10-Q 1 k58402e10-q.txt QUARTERLY REPORT ENDED 9/30/00 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 2 INDEPENDENT BANK CORPORATION AND SUBSIDIARIES INDEX
Page Number(s) --------- 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
3 Part I. INDEPENDENT BANK CORPORATION AND SUBSIDIARIES Consolidated Statements of Financial Condition
September 30, December 31, 2000 1999 --------------- --------------- Assets (unaudited) --------------- --------------- 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 =============== ===============
See notes to interim consolidated financial statements. 2 4 INDEPENDENT BANK CORPORATION AND SUBSIDIARIES Consolidated Statements of Operations
Three Months Ended Nine Months Ended September 30, September 30, 2000 1999 2000 1999 ------------ ------------- ------------ ------------ (unaudited) (unaudited) --------------------------- --------------------------- 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
See notes to interim consolidated financial statements. 3 5 INDEPENDENT BANK CORPORATION AND SUBSIDIARIES Consolidated Statements of Cash Flows
Nine months ended September 30, 2000 1999 ------------- ------------- (unaudited) ---------------------------------- 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
See notes to interim consolidated financial statements 4 6 INDEPENDENT BANK CORPORATION AND SUBSIDIARIES Consolidated Statements of Shareholders' Equity
Nine months ended September 30, 2000 1999 ------------- ------------- (unaudited) -------------------------------- 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 ============= =============
See notes to interim consolidated financial statements. 5 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:
Three months ended Nine months ended September 30, September 30, 2000 1999 2000 1999 ----------- ----------- ----------- ----------- 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 =========== =========== =========== ===========
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 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,
IB IBWM IBSM IBEM IBMSB OTHER(1) TOTAL ------------------------------------------------------------------------------------ (in thousands) 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)
Nine months ended September 30,
IB IBWM IBSM IBEM IBMSB OTHER(1) TOTAL ------------------------------------------------------------------------------------ (in thousands) 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
(1) Includes items relating to the Registrant and certain insignificant operations. 7 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:
Three months ended Nine months ended September 30, September 30, 2000 1999 2000 1999 ------------- ------------- ------------- ------------- 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
(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 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
Unrealized ---------------------- Amortized Fair Cost Gains Losses Value --------- -------- -------- -------- (in thousands) 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
9 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
Three months ended Nine months ended September 30, September 30, 2000 1999 2000 1999 ------------ ------------ ------------ ------------ 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) ============ ============ ============ ============
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 12 LOAN PORTFOLIO COMPOSITION
September 30, December 31, 2000 1999 -------------- -------------- 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 ============== ==============
(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.
NON-PERFORMING ASSETS September 30, December 31, 2000 1999 ------------ ------------ 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
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 13 to the principal balance. Interest recognized on impaired loans during that nine-month period was approximately $125,000. ALLOWANCE FOR LOAN LOSSES
Nine months ended September 30, 2000 1999 ------------ ------------ 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%
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
September 30, December 31, 2000 1999 ------------------------------- 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 =========== ===========
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 14 CORE DEPOSITS
September 30, December 31, 2000 1999 -------------- -------------- 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 ============== ==============
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.
September 30, 2000 December 31, 1999 ---------------------------- ------------------------------- Average Average Amount Maturity Rate Amount Maturity Rate ------ -------- ---- ------ -------- ---- (dollars in thousands) 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
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 15 INTEREST-RATE DERIVATIVE FINANCIAL INSTRUMENTS
SWAPS ---------------------------------- CAPS FLOORS COLLARS PAY FIXED PAY VARIABLE ---------------------------------------------------------------------------------------------------------------- (dollars in thousands) 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)
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 16 CAPITALIZATION
September 30, December 31, 2000 1999 ------------- ------------- 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 ============= =============
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
September 30, 2000 December 31, 1999 ------------------ ----------------- 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
(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 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
Three months Nine months ended September 30, ended September 30, 2000 1999 2000 1999 -------------------------- -------------------------- 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
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 18 NET INTEREST INCOME AND SELECTED RATIOS
Three months Nine months ended September 30, ended September 30, 2000 1999 2000 1999 ---------- ---------- ---------- ---------- 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%
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 19 NON-INTEREST INCOME
Three months ended Nine months ended September 30, September 30, 2000 1999 2000 1999 ------------ ------------ ------------ ------------ 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 ============ ============ ============ ============
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.
Three months ended Nine months ended September 30, September 30, 2000 1999 2000 1999 ---------------------------- ---------------------------- 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%
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 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
Three months ended Nine months ended September 30, September 30, 2000 1999 2000 1999 ----------- ----------- ----------- ----------- 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 =========== =========== =========== ===========
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 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 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 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 24 Exhibit Index -------------
Exhibit No. Description ----------- ----------- 11 Computation of Earnings Per Share 27 Financial Data Schedule