<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 MARCH 31, 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 May 12, 2000
- ------------------------------------- ------------------------------------------
Common stock, par value $1 11,237,505
<PAGE> 2
INDEPENDENT BANK CORPORATION AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Page
Number(s)
---------
PART I - Financial Information
---------------------
<S> <C> <C>
Item 1. Consolidated Statements of Financial Condition
March 31, 2000 and December 31, 1999 2
Consolidated Statements of Operations
Three-month periods ended March 31, 2000 and 1999 3
Consolidated Statements of Cash Flows
Three-month periods ended March 31, 2000 and 1999 4
Consolidated Statements of Shareholders' Equity
Three-month periods ended March 31, 2000 and 1999 5
Notes to Interim Consolidated Financial Statements
Three-month periods ended March 31, 2000 and 1999 6-8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9-17
Item 3. Quantitative and Qualitative Disclosures about Market Risk 18
PART II - Other Information
Item 6. Exhibits & Reports on Form 8-K 19
</TABLE>
<PAGE> 3
Part I.
INDEPENDENT BANK CORPORATION AND SUBSIDIARIES
Consolidated Statements of Financial Condition
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
---------------- ----------------
Assets (unaudited)
---------------- ----------------
<S> <C> <C>
Cash and due from banks $ 45,655,000 $ 58,646,000
Securities available for sale 205,450,000 195,300,000
Securities held to maturity (Fair value of $65,585,000 at March
31, 2000; $70,486,000 at December 31, 1999) 67,211,000 71,115,000
Federal Home Loan Bank stock, at cost 19,612,000 19,612,000
Loans held for sale 12,991,000 12,950,000
Loans
Commercial and agricultural 353,524,000 334,212,000
Real estate mortgage 757,545,000 757,019,000
Installment 200,804,000 199,410,000
---------------- ----------------
Total Loans 1,311,873,000 1,290,641,000
Allowance for loan losses (13,277,000) (12,985,000)
---------------- ----------------
Net Loans 1,298,596,000 1,277,656,000
Property and equipment, net 36,732,000 37,582,000
Accrued income and other assets 52,765,000 52,344,000
---------------- ----------------
Total Assets $ 1,739,012,000 $ 1,725,205,000
================ ================
Liabilities and Shareholders' Equity
Deposits
Non-interest bearing $ 127,309,000 $ 135,868,000
Savings and NOW 588,992,000 567,108,000
Time 632,688,000 607,626,000
---------------- ----------------
Total Deposits 1,348,989,000 1,310,602,000
Federal funds purchased 31,449,000 42,350,000
Other borrowings 204,655,000 224,570,000
Guaranteed preferred beneficial interests in Company's subordinated
debentures 17,250,000 17,250,000
Accrued expenses and other liabilities 20,161,000 16,687,000
---------------- ----------------
Total Liabilities 1,622,504,000 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: 11,221,723 shares at March 31, 2000
and 11,235,088 shares at December 31, 1999 11,222,000 11,235,000
Capital surplus 71,216,000 71,672,000
Retained earnings 36,721,000 33,921,000
Accumulated other comprehensive loss (1,852,000) (2,283,000)
Unearned employee stock ownership plan shares (799,000) (799,000)
---------------- ----------------
Total Shareholders' Equity 116,508,000 113,746,000
---------------- ----------------
Total Liabilities and Shareholders' Equity $ 1,739,012,000 $ 1,725,205,000
================ ================
</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
March 31,
2000 1999
-------------- ------------
(unaudited)
---------------------------
<S> <C> <C>
Interest Income
Interest and fees on loans $ 28,486,000 $ 25,934,000
Securities
Taxable 2,465,000 3,605,000
Tax-exempt 1,663,000 823,000
Other investments 391,000 417,000
------------ -----------
Total Interest Income 33,005,000 30,779,000
------------ -----------
Interest Expense
Deposits 11,741,000 10,776,000
Other borrowings 4,106,000 3,827,000
------------ -----------
Total Interest Expense 15,847,000 14,603,000
------------ -----------
Net Interest Income 17,158,000 16,176,000
Provision for loan losses 557,000 666,000
------------ -----------
Net Interest Income After Provision for Loan Losses 16,601,000 15,510,000
------------ -----------
Non-interest Income
Service charges on deposit accounts 1,501,000 1,207,000
Net gains (losses) on asset sales
Real estate mortgage loans 380,000 1,531,000
Securities (16,000) 14,000
Other income 2,279,000 1,995,000
------------ -----------
Total Non-interest Income 4,144,000 4,747,000
------------ -----------
Non-interest Expense
Salaries and employee benefits 8,392,000 8,445,000
Occupancy, net 1,178,000 1,150,000
Furniture and fixtures 1,141,000 968,000
Other expenses 4,000,000 5,027,000
------------ -----------
Total Non-interest Expense 14,711,000 15,590,000
------------ -----------
Income Before Federal Income Tax 6,034,000 4,667,000
Federal income tax expense 1,548,000 1,396,000
============ ===========
Net Income $ 4,486,000 $ 3,271,000
============ ===========
Net income per common share
Basic $ .40 $ .29
Diluted .40 .28
Dividends Per Common Share
Declared $ .15 $ .09
Paid .14 .09
</TABLE>
See notes to interim consolidated financial statements.
3
<PAGE> 5
INDEPENDENT BANK CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Three months ended
March 31,
2000 1999
--------------- ---------------
(unaudited)
-------------------------------
Net Income $ 4,486,000 $ 3,271,000
--------------- -------------
<S> <C> <C>
Adjustments to Reconcile Net Income
to Net Cash from Operating Activities
Proceeds from sales of loans held for sale 28,155,000 98,378,000
Disbursements for loans held for sale (27,816,000) (85,649,000)
Provision for loan losses 557,000 666,000
Deferred loan fees 122,000 (14,000)
Amortization of intangible assets 432,000 442,000
Depreciation and amortization of premiums and accretion of
discounts on securities and loans 1,173,000 822,000
Net gains on sales of real estate mortgage loans (380,000) (1,531,000)
Net (gains) losses on sales of securities 16,000 (14,000)
Increase in accrued income and other assets (853,000) (1,987,000)
Increase in accrued expenses and other liabilities 3,182,000 904,000
--------------- -------------
Total Adjustments 4,588,000 12,017,000
--------------- -------------
Net Cash from Operating Activities 9,074,000 15,288,000
--------------- -------------
Cash Flow from Investing Activities
Proceeds from the sale of securities available for sale 4,933,000 267,000
Proceeds from the maturity of securities available for sale 345,000 7,000,000
Proceeds from the maturity of securities held to maturity 1,010,000 149,868,000
Principal payments received on securities available for sale 2,968,000 4,398,000
Principal payments received on securities held to maturity 4,269,000 306,000
Purchases of securities available for sale (19,242,000) (6,719,000)
Purchases of securities held to maturity (128,649,000)
Principal payments on portfolio loans purchased 905,000 3,995,000
Portfolio loans made to customers, net of principal payments received (22,524,000) (21,771,000)
Capital expenditures (215,000) (2,272,000)
--------------- -------------
Net Cash from Investing Activities (27,551,000) 6,423,000
--------------- -------------
Cash Flow from Financing Activities
Net increase (decrease) in total deposits 38,387,000 (10,052,000)
Net decrease in short-term borrowings (29,755,000) (7,191,000)
Proceeds from Federal Home Loan Bank advances 147,770,000
Payments of Federal Home Loan Bank advances (148,331,000) (11,000,000)
Retirement of long-term debt (500,000) (500,000)
Dividends paid (1,572,000) (960,000)
Proceeds from issuance of common stock 293,000 194,000
Repurchase of common stock (806,000)
--------------- -------------
Net Cash from Financing Activities 5,486,000 (29,509,000)
--------------- -------------
Net Decrease in Cash and Cash Equivalents (12,991,000) (7,798,000)
Cash and Cash Equivalents at Beginning of Period 58,646,000 57,610,000
--------------- -------------
Cash and Cash Equivalents at End of Period $ 45,655,000 $ 49,812,000
=============== =============
Cash paid during the period for interest $ 16,144,000 $ 14,587,000
Transfer of loans to other real estate 1,534,000 827,000
</TABLE>
See notes to interim consolidated financial statements
4
<PAGE> 6
INDEPENDENT BANK CORPORATION AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
<TABLE>
<CAPTION>
Three months ended
March 31,
2000 1999
-------------- ------------
(unaudited)
----------------------------
<S> <C> <C>
Balance at beginning of period $ 113,746,000 $ 117,042,000
Net income 4,486,000 3,271,000
Cash dividends declared (1,684,000) (1,040,000)
Issuance of common stock 335,000 850,000
Repurchase of common stock (806,000)
ESOP valuation adjustment (16,000)
Net change in unrealized loss on securities
available for sale, net of related tax effect (note 4) 431,000 (545,000)
--------------- --------------
Balance at end of period $ 116,508,000 $ 119,562,000
=============== ==============
</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 March 31, 2000 and December 31,
1999, and the results of operations for the three-month periods ended March 31,
2000 and 1999.
2. 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 $5,435,000 at March 31, 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 for the three-month periods ending March 31 follows:
<TABLE>
<CAPTION>
Three months ended
March 31,
2000 1999
------------- ------------
<S> <C> <C>
Net income $ 4,486,000 $ 3,271,000
Net change in unrealized loss on securities available for sale,
net of related tax effect 431,000 (585,000)
------------ ------------
Comprehensive income $ 4,917,000 $ 2,686,000
============ ============
</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 at March 31, follows:
<TABLE>
<CAPTION>
IB IBWM IBSM IBEM IBMSB OTHER(1) TOTAL
--------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
2000
Total assets $ 421,335 $ 329,536 $ 201,223 $ 306,848 $ 471,525 $ 8,545 $ 1,739,012
Interest income 8,091 7,037 3,934 5,601 8,340 2 33,005
Net interest income 4,725 4,159 2,224 3,276 3,395 (621) 17,158
Provision for loan losses 150 135 60 120 92 557
Income (loss) before
Income tax 1,978 1,663 884 1,169 1,476 (1,136) 6,034
Net income (loss) 1,415 1,157 683 920 1,106 (795) 4,486
1999
Total assets $ 358,112 $ 268,308 $ 161,955 $ 260,757 $ 580,314 $ 5,174 $ 1,634,620
Interest income 7,217 6,207 3,357 4,861 9,132 5 30,779
Net interest income 4,466 3,875 2,068 3,022 3,307 (562) 16,176
Provision for loan losses 150 135 90 150 141 666
Income (loss) before
Income tax 1,667 1,436 793 905 778 (912) 4,667
Net income (loss) 1,150 989 577 680 506 (631) 3,271
</TABLE>
(1) Includes items relating to the Registrant and certain insignificant
operations.
6. A reconciliation of basic and diluted earnings per share for the three-month
periods ending, March 31 follows:
<TABLE>
<CAPTION>
Three months ended
March 31,
2000 1999
------------- -------------
<S> <C> <C>
Net income $ 4,486,000 $ 3,271,000
============= =============
Shares outstanding (Basic) (1) 11,191,000 11,350,000
Effect of dilutive securities - stock options 81,000 140,000
------------- -------------
Shares outstanding (Diluted) 11,272,000 11,490,000
============= =============
Earnings per share
Basic $ .40 $ .29
Diluted .40 .28
</TABLE>
(1) Shares outstanding have been adjusted for a 5% stock dividend in 1999
7
<PAGE> 9
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
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, 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
acquisition 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-month period ended March 31, 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.
FINANCIAL CONDITION
SUMMARY Loans, excluding loans held for sale ("Portfolio Loans"), increased to
$1.312 billion at March 31, 2000, from $1.291 billion at December 31, 1999.
Commercial and agricultural loans grew by $19.3 million to $353.5 million and
account for substantially all of the $21.2 million increase in Portfolio Loans.
(See "Portfolio loans and asset quality.")
Deposits grew to $1.349 billion at March 31, 2000, from $1.311 billion at
December 31, 1999. Savings and NOW accounts grew by $21.9 million during the
three-month period and account for approximately 57% of the $38.4 million
increase in total deposits. The $25.1 million increase in time deposits reflects
the Banks' use of brokered certificates of deposits. (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. 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
-------------- -------------- ------------- -------------
<S> <C> <C> <C> <C>
(in thousands)
Securities available for sale
March 31, 2000 $208,256 $ 898 $3,704 $205,450
December 31, 1999 198,764 1,234 4,698 195,300
Securities held to maturity
March 31, 2000 $ 67,211 $ 192 $1,818 $ 65,585
December 31, 1999 71,115 237 866 70,486
</TABLE>
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 $4.9 million during
9
<PAGE> 11
the three months ended March 31, 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
March 31,
2000 1999
-------------- ---------------
<S> <C> <C>
Proceeds $4,933,000 $ 267,000
============== ===============
Gross gains $ 7,000 $ 14,000
Gross losses (23,000)
-------------- ---------------
Net gains (losses) $ (16,000) $ 14,000
============== ===============
</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.
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 often retain adjustable-rate and balloon real estate mortgage loans,
while 15- and 30-year, fixed-rate obligations are sold to mitigate exposure to
changes in interest rates. (See "Non-interest income.")
The increase in commercial and agricultural 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. Although demand for such loans
is dependent upon a number of factors, Management currently anticipates
continued growth within this segment of Portfolio Loans.
10
<PAGE> 12
NON-PERFORMING ASSETS
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
---------------- ----------------
<S> <C> <C>
Non-accrual loans $ 3,119,000 $ 2,980,000
Loans 90 days or more past due and
still accruing interest 2,050,000 2,029,000
Restructured loans 266,000 270,000
---------------- ----------------
Total non-performing loans 5,435,000 5,279,000
Other real estate 1,452,000 1,315,000
---------------- ----------------
Total non-performing assets $ 6,887,000 $ 6,594,000
================ ================
As a percent of Portfolio Loans
Non-performing loans 0.41 % 0.41 %
Non-performing assets 0.53 0.51
Allowance for loan losses 1.01 1.01
Allowance for loan losses as a percent of
non-performing loans 244 246
</TABLE>
Impaired loans totaled approximately $3,300,000 at March 31, 2000. At that same
date, certain impaired loans with a balance of approximately $1,100,000, had
specific allocations of the allowance for loan losses, which totaled
approximately $400,000. The Banks' average investment in impaired loans was
approximately $3,300,000, for the three-month period ended March 31, 2000. Cash
receipts on impaired loans on non-accrual status are generally applied to the
principal balance. Interest recognized on impaired loans during that three-month
period was approximately $50,000.
ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
Three months ended
March 31,
2000 1999
---------------- --------------
<S> <C> <C>
Balance at beginning of period $ 12,985,000 $ 11,557,000
Additions (deduction)
Provision charged to operating expense 557,000 666,000
Recoveries credited to allowance 160,000 173,000
Loans charged against the allowance (425,000) (516,000)
---------------- --------------
Balance at end of period $ 13,277,000 $ 11,880,000
================ ==============
Net loans charged against the allowance to
average Portfolio Loans (annualized) 0.08% 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. Loans charged against the allowance for
loan losses, net of recoveries, were equal to .08% of average loans during the
three months ended March 31, 2000, compared to .12% during the comparable period
of 1999. (See "Provision for loan losses.")
11
<PAGE> 13
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.
The Banks have implemented funding strategies that incorporate other borrowings
and Brokered CDs to finance 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>
March 31, 2000 December 31, 1999
--------------------------------- -----------------------------------
Average Average
Amount Maturity Rate Amount Maturity Rate
------ -------- ---- ------ -------- ----
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Brokered CDs $140,270 6.0 years 6.71% $101,029 6.0 years 6.24%
Fixed rate FHLB advances 76,087 5.2 years 5.92 131,592 3.2 years 5.98
Variable rate FHLB advances 113,995 0.5 years 5.97 59,056 0.4 years 4.63
</TABLE>
Other borrowed funds, principally advances from the Federal Home Loan Bank (the
"FHLB"), decreased to $204.7 million at March 31, 2000, from $224.6 million at
December 31, 1999. On those same dates, federal funds purchased totaled $31.4
million and $42.4 million, respectively. The decline in other borrowed funds and
federal funds purchased principally reflects the competitive cost of Brokered
CDs as well as Management's efforts to diversify the Banks' funding sources.
Brokered CDs totaled $140.3 million and $101.0 million at March 31, 2000 and
December 31, 1999, respectively.
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 $63,500 $8,000 $7,000 $70,000 $121,000
Weighted-average
maturity 3.7 years 2.0 years 0.8 years 2.5 years 6.7 years
Cap strike 6.87% 6.38%
Floor strike 5.17% 5.75
Rate paying 5.58% 6.03%
Rate receiving 6.04 6.73
Premium paid $ 1,638 $ 31
Annual cost .60% .15%
Amortized cost $ 1,407 $ 25
Fair value 1,413 3 $ 13 $ 1,630 $ (4,262)
</TABLE>
At March 31, 2000, the Company employed interest-rate caps, floors and collars
with an aggregate notional amount of $78.5 million. The Banks also employed
interest-rate swaps with an aggregate notional amount of $191.0 million.
12
<PAGE> 14
LIQUIDITY AND CAPITAL RESOURCES Effective management of the Registrant's 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 strategies. Acquisitions are also integral
components of Management's capital management strategies. (See "Stock repurchase
plan.")
CAPITALIZATION
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
----------------- -------------------
<S> <C> <C>
Unsecured debt $ 13,500,000 $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 11,222,000 11,235,000
Capital surplus 71,216,000 71,672,000
Retained earnings 36,721,000 33,921,000
Accumulated other comprehensive loss (1,852,000) (2,283,000)
Unearned employee stock ownership plan shares (799,000) (799,000)
------------ ------------
Total shareholders' equity 116,508,000 113,746,000
------------ ------------
Total capitalization $147,258,000 $143,496,000
============ ============
</TABLE>
Shareholders' equity totaled $116.5 million at March 31, 2000. The $2.8 million
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 6.70% of total assets at March 31,
2000, compared to 6.59% at December 31, 1999.
CAPITAL RATIOS
<TABLE>
<CAPTION>
March 31, 2000 December 31, 1999
---------------------- ----------------------
<S> <C> <C>
Equity capital 6.70% 6.59%
Average shareholders equity to average assets(1) 6.68 7.16
Tier 1 leverage (tangible equity capital) 6.78 6.52
Tier 1 risk-based capital 9.62 9.33
Total risk-based capital 10.72 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
13
<PAGE> 15
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.
RESULTS OF OPERATIONS
SUMMARY Net income totaled $4,486,000 during the three months ended March 31,
2000. The $1,215,000 increase from $3,271,000 during the comparable period in
1999, principally reflects an increase in net interest income as well as a
decline in non-interest expense. A decrease in the provision for loan losses
also contributed to the increase in net income. A decline in non-interest
income, which is attributable to the Banks' mortgage-banking activities, as well
as an increase in federal income tax expense limited the increase in net income.
KEY PERFORMANCE RATIOS
<TABLE>
<CAPTION>
Three months
ended March 31,
2000 1999
----------------------------
<S> <C> <C>
Net income to
Average assets 1.05% .81%
Average equity 15.74 11.14
Earnings per common share
Basic $.40 $.29
Diluted .40 .28
Cash basis income to(A)
Average tangible assets 1.15% .91%
Average tangible equity 19.89 14.64
Cash basis income per share(A)
Basic $.43 $.32
Diluted .43 .32
</TABLE>
(A) Cash basis financial data exclude intangible assets and the related
amortization expense
NET INTEREST INCOME Tax equivalent net interest income totaled $18,111,000
during the three months ended March 31, 2000. The $2,168,000 increase from
$16,643,000 during the comparable period of 1999 reflects an increase in average
earning assets as well as an increase in Net Yield.
Average earning assets totaled $1.602 billion during the three-month period in
2000. The $76 million increase from $1.526 billion during the comparable period
in 1999 principally reflects an increase in Portfolio Loans.
14
<PAGE> 16
Tax equivalent net interest income as a percent of average earning assets ("Net
Yield") was equal to 4.52% of average earning assets during the three months
ended March 31, 2000, compared to 4.37% during the corresponding period of 1999.
A portion of the 15 basis point increase in Net Yield may be attributed to the
scheduled maturity of certain low-yielding assets and high-cost liabilities at
MSB.
Increases in Net Yield also reflect increases in Portfolio Loans as a percent of
average earning assets. Portfolio Loans were equal to 80.2% and 75.2% of average
earning assets for the three months ended March 31, 2000 and 1999, respectively.
NET INTEREST INCOME AND SELECTED RATIOS
<TABLE>
<CAPTION>
Three months
ended March 31,
2000 1999
----------- ------------
<S> <C> <C>
Average earning assets (in thousands) $1,602,804 $1,526,178
Tax equivalent net interest income 18,111 16,643
As a percent of average earning assets
Tax equivalent interest income 8.50 % 8.25 %
Interest expense 3.98 3.88
Tax equivalent net interest income 4.52 4.37
Average earning assets as a
percent of average assets 93.48 % 92.81 %
Free-funds ratio 8.58 % 10.04 %
</TABLE>
PROVISION FOR LOAN LOSSES The provision for loan losses was $557,000 during the
three months ended March 31, 2000, compared to $666,000 during the three-month
period in 1999. The decrease in the provision reflects Management's assessment
of the allowance for loan losses. (See "Asset quality.")
NON-INTEREST INCOME Non-interest income totaled $4,144,000 during the three
months ended March 31, 2000, compared to $4,747,000 during the comparable period
in 1999. The decline in non-interest income reflects a decrease in net gains on
the sale of real estate mortgage loans. Increases in service charges on deposit
accounts partially offset the decline in net gains. 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 period in 1999.
15
<PAGE> 17
NON-INTEREST INCOME
<TABLE>
<CAPTION>
Three months ended
March 31,
2000 1999
--------------- --------------
<S> <C> <C>
Service charges on deposit
accounts $1,501,000 $ 1,207,000
Net gains (losses) on asset sales
Real estate mortgage loans 380,000 1,531,000
Securities (16,000) 14,000
First Home Financial 508,000 426,000
Title insurance fees 160,000 185,000
Real estate mortgage loan
servicing fees 376,000 288,000
Mutual fund and annuity
commissions 405,000 317,000
Other 830,000 779,000
-------------- --------------
Total non-interest income $4,144,000 $4,747,000
============== ==============
</TABLE>
Net gains on the sale of real estate mortgage loans totaled $380,000 during the
three months ended March 31, 2000, compared to $1,531,000 during the comparable
period in 1999. The decline in such net gains principally reflects a decline in
loans sold.
<TABLE>
<CAPTION>
Three months ended
March 31,
2000 1999
------------------------------------
<S> <C> <C>
Real estate mortgage loans originated $66,954,000 $148,080,000
Real estate mortgage loan sales 27,775,000 96,847,000
Real estate mortgage loan servicing rights sold 2,642,000 5,014,000
Net gains on the sale of real estate mortgage loans 380,000 1,531,000
Net gains as a percent of real estate mortgage loans sold 1.37% 1.58%
</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 $200,000 and $750,000 of related servicing
rights during the three-month periods ended March 31, 2000 and 1999,
respectively. Amortization of capitalized servicing rights for those periods was
$267,000 and $324,000, respectively. The book value of capitalized mortgage
servicing rights was $4,645,000 at March 31, 2000. The fair value of capitalized
servicing rights, which relate to approximately $770 million of loans sold and
serviced, approximated $8 million at that same date, and therefore, no valuation
allowance was considered necessary.
Service charges on deposit accounts increased by 24% to $1,501,000 during the
three months ended March 31, 2000, from $1,207,000 during the comparable period
in 1999. The increase in
16
<PAGE> 18
service charges principally relate to certain deposit account promotions, which
includes direct mail solicitations, at each of the Banks.
NON-INTEREST EXPENSE Non-interest expense totaled $14,711,000 during the three
months ended March 31, 2000. The $879,000 decrease from $15,590,000 during the
comparable period of 1999 reflects a $290,000 decline in FDIC insurance
assessments. A decrease in costs relating to the origination of real estate
mortgage loans as well as a decline in legal and professional fees also
contributed to the decrease in non-interest expense.
NON-INTEREST EXPENSE
<TABLE>
<CAPTION>
Three months ended
March 31,
2000 1999
------------ -------------
<S> <C> <C>
Salaries $ 5,824,000 $ 5,715,000
Performance-based compensation and benefits 1,201,000 1,309,000
Other benefits 1,367,000 1,421,000
----------- -----------
Salaries and benefits 8,392,000 8,445,000
Occupancy, net 1,178,000 1,150,000
Furniture and fixtures 1,141,000 968,000
Computer processing 693,000 784,000
Communications 565,000 593,000
Advertising 457,000 719,000
Amortization of intangible assets 432,000 442,000
Supplies 395,000 351,000
Loan and collection 307,000 439,000
FDIC insurance 71,000 361,000
Other 1,080,000 1,338,000
----------- -----------
Total non-interest expense $14,711,000 $15,590,000
=========== ===========
</TABLE>
STOCK REPURCHASE PLAN On October 21, 1999, the Registrant announced that its
board of directors has adopted a share repurchase plan. The plan authorizes 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.
RECENT 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.
17
<PAGE> 19
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.
18
<PAGE> 20
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 March 31, 2000, there were no reports filed
on Form 8-K.
19
<PAGE> 21
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 May 12, 2000 By s/ William R. Kohls
------------------------- -----------------------------------------
William R. Kohls, Principal Financial
Officer
Date May 12, 2000 By s/ James J. Twarozynski
------------------------- ----------------------------------------
James J. Twarozynski, Principal
Accounting Officer
20
<PAGE> 22
Exhibit Index
-------------
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
11 Computation of Earnings Per Share
27 Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 11
A reconciliation of basic and diluted earnings per share for the
three-month periods ending March 31 follows:
<TABLE>
<CAPTION>
Three months ended
March 31,
2000 1999
--------------- --------------
<S> <C> <C>
Net income $ 4,486,000 $ 3,271,000
============= =============
Shares outstanding (Basic) (1) 11,191,000 11,350,000
Effect of dilutive securities - stock options 81,000 140,000
------------- -------------
Shares outstanding (Diluted) 11,272,000 11,490,000
============= =============
Earnings per share
Basic $ .40 $ .29
Diluted .40 .28
</TABLE>
(1) Shares outstanding have been adjusted for a 5% stock dividend in 1999
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-END> MAR-31-2000
<CASH> 45,655
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 205,450
<INVESTMENTS-CARRYING> 67,211
<INVESTMENTS-MARKET> 65,585
<LOANS> 1,311,873
<ALLOWANCE> 13,277
<TOTAL-ASSETS> 1,739,012
<DEPOSITS> 1,348,989
<SHORT-TERM> 233,604
<LIABILITIES-OTHER> 20,161
<LONG-TERM> 19,750
0
0
<COMMON> 11,222
<OTHER-SE> 105,286
<TOTAL-LIABILITIES-AND-EQUITY> 1,739,012
<INTEREST-LOAN> 28,486
<INTEREST-INVEST> 4,128
<INTEREST-OTHER> 391
<INTEREST-TOTAL> 33,005
<INTEREST-DEPOSIT> 11,741
<INTEREST-EXPENSE> 15,847
<INTEREST-INCOME-NET> 17,158
<LOAN-LOSSES> 557
<SECURITIES-GAINS> (16)
<EXPENSE-OTHER> 14,711
<INCOME-PRETAX> 6,034
<INCOME-PRE-EXTRAORDINARY> 6,034
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,486
<EPS-BASIC> 0.40
<EPS-DILUTED> 0.40
<YIELD-ACTUAL> 4.52
<LOANS-NON> 3,119
<LOANS-PAST> 2,050
<LOANS-TROUBLED> 266
<LOANS-PROBLEM> 3,300
<ALLOWANCE-OPEN> 12,985
<CHARGE-OFFS> 425
<RECOVERIES> 160
<ALLOWANCE-CLOSE> 13,277
<ALLOWANCE-DOMESTIC> 7,626
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 5,651
</TABLE>
