<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, 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 November 10, 2000
-------------------------------- ----------------------------------------
Common stock, par value $1 11,699,524
<PAGE> 2
INDEPENDENT BANK CORPORATION AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Page
Number(s)
---------
<S> <C> <C>
PART I - Financial Information
Item 1. Consolidated Statements of Financial Condition
September 30, 2000 and December 31, 1999 2
Consolidated Statements of Operations
Three- and nine-month periods ended September 30, 2000 and 1999 3
Consolidated Statements of Cash Flows
Nine-month periods ended September 30, 2000 and 1999 4
Consolidated Statements of Shareholders' Equity
Nine-month periods ended September 30, 2000 and 1999 5
Notes to Interim Consolidated Financial Statements
Three- and Nine-month periods ended September 30, 2000 and 1999 6-8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9-19
Item 3. Quantitative and Qualitative Disclosures about Market Risk 20
PART II - Other Information
Item 4. Submission of Matters to a Vote of Security-Holders 21
Item 6. Exhibits & Reports on Form 8-K 21
</TABLE>
<PAGE> 3
Part I.
INDEPENDENT BANK CORPORATION AND SUBSIDIARIES
Consolidated Statements of Financial Condition
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
--------------- ---------------
Assets (unaudited)
--------------- ---------------
<S> <C> <C>
Cash and due from banks $ 51,589,000 $ 58,646,000
Securities available for sale 207,573,000 195,300,000
Securities held to maturity (Fair value of $42,343,000 at September
30,2000; $70,486,000 at December 31, 1999) 42,990,000 71,115,000
Federal Home Loan Bank stock, at cost 19,612,000 19,612,000
Loans held for sale 15,849,000 12,950,000
Loans
Commercial 373,478,000 334,212,000
Real estate mortgage 767,683,000 757,019,000
Installment 220,147,000 199,410,000
--------------- ---------------
Total Loans 1,361,308,000 1,290,641,000
Allowance for loan losses (13,589,000) (12,985,000)
--------------- ---------------
Net Loans 1,347,719,000 1,277,656,000
Property and equipment, net 35,087,000 37,582,000
Accrued income and other assets 50,253,000 52,344,000
--------------- ---------------
Total Assets $ 1,770,672,000 $ 1,725,205,000
=============== ===============
Liabilities and Shareholders' Equity
Deposits
Non-interest bearing $ 139,063,000 $ 135,868,000
Savings and NOW 562,934,000 567,108,000
Time 686,797,000 607,626,000
--------------- ---------------
Total Deposits 1,388,794,000 1,310,602,000
Federal funds purchased 37,700,000 42,350,000
Other borrowings 178,393,000 224,570,000
Guaranteed preferred beneficial interests in Company's subordinated
debentures 17,250,000 17,250,000
Accrued expenses and other liabilities 24,197,000 16,687,000
--------------- ---------------
Total Liabilities 1,646,334,000 1,611,459,000
--------------- ---------------
Shareholders' Equity
Preferred stock, no par value--200,000 shares authorized; none
Outstanding
Common stock, $1.00 par value--30,000,000 shares authorized;
issued and outstanding: 11,731,820 shares at September 30, 2000
and 11,235,088 shares at December 31, 1999 11,732,000 11,235,000
Capital surplus 79,195,000 71,672,000
Retained earnings 33,857,000 33,921,000
Accumulated other comprehensive (loss) (446,000) (2,283,000)
Unearned employee stock ownership plan shares (799,000)
--------------- ---------------
Total Shareholders' Equity 124,338,000 113,746,000
--------------- ---------------
Total Liabilities and Shareholders' Equity $ 1,770,672,000 $ 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 Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
------------ ------------- ------------ ------------
(unaudited) (unaudited)
--------------------------- ---------------------------
<S> <C> <C> <C> <C>
Interest Income
Interest and fees on loans $ 31,011,000 $ 27,029,000 $ 89,121,000 $ 79,237,000
Securities
Taxable 2,556,000 3,125,000 7,554,000 10,270,000
Tax-exempt 1,476,000 1,080,000 4,729,000 2,754,000
Other investments 421,000 530,000 1,201,000 1,176,000
------------ ------------ ------------ ------------
Total Interest Income 35,464,000 31,764,000 102,605,000 93,437,000
------------ ------------ ------------ ------------
Interest Expense
Deposits 13,690,000 11,107,000 37,913,000 32,593,000
Other borrowings 3,878,000 3,518,000 12,082,000 10,977,000
------------ ------------ ------------ ------------
Total Interest Expense 17,568,000 14,625,000 49,995,000 43,570,000
------------ ------------ ------------ ------------
Net Interest Income 17,896,000 17,139,000 52,610,000 49,867,000
Provision for loan losses 657,000 645,000 2,606,000 1,966,000
------------ ------------ ------------ ------------
Net Interest Income After
Provision for Loan Losses 17,239,000 16,494,000 50,004,000 47,901,000
------------ ------------ ------------ ------------
Non-interest Income
Service charges on deposit accounts 1,794,000 1,481,000 5,005,000 4,051,000
Net gains (losses) on asset sales
Real estate mortgage loans 631,000 880,000 1,545,000 3,662,000
Securities 28,000 (108,000) 12,000 (93,000)
Other income 2,524,000 2,036,000 7,383,000 6,244,000
------------ ------------ ------------ ------------
Total Non-interest Income 4,977,000 4,289,000 13,945,000 13,864,000
------------ ------------ ------------ ------------
Non-interest Expense
Salaries and employee benefits 8,438,000 8,767,000 25,127,000 25,923,000
Occupancy, net 1,157,000 1,162,000 3,454,000 3,429,000
Furniture and fixtures 1,064,000 1,108,000 3,297,000 3,070,000
Merger related costs 4,623,000 4,623,000
Settlement of lawsuit 2,025,000 2,025,000
Other expenses 4,049,000 4,662,000 12,302,000 14,614,000
------------ ------------ ------------ ------------
Total Non-interest Expense 14,708,000 22,347,000 44,180,000 53,684,000
------------ ------------ ------------ ------------
Income (Loss) Before Federal Income Tax 7,508,000 (1,564,000) 19,769,000 8,081,000
Federal income tax expense (benefit) 2,049,000 (385,000) 5,188,000 2,488,000
------------ ------------ ------------ ------------
Net Income (Loss) $ 5,459,000 $ (1,179,000) $ 14,581,000 $ 5,593,000
============ ============ ============ ============
Net Income (Loss) Per Share
Basic $ .46 $ (.10) $ 1.24 $ .47
Diluted .46 (.10) 1.23 .46
Dividends Per Common Share
Declared $ .143 $ .127 $ .429 $ .381
Paid .143 .127 .429 .381
</TABLE>
See notes to interim consolidated financial statements.
3
<PAGE> 5
INDEPENDENT BANK CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Nine months ended
September 30,
2000 1999
------------- -------------
(unaudited)
----------------------------------
<S> <C> <C>
Net Income $ 14,581,000 $ 5,593,000
------------- -------------
Adjustments to Reconcile Net Income
to Net Cash from Operating Activities
Proceeds from sales of loans held for sale 115,460,000 240,105,000
Disbursements for loans held for sale (116,814,000) (206,653,000)
Provision for loan losses 2,606,000 1,966,000
Deferred loan fees 178,000 (8,000)
Depreciation and amortization of premiums and accretion of
discounts on securities and loans 5,051,000 4,666,000
Net gains on sales of real estate mortgage loans (1,545,000) (3,662,000)
Net (gains) losses on sales of securities (12,000) 93,000
Increase (decrease) in accrued income and other assets 794,000 (4,113,000)
Increase in accrued expenses and other liabilities 6,548,000 5,944,000
------------- -------------
Total Adjustments 12,266,000 38,338,000
------------- -------------
Net Cash from Operating Activities 26,847,000 43,931,000
------------- -------------
Cash Flow from Investing Activities
Proceeds from the sale of securities available for sale 19,605,000 15,928,000
Proceeds from the maturity of securities available for sale 1,930,000 35,281,000
Proceeds from the maturity of securities held to maturity 4,899,000 533,550,000
Principal payments received on securities available for sale 7,057,000 11,183,000
Principal payments received on securities held to maturity 24,221,000 463,000
Purchases of securities available for sale (38,839,000) (104,065,000)
Purchases of securities held to maturity (500,000) (480,164,000)
Principal payments on portfolio loans purchased 1,636,000 2,073,000
Portfolio loans made to customers, net of principal payments received (74,482,000) (84,566,000)
Capital expenditures (983,000) (5,209,000)
------------- -------------
Net Cash from Investing Activities (55,456,000) (75,526,000)
------------- -------------
Cash Flow from Financing Activities
Net increase in total deposits 78,192,000 41,636,000
Net increase (decrease) in short-term borrowings (41,781,000) 14,422,000
Proceeds from Federal Home Loan Bank advances 225,866,000 56,831,000
Payments of Federal Home Loan Bank advances (233,412,000) (88,584,000)
Retirement of long-term debt (1,500,000) (1,500,000)
Dividends paid (4,941,000) (3,047,000)
Proceeds from issuance of common stock 710,000 883,000
Repurchase of common stock (1,582,000)
------------- -------------
Net Cash from Financing Activities 21,552,000 20,641,000
------------- -------------
Net Decrease in Cash and Cash Equivalents (7,057,000) (10,954,000)
Cash and Cash Equivalents at Beginning of Period 58,646,000 53,943,000
------------- -------------
Cash and Cash Equivalents at End of Period $ 51,589,000 $ 42,989,000
============= =============
Cash paid during the period for
Interest $ 47,917,000 $ 43,708,000
Income taxes 1,300,000 2,600,000
Transfer of loans to other real estate 2,188,000 1,635,000
</TABLE>
See notes to interim consolidated financial statements
4
<PAGE> 6
INDEPENDENT BANK CORPORATION AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
<TABLE>
<CAPTION>
Nine months ended
September 30,
2000 1999
------------- -------------
(unaudited)
--------------------------------
<S> <C> <C>
Balance at beginning of period $ 113,746,000 $ 117,042,000
Net income 14,581,000 5,593,000
Cash dividends declared (5,061,000) (3,610,000)
Issuance of common stock 753,000 1,686,000
Repurchase of common stock (1,582,000)
ESOP valuation adjustment (48,000)
Allocation of ESOP shares 64,000
Net change in unrealized gain (loss) on securities
available for sale, net of related tax effect (note 4) 1,837,000 (3,247,000)
------------- -------------
Balance at end of period $ 124,338,000 $ 117,416,000
============= =============
</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 September 30, 2000 and December 31,
1999, and the results of operations for the nine-month periods ended September
30, 2000 and 1999.
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 $6,526,000 at September 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. Comprehensive income (loss) for the three-month and the nine-month periods
ending September 30 follows:
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net income (loss) $ 5,459,000 $(1,179,000) $14,581,000 $ 5,593,000
Net change in unrealized gain
on securities available for sale,
net of related tax effect 1,192,000 (1,560,000) 1,837,000 (3,247,000)
----------- ----------- ----------- -----------
Comprehensive income (loss) $ 6,651,000 $(2,739,000) $16,418,000 $ 2,346,000
=========== =========== =========== ===========
</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 for the three and nine-month periods ended September 30, follows:
Three months ended September 30,
<TABLE>
<CAPTION>
IB IBWM IBSM IBEM IBMSB OTHER(1) TOTAL
------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
2000
Total assets $ 426,897 $ 346,695 $ 212,525 $ 313,095 $ 463,786 $ 7,674 $ 1,770,672
Interest income 8,889 7,748 4,530 5,990 8,302 5 35,464
Net interest income 5,096 4,490 2,501 3,373 3,143 (707) 17,896
Provision for loan losses 250 135 60 120 92 657
Income (loss) before
Income tax 2,438 2,273 1,288 1,320 1,171 (982) 7,508
Net income (loss) 1,714 1,551 967 1,023 911 (707) 5,459
1999
Total assets $ 374,673 $ 302,139 $ 171,441 $ 285,633 $ 545,035 $ 9,506 $ 1,688,427
Interest income 7,187 6,652 3,339 5,233 9,348 5 31,764
Net interest income 4,424 4,172 2,014 3,170 3,890 (531) 17,139
Provision for loan losses 150 135 60 150 150 645
Income (loss) before
Income tax 1,605 1,607 611 1,055 (5,560) (882) (1,564)
Net income (loss) 1,145 1,104 493 812 (4,128) (605) (1,179)
</TABLE>
Nine months ended September 30,
<TABLE>
<CAPTION>
IB IBWM IBSM IBEM IBMSB OTHER(1) TOTAL
------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
2000
Total assets $ 426,897 $ 346,695 $ 212,525 $ 313,095 $ 463,786 $ 7,674 $ 1,770,672
Interest income 25,463 22,211 12,679 17,317 24,920 15 102,605
Net interest income 14,761 13,102 7,096 10,015 9,774 (2,138) 52,610
Provision for loan losses 1,245 405 320 360 276 2,606
Income (loss) before
Income tax 6,266 5,976 3,101 3,683 3,968 (3,225) 19,769
Net income (loss) 4,482 4,111 2,358 2,883 3,027 (2,280) 14,581
1999
Total assets $ 374,673 $ 302,139 $ 171,441 $ 285,633 $ 545,035 $ 9,506 $ 1,688,427
Interest income 21,371 19,235 9,908 15,011 27,894 18 93,437
Net interest income 13,198 12,156 6,072 9,291 10,766 (1,616) 49,867
Provision for loan losses 450 405 220 450 441 1,966
Income (loss) before
Income tax 4,855 4,584 2,072 2,946 (3,769) (2,607) 8,081
Net income (loss) 3,395 3,156 1,581 2,236 (2,964) (1,811) 5,593
</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 nine-month periods ending September 30 follows:
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
2000 1999 2000 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net income (loss) $ 5,459,000 $ (1,179,000) $ 14,581,000 $ 5,593,000
============= ============= ============= =============
Shares outstanding (Basic) (1) 11,756,000 11,999,000 11,757,000 11,962,000
Effect of dilutive securities - stock options 110,000 138,000 87,000 138,000
------------- ------------- ------------- -------------
Shares outstanding (Diluted) 11,866,000 12,137,000 11,844,000 12,100,000
============= ============= ============= =============
Net income (loss) per share
Basic $ .46 $ (.10) $ 1.24 $ .47
Diluted .46 (.10) 1.23 .46
</TABLE>
(1) Shares outstanding have been adjusted for a 5% stock dividend in 2000.
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. (See "Deposits and
borrowings")
The Financial Accounting Standards Board has adopted Statement of Financial
Accounting Standards, No. 140, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities", ("SFAS #140").
SFAS #140, which replaces SFAS #125, "Accounting for Transfers and Servicing of
Financial Asset and Extinguishments of Liabilities", ("SFAS #125"), revises the
standards for accounting for the securitization and other transfers of financial
assets and collateral. SFAS #140 also requires certain disclosures, but carries
over most of the provisions of SFAS 125.
This statement is effective for fiscal years ending after December 15, 2000 with
earlier application not 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. The results of operations for the three- and nine-month periods ended
September 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.
FINANCIAL CONDITION
SUMMARY Assets totaled $1.771 billion at September 30, 2000, compared to $1.725
at December 31, 1999. An increase in loans, excluding loans held for sale
("Portfolio Loans"), accounts for the $46.0 million increase in total assets.
Portfolio Loans totaled $1.361 billion at September 30, 2000, compared to $1.291
billion at December 31, 1999. Commercial loans grew by $39.3 million to $373.5
million and account for the majority of the $70.0 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 increased by $116.1 million to $217.1
million at September 30, 2000, from $101.0 million at December 31, 1999. A
decline in other borrowings partially offset the increase in Brokered CDs. (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
September 30, 2000 $208,249 $ 1,485 $ 2,161 $207,573
December 31, 1999 198,764 1,234 4,698 195,300
Securities held to maturity
September 30, 2000 $ 42,990 $ 191 $ 838 $ 42,343
December 31, 1999 71,115 237 866 70,486
</TABLE>
9
<PAGE> 11
Securities held to maturity declined to $43.0 million at September 30, 2000,
from $71.1 million at December 31, 1999. The $28.1 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.")
Securities available for sale increased by $12.3 million during the nine-month
period to $207.6 million at September 30, 2000. The increase in securities
available for sale largely represent the purchase of capital securities.
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 $19.6 million during the nine months ended
September 30, 2000. The Banks sold securities with a market value of $15.9
million during the corresponding period of 1999.
SALES OF SECURITIES AVAILABLE FOR SALE
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Proceeds $ 13,775,000 $ 15,661,000 $ 19,605,000 $ 15,928,000
============ ============ ============ ============
Gross gains $ 45,000 $ 53,000 $ 15,000
Gross losses (17,000) (108,000) (41,000) (108,000)
------------ ------------ ------------ ------------
Net Gains 28,000 $ (108,000) $ 12,000 $ (93,000)
============ ============ ============ ============
</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 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>
September 30, December 31,
2000 1999
-------------- --------------
<S> <C> <C>
Real estate
Residential first mortgages $ 603,114,000 $ 603,714,000
Residential home equity and other junior mortgages 169,844,000 138,682,000
Construction and land development 137,720,000 130,373,000
Other (1) 254,258,000 230,005,000
Consumer 110,984,000 108,054,000
Commercial 64,657,000 60,637,000
Agricultural 20,731,000 19,176,000
-------------- --------------
Total loans $1,361,308,000 $1,290,641,000
============== ==============
</TABLE>
(1) Includes loans secured by multi-family residential and non-farm,
non-residential property.
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 of competitive and economic factors.
<TABLE>
<CAPTION>
NON-PERFORMING ASSETS
September 30, December 31,
2000 1999
------------ ------------
<S> <C> <C>
Non-accrual loans $4,915,000 $2,980,000
Loans 90 days or more past due and
still accruing interest 1,352,000 2,029,000
Restructured loans 259,000 270,000
---------- ----------
Total non-performing loans 6,526,000 5,279,000
Other real estate 1,493,000 1,315,000
---------- ----------
Total non-performing assets $8,019,000 $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 208 246
</TABLE>
A default by a land-development company on loans totaling $2.2 million accounts
for the majority of the increase in non-performing loans. Approximately $990,000
of the principal amount of these loans has been charged against the allowance
for loan losses. The remaining balance of $1,200,000, 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 $3,800,000 at September 30, 2000. At that
same date, certain impaired loans with a balance of approximately $500,000, 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 September 30, 2000.
Cash receipts on impaired loans on non-accrual status are generally applied
11
<PAGE> 13
to the principal balance. Interest recognized on impaired loans during that
nine-month period was approximately $125,000.
ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
Nine months ended
September 30,
2000 1999
------------ ------------
<S> <C> <C>
Balance at beginning of period $ 12,985,000 $ 11,557,000
Additions (deduction)
Provision charged to operating expense 2,606,000 1,966,000
Recoveries credited to allowance 489,000 620,000
Loans charged against the allowance (2,491,000) (1,536,000)
------------ ------------
Balance at end of period $ 13,589,000 $ 12,607,000
============ ============
Net loans charged against the allowance to
average Portfolio Loans (annualized) 0.20% 0.11%
</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 considered national and local economic trends as well as
the recent performance of the major stock indices and changes in consumer
spending which may indicate a relatively stable economy.
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
-------------------------------
<S> <C> <C>
Specific allocations $ 300,000 $ 655,000
Other adversely rated loans 3,692,000 2,484,000
Historical loss allocations 4,235,000 4,063,000
Additional allocations based on subjective factors 5,362,000 5,783,000
----------- -----------
$13,589,000 $12,985,000
=========== ===========
</TABLE>
Loans charged against the allowance for loan losses, net of recoveries, were
equal to an annualized .20% of average loans during the nine months ended
September 30, 2000, compared to an annualized .11% 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 principally compete on the basis of convenience and
personal service, while employing pricing tactics that are intended to enhance
the value of core deposits.
12
<PAGE> 14
CORE DEPOSITS
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
-------------- --------------
<S> <C> <C>
Demand $ 139,063,000 $ 135,868,000
Savings and Now 562,934,000 567,108,000
Retail certificates of deposit 469,686,000 506,597,000
-------------- --------------
$1,171,683,000 $1,209,573,000
============== ==============
</TABLE>
To attract new core depositors, the Banks have implemented high-performance
checking, which has generated significant increases in relationships as well as
service charges. Management believes that the new relationships which result
from these marketing efforts provide valuable opportunities to cross sell
related financial products and services.
<TABLE>
<CAPTION>
September 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 217,111 3.7 years 6.74% 101,029 6.0 years 6.24%
Fixed rate FHLB advances 76,084 6.6 years 6.24 131,592 3.2 years 5.98
Variable rate FHLB advances 89,000 0.4 years 6.79 59,056 0.4 years 4.63
Federal funds purchased 37,700 1 day 6.88 42,350 1 day 5.42
</TABLE>
The Banks have implemented strategies that incorporate federal funds purchased,
other borrowings and Brokered CDs to fund a portion of the increase in total
assets. 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.")
Other borrowed funds, principally advances from the Federal Home Loan Bank (the
"FHLB"), decreased to $178.4 million at September 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.
13
<PAGE> 15
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 $ 111,000 $ 8,000 $27,000 $76,000 $ 196,000
Weighted-average 2.7 years 1.5 years 2.3 years 2.2 years 4.1 years
maturity
Cap strike 7.08% 7.30%
Floor strike 5.17% 5.75
Rate paying 5.81% 6.67%
Rate receiving 6.77 6.82
Premium paid $ 1,970 $ 31
Annual cost .50% .15%
Amortized cost $ 1,548 $ 19 $ 124
Fair value 840 5 2 $ 623 $ (2,356)
</TABLE>
At September 30, 2000, the Banks employed interest-rate caps, floors and collars
with an aggregate notional amount of $146.0 million. The Banks also employed
interest-rate swaps with an aggregate notional amount of $272.0 million.
Management has evaluated the impact of Financial Accounting Standards Board
Statement of Financial Accounting Standards, No. 133, "Accounting for Derivative
Instruments and Hedging Activities", ("SFAS #133") at September 30, 2000. (See
note #2 to consolidated financial statements.) As a result of its assessment,
Management expects that the majority of the interest-rate caps and pay fixed
swaps will qualify as cash flow hedges which would have resulted in the
recognition of a net unrealized loss of $85,000 in other comprehensive income.
Floors and collars are not expected to be designated as hedges and would have
resulted in the recognition of a net unrealized loss of $136,000. Approximately
$85 million of pay variable swaps with an average life of 0.7 years are not
expected to be designated as hedges and would have resulted in the recognition
of a net unrealized gain of $159,000. The balance of the pay variable swaps are
anticipated to be designated as fair value hedges and are not expected to have
an impact on income at implementation.
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 Cumulative Trust Preferred Securities ("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.
On September 19, 2000, the Registrant announced that its board of directors
adopted a share repurchase plan. The plan authorizes the Registrant to acquire
up to 500,000 shares of its common stock in open market transactions through
September 30, 2001. The Registrant has purchased 45,000 shares at an average
price of $17.25 during the three month period ending September 30, 2000.
14
<PAGE> 16
CAPITALIZATION
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------- -------------
<S> <C> <C>
Unsecured debt $ 12,000,000 $ 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 11,732,000 11,235,000
Capital surplus 79,195,000 71,672,000
Retained earnings 33,857,000 33,921,000
Accumulated other comprehensive income (446,000) (2,283,000)
Unearned employee stock ownership plan shares (799,000)
------------- -------------
Total shareholders' equity 124,338,000 113,746,000
------------- -------------
Total capitalization $ 153,588,000 $ 143,496,000
============= =============
</TABLE>
Shareholders' equity totaled $124.3 million at September 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 7.02% of total assets at September 30, 2000, compared to
6.59% at December 31, 1999.
CAPITAL RATIOS
<TABLE>
<CAPTION>
September 30, 2000 December 31, 1999
------------------ -----------------
<S> <C> <C>
Equity capital 7.02% 6.59%
Average shareholders equity to average assets(1) 6.84 7.16
Tier 1 leverage (tangible equity capital) 7.20 6.52
Tier 1 risk-based capital 9.62 9.33
Total risk-based capital 10.67 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.
15
<PAGE> 17
RESULTS OF OPERATIONS
SUMMARY Net income for the three months ended September 30, 2000, totaled
$5,459,000, equal to $0.46 per share. During the comparable three-month period
in 1999, the company reported a net loss of $1,179,000, equal to $.10 per share.
Net income for the nine months ended September 30, 2000, totaled $14,581,000,
equal to $1.23 per share. Earnings for the nine-month period in 1999 totaled
$5,593,000, equal to $.46 per share.
Net income for 1999 includes acquisition-related charges totaling $4,921,000,
net of federal income taxes. Excluding consideration of such charges, earnings
would have totaled $3,742,000, equal to $.31 per share, during the three-month
period in 1999. Earnings for the nine-month period in 1999 would have been
$10,514,000, equal to $.87 per share.
Excluding consideration of the acquisition related charges, increases in the
company's earnings largely resulted from increases in its net interest income as
well as declines in its non-interest expense.
KEY PERFORMANCE RATIOS
<TABLE>
<CAPTION>
Three months Nine months
ended September 30, ended September 30,
2000 1999 2000 1999
-------------------------- --------------------------
<S> <C> <C> <C> <C>
Net income to
Average assets 1.23% (.28)% 1.12% .45%
Average equity 17.61 (3.83) 16.41 6.19
Earnings per common share
Basic $ 0.46 $ (0.10) $ 1.24 $ .47
Diluted 0.46 (0.10) 1.23 .46
</TABLE>
NET INTEREST INCOME Tax equivalent net interest income increased by 6.2% to
$18,850,000 and by 7.8% to $55,455,000, respectively, during the three- and
nine-month periods in 2000. Increases from the comparable periods of 1999
principally reflect increases in average earning assets. An increase in tax
equivalent net interest income as a percent of average earning assets ("Net
Yield") also contributed to the increase in net interest income during the
nine-month period.
Average earning assets totaled $1.651 billion and $1.627 billion during the
three- and nine-month periods in 2000, respectively. The increases from the
corresponding periods of 1999 principally reflect increases in Portfolio Loans.
Net Yield was equal to 4.56% during the three-months ended September 30, 2000
and 1999. Net Yield increased by 9 basis points to 4.55% during the nine-month
period in 2000, from 4.46% during the comparable period of 1999. 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.
16
<PAGE> 18
NET INTEREST INCOME AND SELECTED RATIOS
<TABLE>
<CAPTION>
Three months Nine months
ended September 30, ended September 30,
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Average earning assets (in thousands) $1,651,254 $1,555,476 $1,626,867 $1,537,168
Tax equivalent net interest income 18,850 17,750 55,455 51,427
As a percent of average earning assets
Tax equivalent interest income 8.79% 8.29% 8.65% 8.25%
Interest expense 4.23 3.73 4.10 3.79
Tax equivalent net interest income 4.56 4.56 4.55 4.46
Average earning assets as a
percent of average assets 93.84% 92.34% 93.70% 92.53%
Free-funds ratio 10.06% 9.14% 9.30% 8.93%
</TABLE>
PROVISION FOR LOAN LOSSES The provision for loan losses was $657,000 during the
three months ended September 30, 2000, compared to $645,000 during the
three-month period in 1999. During the nine-month periods in 2000 and 1999, the
provision was $2,606,000 and $1,966,000, respectively. The increase in the
provision during the nine-month period 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 $4,977,000 during the three
months ended September 30, 2000, compared to $4,289,000 during the comparable
period in 1999. Non-interest income totaled $13,945,000 and $13,864,000 during
the nine months ended September 30, 2000 and 1999, respectively.
Changes in the net gains and losses on asset sales have had a substantial impact
on total non-interest income. Excluding net gains and losses on asset sales,
non-interest income grew by 23% during the three-month period and by 20% during
the nine-month period. Service charges on deposit accounts increased by 21% to
$1,794,000 and by 24% to $5,005,000 during the three- and nine-month periods in
2000. Increases in service charges principally relate to the introduction of
High Performance Checking into each of the markets served by the Banks. Loan
servicing fees as well as ATM and debit card fees also contributed to the
increase in non-interest income.
17
<PAGE> 19
NON-INTEREST INCOME
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Service charges on deposit
accounts $ 1,794,000 $ 1,481,000 $ 5,005,000 $ 4,051,000
Net gains on asset sales
Real estate mortgage loans 631,000 880,000 1,545,000 3,662,000
Securities 28,000 (108,000) 12,000 (93,000)
First Home Financial 545,000 613,000 1,567,000 1,547,000
Title insurance fees 253,000 215,000 655,000 639,000
Real estate mortgage loan
servicing fees 367,000 317,000 1,115,000 915,000
Mutual fund and annuity
commissions 281,000 365,000 1,023,000 973,000
Other 1,078,000 526,000 3,023,000 2,170,000
------------ ------------ ------------ ------------
Total non-interest income $ 4,977,000 $ 4,289,000 $ 13,945,000 $ 13,864,000
============ ============ ============ ============
</TABLE>
Net gains on the sale of real estate mortgage loans totaled $631,000 and
$1,545,000 during the three- and nine-month periods in 2000. The decline in such
net gains from $880,000 and $3,662,000 in the respective periods of 1999
reflects a decline in loans sold as well as the impact of price competition in
the origination of loans.
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
2000 1999 2000 1999
---------------------------- ----------------------------
<S> <C> <C> <C> <C>
Real estate mortgage loans
originated $ 91,649,000 $111,120,000 $255,221,000 $414,553,000
Real estate mortgage loan
sales 45,025,000 55,801,000 113,915,000 236,676,000
Real estate mortgage loan
servicing rights sold 12,386,000 6,090,000 23,379,000 17,053,000
Net gains on the sale of real
estate mortgage loans 631,000 880,000 1,545,000 3,662,000
Net gains as a percent of real
estate mortgage loans sold 1.40% 1.58% 1.36% 1.55%
</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 $735,000 and $1,771,000 of related servicing
rights during the nine-month periods ended September 30, 2000 and 1999,
respectively. Amortization of capitalized servicing rights for those periods was
$809,000 and $965,000, respectively. The book
18
<PAGE> 20
value of capitalized mortgage servicing rights was $4,638,000 at September 30,
2000. The fair value of capitalized servicing rights, which relate to
approximately $800 million of loans sold and serviced, approximated $7 million
at that same date, and therefore, no valuation allowance was considered
necessary.
NON-INTEREST EXPENSE Non-interest expense totaled $14,708,000 and $44,180,000
during the three- and nine-month periods in 2000. The substantial decreases from
the comparable periods in 1999 principally reflect merger-related charges and
the costs to settle a lawsuit, which were incurred in conjunction with the 1999
acquisition of MSB.
Excluding consideration of such charges, non-interest expense would have
declined by $991,000 during the three-month period and by $2,856,000 during the
nine-month periods.
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 Nine months ended
September 30, September 30,
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Salaries $ 6,071,000 $ 6,460,000 $17,612,000 $18,119,000
Performance-based compensation
and benefits 1,054,000 1,015,000 3,565,000 3,804,000
Other benefits 1,313,000 1,292,000 3,950,000 4,000,000
----------- ----------- ----------- -----------
Salaries and benefits 8,438,000 8,767,000 25,127,000 25,923,000
Occupancy, net 1,157,000 1,162,000 3,454,000 3,429,000
Furniture and fixtures 1,064,000 1,108,000 3,297,000 3,070,000
Data processing 530,000 951,000 1,887,000 2,635,000
Communications 524,000 564,000 1,618,000 1,710,000
Advertising 451,000 548,000 1,495,000 1,873,000
Amortization of intangible assets 431,000 433,000 1,295,000 1,307,000
Supplies 374,000 391,000 1,137,000 1,127,000
Loan and collection 484,000 255,000 1,127,000 1,159,000
FDIC insurance 71,000 333,000 214,000 1,056,000
Merger related costs 4,623,000 4,623,000
Litigation settlement 2,025,000 2,025,000
Other 1,184,000 1,187,000 3,529,000 3,747,000
----------- ----------- ----------- -----------
Total non-interest expense $14,708,000 $22,347,000 $44,180,000 $53,684,000
=========== =========== =========== ===========
</TABLE>
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. The transaction qualified as a "pooling of interests".
19
<PAGE> 21
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.
20
<PAGE> 22
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 September 30, 2000, there were no reports
filed on Form 8-K.
21
<PAGE> 23
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 10, 2000 By s/William R. Kohls
---------------------------- ----------------------------------------
William R. Kohls, Principal Financial
Officer
Date November 10, 2000 By s/James J. Twarozynski
---------------------------- ----------------------------------------
James J. Twarozynski, Principal
Accounting Officer
22
<PAGE> 24
Exhibit Index
-------------
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<S> <C>
11 Computation of Earnings Per Share
27 Financial Data Schedule
</TABLE>
