securities available for sale 5,452,000 7,944,000
Principal payments received on securities held to maturity 13,252,000 322,000
Purchases of securities available for sale (31,292,000) (47,254,000)
Purchases of securities held to maturity (285,113,000)
Principal payments on portfolio loans purchased 1,255,000 7,540,000
Portfolio loans made to customers, net of principal payments received (54,438,000) (48,061,000)
Capital expenditures (315,000) (4,329,000)
---------------- --------------
Net Cash from Investing Activities (55,747,000) (35,225,000)
---------------- --------------
Cash Flow from Financing Activities
Net increase in total deposits 59,410,000 13,849,000
Net increase (decrease) in short-term borrowings (15,022,000) 8,268,000
Proceeds from Federal Home Loan Bank advances 203,866,000 6,831,000
Payments of Federal Home Loan Bank advances (210,331,000) (32,016,000)
Retirement of long-term debt (1,000,000) (1,000,000)
Dividends paid (3,255,000) (1,999,000)
Proceeds from issuance of common stock 413,000 625,000
Repurchase of common stock (806,000)
---------------- --------------
Net Cash from Financing Activities 33,275,000 (5,442,000)
---------------- --------------
Net Decrease in Cash and Cash Equivalents (8,016,000) (9,815,000)
Cash and Cash Equivalents at Beginning of Period 58,646,000 57,610,000
---------------- --------------
Cash and Cash Equivalents at End of Period $ 50,630,000 $ 47,795,000
================ ==============
Cash paid during the period for
Interest $ 30,409,000 $ 29,211,000
Income taxes 1,300,000 2,100,000
Transfer of loans to other real estate 1,816,000 1,346,000
</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,
2000 1999
-------------- ---------------
(unaudited)
--------------------------------
<S> <C> <C>
Balance at beginning of period $ 113,746,000 $ 117,042,000
Net income 9,122,000 6,772,000
Cash dividends declared (3,369,000) (2,086,000)
Issuance of common stock 457,000 1,432,000
Repurchase of common stock (806,000)
ESOP valuation adjustment (36,000)
Net change in unrealized loss on securities
available for sale, net of related tax effect (note 4) 645,000 (2,093,000)
--------------- --------------
Balance at end of period $ 119,795,000 $ 121,031,000
=============== ==============
</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, 2000 and December 31, 1999,
and the results of operations for the six-month periods ended June 30, 2000 and
1999.
2. The allowance for loan losses represents Management's best estimate of losses
incurred. In determining the allowance and the related provision for loan
losses, Management considers four principal elements: (i) specific allocations
based upon probable losses identified during the review of the loan portfolio,
(ii) allocations established for other adversely rated loans, (iii) allocations
based principally on historical loan loss experience and (iv) additional
allowances based on subjective factors, including local and general economic
business factors and trends, portfolio concentrations and changes in the size
and/or the general terms of the loan portfolios. Loans on non-accrual status,
past due more than 90 days, or restructured amounted to $6,415,000 at June 30,
2000, and $5,279,000 at December 31, 1999. (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 Registrant adopted Statement of Financial Accounting Standards, No. 130,
"Reporting Comprehensive Income", (SFAS #130) effective January 1, 1998. SFAS
#130 establishes standards for reporting and displaying comprehensive income and
its components, including but not limited to unrealized gains and losses on
securities available for sale.
Comprehensive income (loss) for the three-month and the six-month
periods ending June 30 follows:
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
2000 1999 2000 1999
------------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
Net income $ 4,636,000 $ 3,501,000 $ 9,122,000 $ 6,772,000
Net change in unrealized loss
on securities available for sale,
net of related tax effect 214,000 (1,508,000) 645,000 (2,093,000)
------------- ------------- -------------- -------------
Comprehensive income $ 4,850,000 $ 1,993,000 $ 9,767,000 $ 4,679,000
============= ============= ============== =============
</TABLE>
5. The Registrant's reportable segments are based upon legal entities. The
Registrant has five reportable segments: Independent Bank ("IB"), Independent
Bank West Michigan ("IBWM"), Independent Bank South Michigan ("IBSM"),
Independent Bank East Michigan ("IBEM") and Independent Bank MSB ("IBMSB"). The
Registrant evaluates performance based principally on net income of the
respective reportable segments.
6
<PAGE> 8
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
A summary of selected financial information for the Registrant's reportable
segments follows:
Three months ended June 30,
<TABLE>
<CAPTION>
IB IBWM IBSM IBEM IBMSB OTHER(1) TOTAL
--------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
2000
Total assets $ 426,345 $ 348,981 $ 211,964 $ 308,237 $ 470,154 $ 6,548 $ 1,772,229
Interest income 8,483 7,426 4,215 5,726 8,278 8 34,136
Net interest income 4,940 4,453 2,371 3,366 3,236 (810) 17,556
Provision for loan losses 845 135 200 120 92 1,392
Income (loss) before
Income tax 1,850 2,040 929 1,194 1,321 (1,107) 6,227
Net income (loss) 1,353 1,403 708 940 1,010 (778) 4,636
1999
Total assets $ 362,783 $ 279,418 $ 164,119 $ 261,781 $ 584,990 $ 9,227 $ 1,662,318
Interest income 6,968 6,413 3,279 4,918 9,308 8 30,894
Net interest income 4,308 4,109 1,990 3,099 3,569 (523) 16,552
Provision for loan losses 150 135 70 150 150 655
Income (loss) before
Income tax 1,583 1,541 668 986 1,013 (813) 4,978
Net income (loss) 1,100 1,063 511 744 658 (575) 3,501
</TABLE>
Six months ended June 30,
<TABLE>
<CAPTION>
IB IBWM IBSM IBEM IBMSB OTHER(1) TOTAL
--------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
2000
Total assets $ 426,345 $ 348,981 $ 211,964 $ 308,237 $ 470,154 $ 6,548 $ 1,772,229
Interest income 16,574 14,463 8,149 11,327 16,618 10 67,141
Net interest income 9,665 8,612 4,595 6,642 6,631 (1,431) 34,714
Provision for loan losses 995 270 260 240 184 1,949
Income (loss) before
Income tax 3,828 3,703 1,813 2,363 2,797 (2,243) 12,261
Net income (loss) 2,768 2,560 1,391 1,860 2,116 (1,573) 9,122
1999
Total assets $ 362,783 $ 279,418 $ 164,119 $ 261,781 $ 584,990 $ 9,227 $ 1,662,318
Interest income 14,185 12,620 6,636 9,779 18,440 13 61,673
Net interest income 8,774 7,984 4,058 6,121 6,876 (1,085) 32,728
Provision for loan losses 300 270 160 300 291 1,321
Income (loss) before
Income tax 3,250 2,977 1,461 1,891 1,791 (1,725) 9,645
Net income (loss) 2,250 2,052 1,088 1,424 1,164 (1,206) 6,772
</TABLE>
(1) Includes items relating to the Registrant and certain insignificant
operations.
7
<PAGE> 9
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
6. A reconciliation of basic and diluted earnings per share for the three-month
and the six-month periods ending June 30 follows:
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
2000 1999 2000 1999
-------------- -------------- ------------- -------------
<S> <C> <C> <C> <C>
Net income $ 4,636,000 $ 3,501,000 $ 9,122,000 $ 6,772,000
============== ============== ============= =============
Shares outstanding (Basic) (1) 11,204,000 11,398,000 11,198,000 11,374,000
Effect of dilutive securities - stock options 63,000 126,000 72,000 133,000
-------------- -------------- ------------- -------------
Shares outstanding (Diluted) 11,267,000 11,524,000 11,270,000 11,507,000
============== ============== ============= =============
Net income per share
Basic $ .41 $ .31 $ .81 $ .60
Diluted .41 .30 .81 .59
</TABLE>
(1) Shares outstanding have been adjusted for a 5% stock dividend in 1999.
7. The Financial Accounting Standards Board adopted Statement of Financial
Accounting Standards, No. 133, "Accounting for Derivative Instruments and
Hedging Activities", ("SFAS #133") in June 1998.
SFAS #133, which has been subsequently amended by SFAS #137 and SFAS#138,
requires companies to record derivatives on the balance sheet as assets and
liabilities measured at fair value. The accounting for increases and decreases
in the value of those derivatives will depend upon the use of those derivatives
and whether or not they qualify for hedge accounting.
This statement is effective for all fiscal quarters of fiscal years beginning
after June 15, 2000 with earlier application allowed and is to be applied
prospectively. The adoption of this statement is not expected to have a material
impact on the Registrant's financial statements.
8. Prior period financial information has been restated to reflect the
acquistion of Mutual Savings Bank, f.s.b., ("MSB") completed September 15, 1999,
which has been accounted for as a pooling of interests.
9. The results of operations for the three- and six-month period ended June 30,
2000, are not necessarily indicative of the results to be expected for the full
year.
8
<PAGE> 10
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 1999 Annual Report on Form 10-K, as amended.
FINANCIAL CONDITION
SUMMARY Assets totaled $1.772 billion at June 30, 2000, compared to $1.725
billion at December 31, 1999. An increase in loans, excluding loans held for
sale ("Portfolio Loans"), accounts for the $47.0 million increase in total
assets.
Portfolio Loans increased to $1.342 billion at June 30, 2000, from $1.291
billion at December 31, 1999. Commercial loans grew by $34.7 million to $368.9
million and account for the majority of the $51.4 million increase in Portfolio
Loans. (See "Portfolio loans and asset quality.")
Brokered certificates of deposits ("Brokered CDs") have been utilized to fund
the increase in total assets. Brokered CDs totaled $187.4 million and $101.0
million at June 30, 2000 and December 31, 1999, respectively. (See "Deposits and
borrowings.")
SECURITIES The Banks maintain diversified securities portfolios, which include
obligations of the U.S. Treasury and government-sponsored agencies as well as
securities issued by states and political subdivisions, corporate securities and
mortgage-backed securities. The Banks also invest in capital securities, which
include preferred stocks and trust preferred securities. Management continually
evaluates the Banks' asset/liability management needs and attempts to maintain a
portfolio structure that provides sufficient liquidity and cash flow. (See
"Asset/liability management.")
SECURITIES
<TABLE>
<CAPTION>
Unrealized
----------------------------
Amortized Fair
Cost Gains Losses Value
-------------- -------------- ------------- -------------
(in thousands)
<S> <C> <C> <C> <C>
Securities available for sale
June 30, 2000 $216,608 $ 936 $ 3,418 $214,126
December 31, 1999 198,764 1,234 4,698 195,300
Securities held to maturity
June 30, 2000 $ 55,311 $ 171 $ 1,434 $ 54,048
December 31, 1999 71,115 237 866 70,486
</TABLE>
9
<PAGE> 11
Securities held to maturity declined to $55.3 million at June 30, 2000, from
$71.1 million at December 31, 1999. The $15.8 million decline principally
reflects the proceeds from maturing 5- and 7-year balloon, mortgage-backed
securities. Such securities were held by MSB. (See "1999 Acquisition.")
The purchase or sale of securities is dependent upon Management's assessment of
investment and funding opportunities as well as the Banks' asset/liability
management needs. The Banks sold securities designated as available for sale
with an aggregate market value of $5.8 million during the six months ended June
30, 2000. The Banks sold securities with a market value of $267,000 during the
corresponding period of 1999.
SALES OF SECURITIES AVAILABLE FOR SALE
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
2000 1999 2000 1999
---------------- --------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Proceeds $897,000 0 $5,830,000 $267,000
=============== ================ ================ ================
Gross gains $ 1,000 $ 8,000 $ 15,000
Gross losses (1,000) (24,000)
--------------- ---------------- ---------------- ----------------
Net Gains 0 0 $ (16,000) $ 15,000
=============== ================ ================ ================
</TABLE>
PORTFOLIO LOANS AND ASSET QUALITY Management believes that the Registrant's
decentralized structure provides important advantages in serving the credit
needs of the Banks' principal lending markets. 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 may also purchase real estate mortgage loans
from third-party originators. Commercial loan participations with non-affiliated
banks totaled approximately $8 million at June 30, 2000.
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.
The Banks generally retain loans that may be profitably funded within
established risk parameters. (See "Asset/liability management.") As a result,
the Banks may hold adjustable-rate and balloon real estate mortgage loans as
Portfolio Loans, while 15- and 30-year, fixed-rate obligations are generally
sold to mitigate exposure to changes in interest rates. (See "Non-interest
income.")
10
<PAGE> 12
LOAN PORTFOLIO COMPOSITION
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
------------------ ------------------
<S> <C> <C>
Real estate
Residential first mortgages $ 611,840,000 $ 603,714,000
Residential home equity and other junior mortgages 155,928,000 138,682,000
Construction and land development 132,666,000 130,373,000
Other (1) 248,243,000 230,005,000
Consumer 107,879,000 108,054,000
Commercial 65,644,000 60,637,000
Agricultural 19,864,000 19,176,000
------------------ ------------------
Total loans $1,342,064,000 $1,290,641,000
============== ==============
(1) Includes loans secured by multi-family residential and non-farm, non-residential property.
</TABLE>
The increase in commercial loans principally reflects Management's emphasis on
lending opportunities within the Lansing and Grand Rapids markets. Commercial
real estate projects, including land development and construction comprise the
majority of new loans. Continued growth within this segment of Portfolio Loans
is dependent upon a number competitive and economic factors.
NON-PERFORMING ASSETS
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
----------------- -----------------
<S> <C> <C>
Non-accrual loans $4,427,000 $2,980,000
Loans 90 days or more past due and
still accruing interest 1,729,000 2,029,000
Restructured loans 259,000 270,000
----------------- -----------------
Total non-performing loans 6,415,000 5,279,000
Other real estate 1,438,000 1,315,000
----------------- -----------------
Total non-performing assets $7,853,000 $6,594,000
================= =================
As a percent of Portfolio Loans
Non-performing loans 0.48% 0.41%
Non-performing assets 0.59 0.51
Allowance for loan losses 1.00 1.01
Allowance for loan losses as a percent of
non-performing loans 209 246
</TABLE>
A default by a land-development company on loans totaling $2.2 million accounts
for the increase in non-performing loans. Approximately $890,000 of the
principal amount of these loans has been charged against the allowance for loan
losses. The remaining balance of $1,300,000, which represent the anticipated
liquidation value of the residential real estate developments that secure the
loans, has been designated as non-accrual.
Impaired loans totaled approximately $4,100,000 at June 30, 2000. At that same
date, certain impaired loans with a balance of approximately $600,000, had
specific allocations of the allowance for loan losses, which totaled
approximately $300,000. The Banks' average investment in impaired loans was
approximately $3,600,000, for the three-month period ended June 30, 2000. Cash
receipts on impaired loans on non-accrual status are generally applied to the
11
<PAGE> 13
principal balance. Interest recognized on impaired loans during that six-month
period was approximately $85,000.
ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
Six months ended
June 30,
2000 1999
---------------- --------------
<S> <C> <C>
Balance at beginning of period $12,985,000 $ 11,557,000
Additions (deduction)
Provision charged to operating expense 1,949,000 1,321,000
Recoveries credited to allowance 355,000 306,000
Loans charged against the allowance (1,883,000) (1,061,000)
---------------- --------------
Balance at end of period $13,406,000 $ 12,123,000
================ ==============
Net loans charged against the allowance to
average Portfolio Loans (annualized) 0.23% 0.12%
</TABLE>
In determining the allowance and the related provision for loan losses,
Management considers four principal elements: (i) specific allocations based
upon probable losses identified during the review of the loan portfolio, (ii)
allocations established for other adversely rated loans, (iii) allocations based
principally on historical loan loss experience and (iv) additional allowances
based on subjective factors, including local and general economic business
factors and trends, portfolio concentrations and changes in the size and/or the
general terms of the loan portfolios. In its recent assessment of subjective
factors, Management specifically considered the relative strength of the local
and national economies. Management also considered recent trends in adversely
rated loans as well as the impact of recent increase in interest rates on the
business prospects of the Banks' commercial customers.
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
----------------------------------------
<S> <C> <C>
Specific allocations $ 300,000 $ 655,000
Other adversely rated loans 3,757,000 2,484,000
Historical loss allocations 3,795,000 4,063,000
Additional allocations based on subjective factors 5,554,000 5,783,000
----------------------------------------
$ 13,406,000 $ 12,985,000
----------------------------------------
</TABLE>
Loans charged against the allowance for loan losses, net of recoveries, were
equal to an annualized .23% of average loans during the six months ended June
30, 2000, compared to an annualized .12% during the comparable period of 1999.
The increase in net loans charged against the allowance relates to the default
described above. (See "Provision for loan losses.")
DEPOSITS AND BORROWINGS The Banks' competitive position within many of the
markets served by the branch networks limits the ability to materially increase
deposits without adversely impacting the weighted-average cost of core deposits.
Accordingly, the Banks compete on the basis of convenience and personal service,
while employing pricing tactics that are intended to enhance the value of core
deposits. Deposits, excluding Brokered CDs, totaled $1.183 billion at June 30,
2000, compared to $1.210 billion at December 31, 1999.
12
<PAGE> 14
The Banks have implemented strategies that incorporate federal funds purchased,
other borrowings and Brokered CDs to fund a portion of the Portfolio Loans. The
use of such alternate sources of funds supplements the Banks' core deposits and
is also an integral part of the Banks' asset/liability management efforts.
Derivative financial instruments are employed to reduce the cost of alternate
sources of funds and to manage the Banks' exposure to changes in interest rates.
(See "Asset/liability management.")
<TABLE>
<CAPTION>
June 30, 2000 December 31, 1999
-------------------------------- ----------------------------------
Average Average
Amount Maturity Rate Amount Maturity Rate
------ -------- ---- ------ -------- ----
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Brokered CDs $187,445 4.5 years 6.69% $101,029 6.0 years 6.24%
Fixed rate FHLB advances 102,165 5.1 years 6.19 131,592 3.2 years 5.98
Variable rate FHLB advances 82,000 0.3 years 6.65 59,056 0.4 years 4.63
</TABLE>
Other borrowed funds, principally advances from the Federal Home Loan Bank (the
"FHLB"), decreased to $198.0 million at June 30, 2000, from $224.6 million at
December 31, 1999. The decline in other borrowed funds principally reflects the
competitive cost of Brokered CDs as well as Management's efforts to diversify
the Banks' funding sources.
INTEREST-RATE DERIVATIVE FINANCIAL INSTRUMENTS
<TABLE>
<CAPTION>
SWAPS
----------------------------------
CAPS FLOORS COLLARS PAY FIXED PAY
VARIABLE
------------------------ ----------------- ---------------- ----------------- ----------------- ----------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Notional amount $ 93,000 $8,000 $ 7,000 $ 71,000 $ 166,000
Weighted-average
maturity 3.0 years 1.8 years 0.5 years 2.3 years 5.0 years
Cap strike 7.01% 6.38%
Floor strike 5.17% 5.75
Rate paying 5.60% 6.48%
Rate receiving 6.26 6.79
Premium paid $ 1,876 $ 31
Annual cost .54% .15%
Amortized cost $ 1,553 $ 22
Fair value 1,361 2 $ 22 $ 1,455 $ (2,619)
</TABLE>
At June 30, 2000, the Company employed interest-rate caps, floors and collars
with an aggregate notional amount of $108.0 million. The Banks also employed
interest-rate swaps with an aggregate notional amount of $237.0 million.
LIQUIDITY AND CAPITAL RESOURCES Effective management of capital resources is
critical to Management's mission to create value for the Registrant's
shareholders. The cost of capital is an important factor in creating shareholder
value and, accordingly, the Registrant's capital structure includes unsecured
debt and Preferred Securities.
To profitably deploy capital within existing markets, the Banks have implemented
balance sheet management strategies that combine efforts to originate Portfolio
Loans with disciplined funding
13
<PAGE> 15
strategies. Acquisitions are also integral components of Management's capital
management strategies. (See "Stock repurchase plan.")
<TABLE>
<CAPTION>
CAPITALIZATION
June 30, December 31,
2000 1999
------------------ ------------------
<S> <C> <C>
Unsecured debt $ 12,500,000 $ 12,500,000
Preferred Securities 17,250,000 17,250,000
Shareholders' Equity
Preferred stock, no par value
Common Stock, par value $1.00 per share 11,238,000 11,235,000
Capital surplus 71,320,000 71,672,000
Retained earnings 39,674,000 33,921,000
Accumulated other comprehensive loss (1,638,000) (2,283,000)
Unearned employee stock ownership plan shares (799,000) (799,000)
----------- -----------
Total shareholders' equity 119,795,000 113,746,000
----------- -----------
Total capitalization $149,545,000 $143,496,000
=========== ===========
</TABLE>
Shareholders' equity totaled $119.8 million at June 30, 2000. The increase from
$113.7 million at December 31, 1999, reflects the retention of earnings as well
as the issuance of common stock pursuant to various equity-based incentive
compensation plans. A decline in unrealized losses on securities available for
sale also contributed to the increase in shareholders equity. Shareholders'
equity was equal to 6.76% of total assets at June 30, 2000, compared to 6.59% at
December 31, 1999.
<TABLE>
<CAPTION>
CAPITAL RATIOS
June 30, 2000 December 31, 1999
---------------------- ----------------------
<S> <C> <C>
Equity capital 6.76% 6.59%
Average shareholders equity to average assets(1) 6.74 7.16
Tier 1 leverage (tangible equity capital) 6.97 6.52
Tier 1 risk-based capital 9.50 9.33
Total risk-based capital 10.56 10.41
</TABLE>
(1) Based on year to date average balances for the respective periods
ASSET/LIABILITY MANAGEMENT Interest-rate risk is created by differences in the
pricing characteristics of the Banks' assets and liabilities. Options embedded
in certain financial instruments, including caps on adjustable-rate loans as
well as borrowers' rights to prepay fixed-rate loans also create interest-rate
risk.
The asset/liability management efforts of the Registrant and the Banks are
intended to identify sources of interest-rate risk and to evaluate opportunities
to structure the balance sheet in a manner that is consistent with Management's
mission to maintain profitable financial leverage. The marginal cost of funds is
a principal consideration in the implementation of the Banks' balance sheet
management strategies, but such evaluations further consider interest-rate and
liquidity risk as well as other pertinent factors.
Management employs simulation analyses to monitor the Banks' interest-rate risk
profiles and evaluate potential changes in the Banks' net interest income and
market value of portfolio equity that result from changes in interest rates.
14
<PAGE> 16
RESULTS OF OPERATIONS
SUMMARY Net income totaled $4,636,000 and $9,122,000 during the three- and
six-month periods ended June 30, 2000. Increases from the comparable periods in
1999 principally reflect increases in net interest income as well as significant
declines in non-interest expense. An increase in the provision for loan losses
as well as the decline in the Banks' mortgage-banking activities limited the
increases in net income.
KEY PERFORMANCE RATIOS
<TABLE>
<CAPTION>
Three months Six months
ended June 30, ended June 30,
2000 1999 2000 1999
---------------------------- ----------------------------
<S> <C> <C> <C> <C>
Net income to
Average assets 1.07% .85% 1.06% .83%
Average equity 15.74 11.59 15.76 11.37
Earnings per common share
Basic $0.41 $.31 $.81 $.60
Diluted 0.41 .30 .81 .59
</TABLE>
NET INTEREST INCOME Tax equivalent net interest income increased by 8.6% to
$18,494,000 and by 8.7% to $36,605,000, respectively, during the three- and
six-month periods in 2000. Increases from the comparable periods of 1999 reflect
increases in average earning assets as well as an increase in Tax equivalent net
interest income as a percent of average earning assets ("Net Yield").
Average earning assets totaled $1.626 billion and $1.615 billion during the
three- and six-month periods in 2000, respectively. The increases from the
corresponding periods of 1999 principally reflect increases in Portfolio Loans.
Net Yield increased by 9 basis points to 4.55% during the three-month period in
2000 and by 13 basis points to 4.54% during the six-month period. In addition to
the increase in Portfolio Loans, the increase in Net Yield may be attributed to
the scheduled maturity of certain low-yielding assets and high-cost liabilities
at MSB.
15
<PAGE> 17
NET INTEREST INCOME AND SELECTED RATIOS
<TABLE>
<CAPTION>
Three months Six months
ended June 30, ended June 30,
2000 1999 2000 1999
-------------- ------------ ------------- ---------------
<S> <C> <C> <C> <C>
Average earning assets (in thousands) $1,626,282 $1,529,850 $1,614,544 $1,528,014
Tax equivalent net interest income 18,494 17,034 36,605 33,677
As a percent of average earning assets
Tax equivalent interest income 8.64% 8.22% 8.58% 8.23%
Interest expense 4.09 3.76 4.04 3.82
Tax equivalent net interest income 4.55 4.46 4.54 4.41
Average earning assets as a
percent of average assets 93.71% 92.44% 93.58% 92.62%
Free-funds ratio 9.23% 9.56% 8.91% 9.35%
</TABLE>
PROVISION FOR LOAN LOSSES The provision for loan losses was $1,392,000 during
the three months ended June 30, 2000, compared to $655,000 during the
three-month period in 1999. During the six-month periods in 2000 and 1999, the
provision was $1,949,000 and $1,321,000, respectively. The increase in the
provision reflects Management's assessment of the allowance for loan losses,
including the recent default by a land development company on loans totaling
$2,200,000. (See "Asset quality.")
NON-INTEREST INCOME Non-interest income totaled $4,824,000 during the three
months ended June 30, 2000, largely unchanged from $4,828,000 during the
comparable period in 1999. Non-interest income declined to $8,968,000 during the
six months ended June 30, 2000, from $9,575,000 a year earlier.
The decline in the Bank's mortgage banking activities has had a substantial
impact on total non-interest income. Excluding net gains on the sale of real
estate mortgage loans, non-interest income grew by 20% during the three-month
period and by 19% during the six-month period. Service charges on deposit
accounts increased by 25% to $1,710,000 and $3,211,000 during the three- and
six-month periods in 2000. Increases in service charges principally relate to
certain deposit account promotions, which include direct mail solicitations.
Loan servicing fees, mutual fund and annuity commissions as well as fees
associated with the origination of manufactured home loans also increased from
the comparable periods in 1999.
16
<PAGE> 18
NON-INTEREST INCOME
<TABLE>
<CAPTION> Three months ended Six months ended
June 30, June 30,
2000 1999 2000 1999
--------------- --------------- --------------- --------------
<S> <C> <C> <C> <C>
Service charges on deposit
accounts $1,710,000 $1,363,000 $3,211,000 $2,570,000
Net gains on asset sales
Real estate mortgage loans 534,000 1,251,000 914,000 2,782,000
Securities (16,000) 15,000
First Home Financial 514,000 508,000 1,022,000 934,000
Title insurance fees 242,000 239,000 402,000 424,000
Real estate mortgage loan
servicing fees 372,000 310,000 748,000 598,000
Mutual fund and annuity
commissions 337,000 291,000 742,000 608,000
Other 1,115,000 866,000 1,945,000 1,644,000
--------------- --------------- -------------- ---------------
Total non-interest income $4,824,000 $4,828,000 $8,968,000 $9,575,000
=============== =============== ============== ===============
</TABLE>
Net gains on the sale of real estate mortgage loans totaled $534,000 and
$914,000 during the three- and six-month periods in 2000. The decline in such
net gains from $1,251,000 and $2,782,000 in the respective periods of 1999
principally reflects a decline in loans sold.
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
2000 1999 2000 1999
------------------------------------ ------------------------------------
<S> <C> <C> <C> <C>
Real estate mortgage loans
originated $96,618,000 $155,353,000 $163,572,000 $303,433,000
Real estate mortgage loan
sales 41,115,000 84,028,000 68,890,000 180,875,000
Real estate mortgage loan
servicing rights sold 8,351,000 5,949,000 10,993,000 10,963,000
Net gains on the sale of real
estate mortgage loans 534,000 1,251,000 914,000 2,782,000
Net gains as a percent of real
estate mortgage loans sold 1.30% 1.49% 1.33% 1.54%
</TABLE>
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 "Portfolio loans and asset quality.") 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 capitalized approximately $465,000 and $1,394,000 of related servicing
rights during the six-month periods ended June 30, 2000 and 1999, respectively.
Amortization of capitalized servicing rights for those periods was $537,000 and
$643,000, respectively. The book value of capitalized mortgage servicing rights
was $4,640,000 at June 30, 2000. The fair value of capitalized servicing rights,
which relate to approximately $780 million of loans sold and
17
<PAGE> 19
serviced, approximated $8 million at that same date, and therefore, no valuation
allowance was considered necessary.
NON-INTEREST EXPENSE Non-interest expense decreased by $986,000 to $14,711,000
during the three-month period in 2000 and by $1,865,000 to $29,472,000 during
the six-month period. A decline in FDIC insurance assessments accounts for a
substantial portion of the decline in non-interest expense during both periods.
A decrease in costs relating to the origination of real estate mortgage loans as
well as declines in legal and professional fees and data processing costs also
contributed to the decrease in non-interest expense.
NON-INTEREST EXPENSE
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
2000 1999 2000 1999
--------------- --------------- --------------- --------------
<S> <C> <C> <C> <C>
Salaries $ 5,717,000 $ 5,944,000 $ 11,541,000 $ 11,659,000
Performance-based compensation
and benefits 1,310,000 1,480,000 2,511,000 2,789,000
Other benefits 1,270,000 1,287,000 2,637,000 2,708,000
--------------- --------------- --------------- ---------------
Salaries and benefits 8,297,000 8,711,000 16,689,000 17,156,000
Occupancy, net 1,119,000 1,117,000 2,297,000 2,267,000
Furniture and fixtures 1,092,000 994,000 2,233,000 1,962,000
Computer processing 664,000 900,000 1,357,000 1,684,000
Communications 529,000 553,000 1,094,000 1,146,000
Advertising 587,000 606,000 1,044,000 1,325,000
Amortization of intangible assets 432,000 432,000 864,000 874,000
Supplies 368,000 385,000 763,000 736,000
Loan and collection 336,000 465,000 643,000 904,000
FDIC insurance 72,000 362,000 143,000 723,000
Other 1,265,000 1,222,000 2,345,000 2,560,000
--------------- --------------- --------------- ---------------
Total non-interest expense $14,761,000 $15,747,000 $ 29,472,000 $ 31,337,000
=============== =============== =============== ===============
</TABLE>
STOCK REPURCHASE PLAN On October 21, 1999, the Registrant announced that its
board of directors had adopted a share repurchase plan. The plan authorized the
Registrant to acquire up to 325,000 shares of its common stock in open market
transactions. The Registrant has since purchased 325,000 shares.
1999 ACQUISITION
On September 15, 1999, the Registrant completed its acquisition of Mutual
Savings Bank, f.s.b. ("MSB"). On September 30, 1999, MSB's assets and
shareholders' equity totaled $582.0 million and $43.9 million, respectively. The
markets served by MSB's 22 offices are located within the Lower Peninsula of
Michigan and are generally contiguous to markets that are served by the
remaining Banks.
Consideration consisted of 3,436,000 shares of Registrant's common stock
(3,608,000 shares adjusted for the Registrant's 5% stock dividend declared
September 21, 1999) with an aggregate value of approximately $54.8 million. The
transaction qualified as a "pooling of interests" and the Registrant's results
of operations for the corresponding period of 1999 has been restated.
18
<PAGE> 20
Item 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
No material changes in the market risk faced by the Registrant has occurred
since December 31, 1999.
19
<PAGE> 21
Item 4. Submission of Matters to a Vote of Security-Holders
The Registrant's Annual Meeting of Shareholders was held on April 18,
2000. As described in the Registrant's proxy statement, dated March 15,
2000, matters considered at that meeting were:
(1) Election of four nominees to the board of directors
Jeffey A. Bratsburg was elected to serve a one year term expiring in 2001.
Robert J. Leppink, Arch V. Wright, Jr., and Robert L. Hetzler were elected
to serve three-year terms expiring in 2003.
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) To consider and vote upon a proposal to amend the Registrant's Articles of
Incorporation to increase the authorized shares of common stock from 14
million shares to 30 million shares.
The proposal was passed. Tabulations on this proposal are set forth
below.
<TABLE>
<CAPTION>
Broker Non-Votes
Votes FOR Votes AGAINST and Abstentions
--------- ------------- ---------------
<S> <C> <C>
8,688,575 1,358,212 175,189
</TABLE>
(3) To consider and vote upon a proposal to amend the Registrant's Articles of
Incorporation and eliminate the requirement that certain business
combinations be approved by 75% of the Registrant's outstanding shares of
common stock.
The meeting was adjourned on this proposal to May 30, 2000. The proposal
was passed. Tabulations on this proposal are set forth below.
<TABLE>
<CAPTION>
Broker Non-Votes
Votes FOR Votes AGAINST and Abstentions
--------- ------------- ---------------
<S> <C> <C>
8,418,534 571,514 237,236
</TABLE>
(4) To consider and vote upon a proposal to make an additional 516,000 shares
of the Registrant's common stock available for issuance under the Employee
Stock Option Plan.
The proposal was passed. Tabulations on this proposal are set forth below.
<TABLE>
<CAPTION>
Broker Non-Votes
Votes FOR Votes AGAINST and Abstentions
--------- ------------- ---------------
<S> <C> <C>
8,391,514 1,617,848 212,614
</TABLE>
Item 6. Exhibits & Reports on Form 8-K
(a) Exhibit Number & Description
11. Computation of Earnings Per Share
27. Financial Data Schedule
(b) Reports on Form 8-K
During the quarter ended June 30, 2000, there were no reports filed on
Form 8-K.
20
<PAGE> 22
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 10, 2000 By s/William R. Kohls
----------------------- ----------------------------------------
William R. Kohls, Principal Financial
Officer
Date August 10, 2000 By s/James J. Twarozynski
------------------------ ---------------------------------------
James J. Twarozynski, Principal
Accounting Officer
<PAGE> 23
Exhibit Index
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<S> <C>
11 Computation of Earnings Per Share
27 Financial Data Schedule
</TABLE>
