-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, QIec0WTix3qhgy0GduyOG+iCvVDD3YLTk6qy6mDIlU4b4skhH8fzSNNVFA5Zz05h BzUkSfsm5LI5vbF4wGeIeA== 0000950124-99-004725.txt : 19990816 0000950124-99-004725.hdr.sgml : 19990816 ACCESSION NUMBER: 0000950124-99-004725 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990813 FILER: COMPANY DATA: COMPANY CONFORMED NAME: INDEPENDENT BANK CORP /MI/ CENTRAL INDEX KEY: 0000039311 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 382032782 STATE OF INCORPORATION: MI FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-07818 FILM NUMBER: 99688281 BUSINESS ADDRESS: STREET 1: 230 W MAIN ST STREET 2: PO BOX 491 CITY: IONIA STATE: MI ZIP: 48846 BUSINESS PHONE: 6165279450 MAIL ADDRESS: STREET 1: 230 W MAIN ST CITY: IONIA STATE: MI ZIP: 48846 10-Q 1 FORM 10-Q 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999 ------------- Commission file number 0-7818 --------- INDEPENDENT BANK CORPORATION - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Michigan 38-2032782 - ------------------------------------------- ---------------------------------- (State or jurisdiction of (I.R.S. Employer Identification Incorporation or Organization) Number) 230 West Main Street, P.O. Box 491, Ionia, Michigan 48846 - -------------------------------------------------------------------------------- (Address of principal executive offices) (616) 527-9450 -------------- (Registrant's telephone number, including area code) NONE - -------------------------------------------------------------------------------- Former name, address and fiscal year, if changed since last report. Indicate by check mark whether the registrant (1) has filed all documents and reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO ---- ---- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class Outstanding at August 10, 1999 - ---------------------------------------- ------------------------------------- Common stock, par value $1 7,477,359 2 INDEPENDENT BANK CORPORATION AND SUBSIDIARIES INDEX Page Number(s) PART I - Financial Information Item 1. Consolidated Statements of Financial Condition June 30, 1999 and December 31, 1998 2 Consolidated Statements of Operations Three- and six-month periods ended June 30, 1999 and 1998 3 Consolidated Statements of Cash Flows Six-month periods ended June 30, 1999 and 1998 4 Consolidated Statements of Shareholders' Equity Six-month periods ended June 30, 1999 and 1998 5 Notes to Interim Consolidated Financial Statements Three- and six-month periods ended June 30, 1999 and 1998 6-8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9-18 Item 3. Quantitative and Qualitative Disclosures about Market Risk 18 PART II - Other Information Item 4. Submission of Matters to a Vote of Security-Holders 19 Item 6. Exhibits & Reports on Form 8-K 19 3 Part I. INDEPENDENT BANK CORPORATION AND SUBSIDIARIES Consolidated Statements of Financial Condition
June 30, December 31, 1999 1998 ----------------- ----------------- (unaudited) ----------------- ----------------- Assets Cash and due from banks $ 33,281,000 $ 42,846,000 Securities available for sale 110,874,000 99,515,000 Securities held to maturity (Fair value of $14,460,000 at June 30,1999; $19,029,000 at December 31, 1998) 14,076,000 18,349,000 Federal Home Loan Bank stock, at cost 12,589,000 12,589,000 Loans held for sale 22,254,000 39,741,000 Loans Commercial and agricultural 247,285,000 238,863,000 Real estate mortgage 441,727,000 449,114,000 Installment 142,908,000 134,627,000 ---------------- ---------------- Total Loans 831,920,000 822,604,000 Allowance for loan losses (10,183,000) (9,714,000) ---------------- ---------------- Net Loans 821,737,000 812,890,000 Property and equipment, net 29,462,000 27,255,000 Accrued income and other assets 33,055,000 32,073,000 ---------------- ---------------- Total Assets $ 1,077,328,000 $ 1,085,258,000 ================ ================ Liabilities and Shareholders' Equity Deposits Non-interest bearing $ 106,408,000 $ 112,930,000 Savings and NOW 378,138,000 377,592,000 Time 352,148,000 339,992,000 ---------------- ---------------- Total Deposits 836,694,000 830,514,000 Federal funds purchased 31,550,000 22,650,000 Other borrowings 104,163,000 130,964,000 Guaranteed preferred beneficial interests in Company's subordinated debentures 17,250,000 17,250,000 Accrued expenses and other liabilities 14,680,000 14,175,000 ---------------- ---------------- Total Liabilities 1,004,337,000 1,015,553,000 ---------------- ---------------- Shareholders' Equity Preferred stock, no par value--200,000 shares authorized; none outstanding Common stock, $1.00 par value--14,000,000 shares authorized; issued and outstanding: 7,474,792 shares at June 30, 1999 and 7,382,506 shares at December 31, 1998 7,475,000 7,383,000 Capital surplus 38,969,000 37,658,000 Retained earnings 26,275,000 22,749,000 Accumulated other comprehensive income 272,000 1,915,000 ---------------- ---------------- Total Shareholders' Equity 72,991,000 69,705,000 ---------------- ---------------- Total Liabilities and Shareholders' Equity $ 1,077,328,000 $ 1,085,258,000 ================ ================
See notes to interim consolidated financial statements. 2 4 Consolidated Statements of Operations
Three Months Ended Six Months Ended June 30, June 30, 1999 1998 1999 1998 ------------ --------------- ------------ ----------- (unaudited) (unaudited) ----------------------------- ------------------------- Interest Income Interest and fees on loans $19,616,000 $19,146,000 $39,124,000 $37,529,000 Securities Taxable 872,000 1,338,000 1,939,000 2,817,000 Tax-exempt 849,000 605,000 1,672,000 1,214,000 Other investments 249,000 252,000 498,000 499,000 ----------- ----------- ----------- ----------- Total Interest Income 21,586,000 21,341,000 43,233,000 42,059,000 ----------- ----------- ----------- ----------- Interest Expense Deposits 6,479,000 6,112,000 12,923,000 11,951,000 Other borrowings 2,124,000 2,985,000 4,458,000 6,104,000 ----------- ----------- ----------- ----------- Total Interest Expense 8,603,000 9,097,000 17,381,000 18,055,000 ----------- ----------- ----------- ----------- Net Interest Income 12,983,000 12,244,000 25,852,000 24,004,000 Provision for loan losses 505,000 670,000 1,030,000 1,303,000 ----------- ----------- ----------- ----------- Net Interest Income After Provision for Loan Losses 12,478,000 11,574,000 24,822,000 22,701,000 ----------- ----------- ----------- ----------- Non-interest Income Service charges on deposit accounts 1,206,000 980,000 2,244,000 1,803,000 Net gains on asset sales Real estate mortgage loans 1,008,000 1,048,000 2,256,000 1,955,000 Securities 7,000 14,000 144,000 Other income 1,605,000 1,336,000 2,996,000 2,097,000 ----------- ----------- ----------- ----------- Total Non-interest Income 3,819,000 3,371,000 7,510,000 5,999,000 ----------- ----------- ----------- ----------- Non-interest Expense Salaries and employee benefits 6,993,000 6,430,000 13,803,000 12,341,000 Occupancy, net 871,000 752,000 1,741,000 1,451,000 Furniture and fixtures 776,000 670,000 1,521,000 1,249,000 Other expenses 3,692,000 3,517,000 7,413,000 6,659,000 ----------- ----------- ----------- ----------- Total Non-interest Expense 12,332,000 11,369,000 24,478,000 21,700,000 ----------- ----------- ----------- ----------- Income Before Federal Income Tax 3,965,000 3,576,000 7,854,000 7,000,000 Federal income tax expense 1,122,000 1,037,000 2,246,000 2,028,000 ----------- ----------- ----------- ----------- Net Income $ 2,843,000 $ 2,539,000 $ 5,608,000 $ 4,972,000 =========== =========== =========== =========== Net Income Per Share Basic $ .38 $ .35 $ .75 $ .68 Diluted .38 .34 .75 .67 Dividends Per Common Share Declared $ .140 $ .124 $ .280 $ .248 Paid .140 .124 .270 .241
See notes to interim consolidated financial statements. 3 5 INDEPENDENT BANK CORPORATION AND SUBSIDIARIES Consolidated Statements of Cash Flows
Six months ended June 30, 1999 1998 --------------- --------------- (unaudited) ------------------------------- Net Income $ 5,608,000 $ 4,972,000 --------------- --------------- Adjustments to Reconcile Net Income to Net Cash from Operating Activities Proceeds from sales of loans held for sale 137,233,000 130,887,000 Disbursements for loans held for sale (117,490,000) (148,523,000) Provision for loan losses 1,030,000 1,303,000 Deferred loan fees 114,000 Depreciation and amortization of premiums and accretion of discounts on securities and loans 2,496,000 2,199,000 Net gains on sales of real estate mortgage loans (2,256,000) (1,955,000) Net gains on sales of securities (14,000) (144,000) Increase in accrued income and other assets (1,856,000) (961,000) Increase in accrued expenses and other liabilities 2,039,000 1,573,000 --------------- ---------------- Total Adjustments 21,182,000 (15,507,000) --------------- ---------------- Net Cash from Operating Activities 26,790,000 (10,535,000) --------------- ---------------- Cash Flow from Investing Activities Proceeds from the sale of securities available for sale 267,000 4,882,000 Proceeds from the maturity of securities available for sale 11,805,000 3,622,000 Proceeds from the maturity of securities held to maturity 4,452,000 1,790,000 Principal payments received on securities available for sale 7,944,000 9,297,000 Principal payments received on securities held to maturity 322,000 941,000 Purchases of securities available for sale (34,343,000) (8,973,000) Principal payments on portfolio loans purchased 3,545,000 9,096,000 Portfolio loans made to customers, net of principal payments received (13,422,000) (45,590,000) Acquisition of business, less cash received 1,459,000 Acquisition of branches, less cash received 16,168,000 Capital expenditures (3,805,000) (2,840,000) --------------- ---------------- Net Cash from Investing Activities (23,235,000) (10,148,000) --------------- ---------------- Cash Flow from Financing Activities Net increase in total deposits 6,180,000 36,121,000 Net increase (decrease) in short-term borrowings 8,268,000 (4,268,000) Proceeds from Federal Home Loan Bank advances 6,831,000 35,515,000 Payments of Federal Home Loan Bank advances (32,000,000) (41,000,000) Retirement of long-term debt (1,000,000) (1,000,000) Dividends paid (1,999,000) (1,762,000) Proceeds from issuance of common stock 600,000 605,000 --------------- ---------------- Net Cash from Financing Activities (13,120,000) 24,211,000 --------------- ---------------- Net Increase (Decrease) in Cash and Cash Equivalents (9,565,000) 3,528,000 Cash and Cash Equivalents at Beginning of Period 42,846,000 30,371,000 --------------- ---------------- Cash and Cash Equivalents at End of Period $ 33,281,000 $ 33,899,000 =============== ================ Cash paid during the period for Interest $ 17,479,000 $ 17,792,000 Income taxes 2,100,000 2,900,000 Transfer of loans to other real estate 990,000 399,000
See notes to interim consolidated financial statements 4 6 INDEPENDENT BANK CORPORATION AND SUBSIDIARIES Consolidated Statements of Shareholders' Equity
Six months ended June 30, 1999 1998 -------------- ------------- (unaudited) ----------------------------- Balance at beginning of period $ 69,705,000 $ 59,516,000 Net income 5,608,000 4,972,000 Cash dividends declared (2,086,000) (1,813,000) Issuance of common stock 1,407,000 3,130,000 Net change in unrealized gain on securities available for sale, net of related tax effect (note 4) (1,643,000) (122,000) -------------- -------------- Balance at end of period $ 72,991,000 $ 65,683,000 ============== ==============
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 June 30, 1999 and December 31, 1998, and the results of operations for the six-month periods ended June 30, 1999 and 1998. 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 $4,736,000 at June 30, 1999, and $6,641,000 at December 31, 1998. (See Management's Discussion and Analysis of Financial Condition and Results of Operations). 3. The provision for income taxes represents federal income tax expense calculated using annualized rates on taxable income generated during the respective periods. 4. The Registrant adopted Statement of Financial Accounting Standards, No. 130, "Reporting Comprehensive Income", (SFAS #130) effective January 1, 1998. SFAS #130 establishes standards for reporting and displaying comprehensive income and its components, including but not limited to unrealized gains and losses on securities available for sale. Comprehensive income for the three-month and the six-month periods ending June 30 follows:
Three months ended Six months ended June 30, June 30, 1999 1998 1999 1998 -------------- ------------ ------------- ------------- Net income $ 2,843,000 $ 2,539,000 $ 5,608,000 $ 4,972,000 Net change in unrealized gain on securities available for sale, net of related tax effect (1,237,000) (60,000) (1,643,000) (122,000) ------------- ------------- ------------- ------------- Comprehensive income $ 1,606,000 $ 2,479,000 $ 3,965,000 $ 4,850,000 ============= ============= ============= =============
5. The Registrant adopted Statement of Financial Accounting Standards, No. 131, "Disclosures about Segments of an Enterprise and Related Information", (SFAS #131) on January 1, 1998. SFAS #131 establishes standards for the way that public entities report information about operating segments in financial statements. The Registrant's reportable segments are based upon legal entities. The Registrant has four reportable segments: Independent Bank ("IB"), Independent Bank West Michigan ("IBWM"), Independent Bank South Michigan ("IBSM") and Independent Bank East Michigan ("IBEM"). 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-month and six-month period ended June 30, follows: Three months ended June 30,
IB IBWM IBSM IBEM OTHER(1) TOTAL -------------------------------------------------------------------------------------- (in thousands) 1999 Total assets $ 362,783 $ 279,418 $ 164,119 $ 261,781 $ 9,227 $1,077,328 Interest income 6,968 6,413 3,279 4,918 8 21,586 Net interest income 4,308 4,109 1,990 3,099 (523) 12,983 Provision for loan losses 150 135 70 150 505 Income (loss) before Income tax 1,583 1,541 668 986 (813) 3,965 Net income (loss) 1,100 1,063 511 744 (575) 2,843 1998 Total assets $ 347,291 $ 267,185 $ 166,285 $ 248,108 $ 6,089 $1,034,958 Interest income 7,021 6,155 3,382 4,771 12 21,341 Net interest income 4,224 3,762 1,939 2,905 (586) 12,244 Provision for loan losses 285 195 85 105 670 Income (loss) before Income tax 1,606 1,310 710 917 (967) 3,576 Net income (loss) 1,121 919 521 654 (676) 2,539 Six months ended June 30, IB IBWM IBSM IBEM OTHER(1) TOTAL -------------------------------------------------------------------------------------- (in thousands) 1999 Total assets $ 362,783 $ 279,418 $ 164,119 $ 261,781 $ 9,227 $1,077,328 Interest income 14,185 12,620 6,636 9,779 13 43,233 Net interest income 8,774 7,984 4,058 6,121 (1,085) 25,852 Provision for loan losses 300 270 160 300 1,030 Income (loss) before Income tax 3,250 2,977 1,461 1,891 (1,725) 7,854 Net income (loss) 2,250 2,052 1,088 1,424 (1,206) 5,608 1998 Total assets $ 347,291 $ 267,185 $ 166,285 $ 248,108 $ 6,089 $1,034,958 Interest income 13,975 11,946 6,706 9,415 17 42,059 Net interest income 8,346 7,346 3,829 5,671 (1,188) 24,004 Provision for loan losses 450 390 160 303 1,303 Income (loss) before Income tax 3,179 2,637 1,465 1,691 (1,972) 7,000 Net income (loss) 2,208 1,848 1,069 1,205 (1,358) 4,972
(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 six-month periods ending June 30 follows:
Three months ended Six months ended June 30, June 30, 1999 1998 1999 1998 ------------- ------------- ------------- ------------- Net income $ 2,843,000 $ 2,539,000 $ 5,608,000 $ 4,972,000 ============= ============= ============= ============= Shares outstanding (Basic)(1) 7,451,000 7,351,000 7,431,000 7,308,000 Effect of dilutive securities - stock options 39,000 90,000 48,000 91,000 ------------- ------------- ------------- ------------- Shares outstanding (Diluted) $ 7,490,000 $ 7,441,000 $ 7,479,000 $ 7,399,000 ============= ============= ============= ============= Earnings per share Basic $ .38 $ .35 $ .75 $ .68 Diluted .38 .34 .75 .67
(1)Shares outstanding have been adjusted for a 5% stock dividend in 1998. 7. The Financial Accounting Standards Board adopted Statement of Financial Accounting Standards, No. 133, "Accounting for Derivative Instruments and Hedging Activities", ("SFAS #133") in June 1998. SFAS #133, which has been subsequently amended by SFAS #137, requires companies to record derivatives on the balance sheet as assets and liabilities measured at fair value. The accounting for increases and decreases in the value of those derivatives will depend upon the use of those derivatives and whether or not they qualify for hedge accounting. This statement is effective for all fiscal quarters of fiscal years beginning after June 15, 2000 with earlier application allowed and is to be applied prospectively. The adoption of this statement is not expected to have a material impact on the Registrant's financial statements. 8. The results of operations for the six-month period ended June 30, 1999, 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 1998 Annual Report on Form 10-K. FINANCIAL CONDITION SUMMARY Assets totaled $1,077.3 million at June 30, 1999. The nominal decline in total assets from $1,085.3 million at December 31, 1998, principally reflects a $17.5 million decrease in loans held for sale. (See "Non-interest income.") Loans, excluding loans held for sale ("Portfolio Loans"), increased to $831.9 million at June 30, 1999, from $822.6 million at December 31, 1998. The increase in Portfolio Loans reflects increases in commercial and agricultural loans as well as installment loans that were partially offset by a decline in real estate mortgage loans. (See "Asset/liability management.") The $7.4 million decline in real estate mortgage loans was the result of refinancing activity during the six months ended June 30, 1999. Deposits increased to $836.7 million at June 30, 1999, from $830.5 million at December 31, 1998. The $6.2 million increase in deposits principally reflects the issuance of brokered certificates of deposits ("Brokered CDs"). (See "Deposits and borrowings.") SECURITIES The Banks maintain diversified securities portfolios that include obligations of the U.S. Treasury and government-sponsored agencies as well as securities issued by states and political subdivisions, corporate notes and mortgage-backed securities. Management continually evaluates the Banks' asset/liability management needs and attempts to maintain a portfolio structure that provides sufficient liquidity and cash flow. (See "Asset/liability management.") SECURITIES
Unrealized ---------------------------- Amortized Fair Cost Gains Losses Value -------------- -------------- ------------- ------------- (in thousands) Securities available for sale June 30, 1999 $110,456 $ 893 $475 $110,874 December 31, 1998 96,614 2,948 47 99,515 Securities held to maturity June 30, 1999 $ 14,076 $ 388 $ 4 $ 14,460 December 31, 1998 18,349 688 8 19,029
9 11 The purchase or sale of securities is dependent upon Management's assessment of reinvestment opportunities as well as the Banks' asset/liability management needs. As a result of such ongoing evaluations, the Banks purchased securities with a fair market value of $34,343,000 and $8,973,000 during the six months ended June 30, 1999 and 1998, respectively. The Banks sold securities with an aggregate market value of approximately $267,000 during the six-month period in 1999 compared to $4.9 million in 1998. The Banks realized net gains on the sale of such securities totaling $14,000 and $144,000 during the six months ended June 30, 1999 and 1998, respectively. SALES OF SECURITIES AVAILABLE FOR SALE
Three months ended Six months ended June 30, June 30, 1999 1998 1999 1998 ---------------- --------------- ---------------- ---------------- Proceeds $ 516,000 $ 267,000 $ 4,882,000 =============== ================ ================ ================ Gross gains $ 7,000 $ 14,000 $ 144,000 Gross losses --------------- ---------------- ---------------- ---------------- Net Gains $ 7,000 $ 14,000 $ 144,000 =============== ================ ================ ================
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. NON-PERFORMING ASSETS
June 30, December 31, 1999 1998 --------------- ----------------- Non-accrual loans $2,776,000 $4,106,000 Loans 90 days or more past due and still accruing interest 1,686,000 2,240,000 Restructured loans 274,000 295,000 --------------- ----------------- Total non-performing loans 4,736,000 6,641,000 Other real estate 1,263,000 936,000 --------------- ---------------- Total non-performing assets $5,999,000 $7,577,000 =============== ================= As a percent of Portfolio Loans Non-performing loans 0.57 % 0.81 % Non-performing assets 0.72 0.92 Allowance for loan losses 1.22 1.18 Allowance for loan losses as a percent of non-performing loans 215 146
10 12 Impaired loans totaled approximately $3,200,000 at June 30, 1999. At that same date, certain impaired loans with a balance of approximately $1,000,000, had specific allocations of the allowance for loan losses calculated in accordance with Statement of Financial Accounting Standards #114 totaling approximately $200,000. The Banks' average investment in impaired loans was approximately $3,300,000, for the six-month period ending June 30, 1999. Cash receipts on impaired loans on non-accrual status are generally applied to the principal balance. Interest recognized on impaired loans during that six-month period was approximately $80,000. Loans charged against the allowance for loan losses, net of recoveries, were equal to .14% of average loans during the six months ended June 30, 1999, compared to .12% during the comparable period of 1998. ALLOWANCE FOR LOAN LOSSES
Six months ended June 30, 1999 1998 --------------- -------------- Balance at beginning of period $ 9,714,000 $7,670,000 Additions (deduction) Provision charged to operating expense 1,030,000 1,303,000 Recoveries credited to allowance 287,000 329,000 Loans charged against the allowance (848,000) (764,000) --------------- -------------- Balance at end of period $10,183,000 $8,538,000 =============== ============== Net loans charged against the allowance to average Portfolio Loans (annualized) 0.14% 0.12%
Management's assessment of the allowance for loan losses is based on the composition of the loan portfolio, an evaluation of specific credits, historical loss experience as well as the level of non-performing and impaired loans. Based upon such assessment, Management does not believe there has been a material change in the adequacy of the allowance for loan losses. (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, Management employs pricing tactics that are intended to enhance the value of core deposits and the Banks have implemented funding strategies that incorporate other borrowings and Brokered CDs to finance a portion of the Portfolio Loans. The use of such alternate sources of funds is also an integral part of the Banks' asset/liability management efforts.
June 30, 1999 December 31, 1998 ------------------------------- --------------------------------- Average Average Amount Maturity Rate Amount Maturity Rate ------ -------- ---- ------ -------- ---- (dollars in thousands) Brokered CDs $65,727 6.4 years 5.92% $54,885 4.4 years 5.64% Fixed rate FHLB advances 51,344 2.9 years 5.71 50,569 3.5 years 5.75 Variable rate FHLB advances 42,556 0.2 years 4.96 68,500 0.5 years 5.21
11 13 Other borrowed funds, principally advances from the Federal Home Loan Bank (the "FHLB"), decreased to $104.2 million at June 30, 1999, from $131.0 million at December 31, 1998. The decline in other borrowed funds reflects the competitive cost of Brokered CDs as well as Management's efforts to diversify the Banks' funding sources. Brokered CDs totaled $65.7 million and $54.9 million at June 30, 1999 and December 31, 1998, respectively. INTEREST-RATE DERIVATIVE FINANCIAL INSTRUMENTS
SWAPS ---------------------------------- CAPS FLOORS COLLARS PAY FIXED PAY VARIABLE - ------------------------------------------------------------------------------------------------------------- (dollars in thousands) Notional amount $18,000 $ 3,000 $10,000 $58,500 $47,000 Weighted-average 1.4 years 1.9 years 1.2 years 2.9 years 8.8 years maturity Cap strike 6.64% 6.42% Floor strike 4.63% 5.71 Rate paying 5.29% 5.08% Rate receiving 4.90 6.10 Premium paid $ 218 $ 5 Annual cost .28% .09% Amortized cost $ 85 $ 5 Fair value 41 1 $ (47) $ 749 $(1,769)
Derivative financial instruments are employed to reduce the cost of alternate funding sources and manage the Banks' exposure to changes in interest rates. Certain derivative financial instruments may also mitigate the interest-rate risk associated with prepayments on fixed-rate loans. (See "Asset/liability management.") At June 30, 1999, the Company employed interest-rate caps, floors and collars with a notional amount of $18.0 million $3.0 million and $10.0 million, respectively. The Banks also employed interest-rate swaps with an aggregate notional amount of $105.5 million. LIQUIDITY AND CAPITAL RESOURCES Effective management of the Registrant's capital resources is critical to Management's mission to create value for the Registrant's shareholders. To profitably deploy capital within existing markets, the Banks have implemented balance sheet management strategies that combine effective loan origination efforts with disciplined funding strategies. Although the Banks' balance sheet management strategies provide profitable opportunities to leverage the balance sheet, Management believes that its acquisition strategy may provide greater value to the Registrant's shareholders. The Registrant's cost of capital is also an important factor in creating shareholder value. Accordingly, the Registrant's capital structure includes unsecured debt and Preferred Securities. 12 14 CAPITALIZATION
June 30, December 31, 1999 1998 ------------------------------------ Unsecured debt $ 9,000,000 $10,000,000 Preferred Securities 17,250,000 17,250,000 Shareholders' Equity Preferred stock, no par value Common Stock, par value $1.00 per share 7,475,000 7,383,000 Capital surplus 38,969,000 37,658,000 Retained earnings 26,275,000 22,749,000 Accumulated other comprehensive income 272,000 1,915,000 ----------- ----------- Total shareholders' equity 72,991,000 69,705,000 ----------- ----------- Total capitalization $99,241,000 $96,955,000 =========== ===========
Shareholders' equity totaled $73.0 million at June 30, 1999. In addition to the retention of earnings, the $3.3 million increase from $69.7 million at December 31, 1998, reflects the issuance of common stock pursuant to various equity-based incentive compensation plans. Shareholders' equity was equal to 6.78% of total assets at June 30, 1999, compared to 6.42% at December 31, 1998. CAPITAL RATIOS
June 30, 1999 December 31, 1998 ------------------- ---------------------- Equity capital 6.78% 6.42% Average shareholders equity to average assets(1) 6.80 6.42 Tier 1 leverage (tangible equity capital) 6.81 6.23 Tier 1 risk-based capital 9.22 8.72 Total risk-based capital 10.47 9.97
(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 Bank's 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 Bank's net interest income and market value of portfolio equity that result from changes in interest rates. At June 30, 1999, each of the Banks was within established parameters for interest-rate risk. Management has determined that the retention of certain real estate mortgage loans, generally 15- and 30-year fixed rate obligations, is inconsistent with its goal to maintain profitable leverage or the Banks' interest-rate risk profiles. Accordingly, the majority of such loans are sold to mitigate exposure to changes in interest rates. Adjustable-rate and balloon real estate mortgage loans may 13 15 be profitably funded within established risk parameters. The retention of such loans, together with commercial and agricultural loans, has been a principal focus of the Banks' balance sheet management strategies. (See "Non-interest income.") RESULTS OF OPERATIONS SUMMARY Net income totaled $2,843,000 and $2,539,000 during the three months ended June 30, 1999 and 1998, respectively. During the six-month periods of 1999 and 1998, net income totaled $5,608,000 and $4,972,000, respectively. The increases in earnings during these periods are principally the result of increases in net interest income and non-interest income. Such increases in revenue were, however, partially offset by increases in non-interest expense and federal income tax expense. Key performance ratios for the three- and six-month periods ended June 30, 1999 and 1998, are set forth below. KEY PERFORMANCE RATIOS
Three months Six months ended June 30, ended June 30, 1999 1998 1999 1998 -------------------------- ---------------------------- Net income to Average assets 1.07% 1.02% 1.06% 1.01% Average equity 15.67 15.78 15.66 15.92 Earnings per common share Basic $ .38 $ .35 $ .75 $ .68 Diluted .38 .34 .75 .67 Cash basis income to(A) Average tangible assets 1.23% 1.18% 1.22% 1.17% Average tangible equity 23.43 25.04 23.63 24.99 Cash basis income per share(A) Basic $ .43 $ .39 $ .85 $ .77 Diluted .43 .39 .85 .76
(A) Cash basis financial data exclude intangible assets and the related amortization expense NET INTEREST INCOME Tax equivalent net interest income totaled $13,465,000 during the three months ended June 30, 1999, compared to $12,593,000 during the comparable period of 1998. Tax equivalent net interest income totaled $26,801,000 and $24,705,000 during the six months ended June 30, 1999 and 1998, respectively. Management estimates that approximately 80% of the $872,000 increase in tax equivalent net interest income during the three-month period and approximately 75% of the $2,906,000 increase during the six-month period reflects increases in average earning assets. Average earning assets increased by 5.5% to $981.1 million during the three months ended June 30, 1999. During the six-month period of 1999, average earning assets increased by 6% to $981.0 million. 14 16 NET INTEREST INCOME AND SELECTED RATIOS
Three months Six months ended June 30, ended June 30, 1999 1998 1999 1998 ----------- ------------ ----------- ------------ Average earning assets (in thousands) $981,097 $929,651 $980,999 $921,536 Tax equivalent net interest income 13,465 12,593 26,801 24,705 As a percent of average earning assets Tax equivalent interest income 9.01% 9.35% 9.05% 9.32% Interest expense 3.52 3.92 3.57 3.95 Tax equivalent net interest income 5.49 5.43 5.48 5.37 Average earning assets as a percent of average assets 92.46% 92.99% 92.34% 93.05% Free-funds ratio 11.42% 10.58% 11.07% 10.20%
Increases in average earning assets have principally been funded with deposits. Total deposits, excluding Brokered CDs ("Core Deposits") averaged $771.8 million and $698.2 million during the six months ended June 30, 1999 and 1998, respectively. (See "Liquidity and capital resources.") Tax equivalent net interest income as a percent of average earnings assets ("Net Yield") has increased from the corresponding periods of 1998. The Net Yield was 5.49% and 5.48% during the three- and six-month periods of 1999, respectively, compared to 5.43% and 5.37% during 1998. Increases in Net Yield principally reflect increases in Core Deposits as a percentage of average earning assets. Core Deposits were equal to 78.7% and 75.8% of average earning assets for the six months ended June 30, 1999 and 1998, respectively. PROVISION FOR LOAN LOSSES The provision for loan losses was $505,000 during the three months ended June 30, 1999, compared to $670,000 during the three-month period in 1998. During the six-month periods, the provision was $1,030,000 and $1,303,000, respectively. The decrease in the provision during both the three- and six-month periods reflects Management's assessment of the allowance for loan losses based upon the composition of the loan portfolio, an evaluation of specific credits, historical loss experience as well as the level of non-performing and impaired loans. (See "Asset quality.") NON-INTEREST INCOME Non-interest income totaled $3,819,000 during the three months ended June 30, 1999, compared to $3,371,000 during the comparable period in 1998. Non-interest income totaled $7,510,000 and $5,999,000 during the six months ended June 30, 1999 and 1998, respectively. The increase in non-interest income during both the three- and six-month periods principally reflects increases in service charges on deposit accounts and revenues associated with First Home Financial, Inc. Increases in mutual fund and annuity commissions as well as real estate mortgage servicing fees also contributed to the increase in non-interest income. 15 17 On April 17, 1998, the Registrant purchased the outstanding capital stock of First Home Financial, Inc. ("FHF"), an originator of manufactured home loans. FHF's revenues during the three months ended June 30, 1999, totaled $508,000 and account for 45% of the $448,000 increase in non-interest income. NON-INTEREST INCOME
Three months ended Six months ended June 30, June 30, 1999 1998 1999 1998 --------------- --------------- --------------- -------------- Service charges on deposit accounts $1,206,000 $ 980,000 $2,244,000 $1,803,000 Net gains on asset sales Real estate mortgage loans 1,008,000 1,048,000 2,256,000 1,955,000 Securities 7,000 14,000 144,000 First Home Financial 508,000 306,000 934,000 306,000 Title insurance fees 239,000 229,000 424,000 425,000 Real estate mortgage loan servicing fees 154,000 131,000 304,000 234,000 Mutual fund and annuity commissions 143,000 48,000 284,000 70,000 Other 561,000 622,000 1,050,000 1,062,000 ---------- ---------- ---------- ---------- Total non-interest income $3,819,000 $3,371,000 $7,510,000 $5,999,000 ========== ========== ========== ==========
Net gains on the sale of real estate mortgage loans totaled $1,008,000 during the three months ended June 30, 1999, compared to $1,048,000 during the comparable period in 1998. Net gains on the sale of such loans totaled $2,256,000 and $1,955,000 during the six months ended June 30, 1999 and 1998, respectively.
Three months ended Six months ended June 30, June 30, 1999 1998 1999 1998 ------------------------------------ ------------------------------------ Real estate mortgage loans originated $111,617,000 $131,295,000 $208,081,000 $250,125,000 Real estate mortgage loan sales 62,039,000 71,418,000 134,977,000 128,932,000 Real estate mortgage loan servicing rights sold 5,949,000 8,117,000 10,963,000 35,490,000 Net gains on the sale of real estate mortgage loans 1,008,000 1,048,000 2,256,000 1,955,000 Net gains as a percent of real estate mortgage loans sold 1.62% 1.47% 1.67% 1.52%
The Banks capitalized approximately $987,000 and $756,000 of related servicing rights during the six-month periods ended June 30, 1999 and 1998, respectively. Amortization of capitalized servicing rights for those periods was $279,000 and $152,000, respectively. The fair value of capitalized servicing rights approximated the book value of $2,782,000 at June 30, 1999, and therefore, no valuation allowance was considered necessary. The capitalized servicing rights relate to approximately $424 million of loans sold and serviced at June 30, 1999. 16 18 The volume of loans sold is dependent upon the Banks' ability to originate real estate mortgage loans as well as the demand for fixed-rate obligations and other loans that the Banks cannot profitably fund within established interest-rate risk parameters. (See "Asset/liability management.") Net gains on real estate mortgage loans are also dependent upon economic and competitive factors as well as the Banks' ability to effectively manage exposure to changes in interest rates. Given a decline in loans held for sale, together with a substantial decline in refinancing activity, net gains on the sale of real estate mortgage loans during subsequent periods may not be commensurate with the amount recorded during the three months ended June 30, 1999. NON-INTEREST EXPENSE Non-interest expense totaled $12,332,000 during the three months ended June 30, 1999, compared to $11,369,000 during the comparable period in 1998. Non-interest expense totaled $24,478,000 and $21,700,000 during the six months ended June 30, 1999 and 1998, respectively. Costs associated with the operation of FHF as well as direct mail marketing costs related to deposit account promotions account for approximately 30% of increase in non-interest expense. Costs associated with the operation of branch facilities that were acquired in June of 1998 also contributed to the increase in non-interest expense. NON-INTEREST EXPENSE
Three months ended Six months ended June 30, June 30, 1999 1998 1999 1998 ----------- ----------- ----------- ----------- Salaries $ 4,656,000 $ 4,211,000 $ 9,051,000 $ 7,919,000 Performance-based compensation and benefits 1,344,000 1,323,000 2,613,000 2,627,000 Other benefits 993,000 896,000 2,139,000 1,795,000 ----------- ----------- ----------- ----------- Salaries and benefits 6,993,000 6,430,000 13,803,000 12,341,000 Occupancy, net 871,000 752,000 1,741,000 1,451,000 Furniture and fixtures 776,000 670,000 1,521,000 1,249,000 Computer processing 582,000 462,000 1,152,000 866,000 Amortization of intangible assets 432,000 419,000 874,000 798,000 Communications 433,000 394,000 895,000 777,000 Advertising 475,000 432,000 1,026,000 818,000 Supplies 354,000 330,000 677,000 619,000 Loan and collection 406,000 280,000 795,000 534,000 Other 1,010,000 1,200,000 1,994,000 2,247,000 ----------- ----------- ----------- ----------- Total non-interest expense $12,332,000 $11,369,000 $24,478,000 $21,700,000 =========== =========== =========== ===========
PROPOSED ACQUISITION On March 24, 1999, the Registrant announced that it had signed a definitive agreement to acquire Mutual Savings Bank f.s.b. ("MSB"). As a result of the transaction, the Registrant will issue 0.80 shares of its common stock for each share of MSB common stock, subject to certain adjustments. The transaction is structured as a tax-free exchange of shares and is expected to qualify as a "pooling-of-interests". The transaction is subject to approval by the shareholders of both 17 19 companies as well as regulatory agencies. The transaction is expected to be consummated in the third quarter of 1999. The Registrant anticipates approximately $5 million, pretax, of nonrecurring, merger related charges. The merger agreement contains a provision, which allows MSB the right to terminate the transaction if the average price of the Registrant's common stock falls below certain pre-determined levels prior to consummation of the transaction. The merger agreement also provides the Registrant with an option to purchase 19.9% of the outstanding shares of MSB's common stock under certain specified circumstances. At June 30, 1999, MSB had assets of $574 million, deposits of $426 million, shareholder's equity of $37.2 million and shares outstanding of 4.3 million. It provides banking services through a total of 22 offices and its common stock trades on the Nasdaq Stock Market under the symbol MSBK. YEAR 2000 The Year 2000 issue refers to computer-based operating systems that were originally designed to recognize calendar years by their last two digits ("Year 2000"). The Registrant began preparing its computer-based operating systems for 2000 during 1997 and formed a committee to address such issues. A significant portion of the Registrant's Year 2000 issue relates to its core data processing applications which are provided by a third-party service provider, M&I Data Services. The Registrant completed its conversion to M&I Data Services Year 2000 compliant application software in 1998. Testing of all other non-compliant operating systems was completed during the second quarter of 1999. It is anticipated that the replacement of such systems will be completed during the third quarter of 1999. Costs incurred to date have approximated $1.3 million, which relate primarily to the replacement of systems and fully depreciated non-compliant personal computer equipment. Management estimates that total costs will not exceed $1.6 million and will not have a material impact on the consolidated financial statements. A substantial portion of these costs represent an acceleration of expenditures to replace or upgrade systems that will become obsolete or otherwise inadequate to meet the Registrant's growing technology needs. While the Registrant is not aware of any Year 2000 problems for which a solution is not available, other unanticipated issues could arise. These unanticipated issues may include the ability to identify and correct all relevant computer code, the availability and cost of trained personnel, the impact of the Year 2000 on our customers and other uncertainties. 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, 1998. 18 20 Item 4. Submission of Matters to a Vote of Security-Holders The Registrant's Annual Meeting of Shareholders was held on April 20, 1999. As described in the Registrant's proxy statement, dated March 17, 1999, matters to be considered at that meeting were: (1) Election of three incumbent nominees to the board of directors All nominees were nominated to serve three-year terms expiring in 2002. Tabulation in the election of directors is set forth below.
Broker Non-Votes ---------------- Nominee Votes FOR Votes AGAINST and Abstentions ------- --------- ------------- --------------- Keith E. Bazaire 5,878,593 0 53,143 Terry L. Haske 5,881,946 0 49,790 Thomas F. Kohn 5,871,229 0 60,507
Directors whose term of office as a director continued after the meeting were Charles A. Palmer, Charles C. Van Loan, Robert J. Leppink, and Arch V. Wright, Jr. 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 A report on Form 8-K was filed on May 25, 1999, under items 5 and 7. The following exhibits were filed under item 7: Exhibit 99.1 Annual report on Form 10-K for the year ended December 31, 1998 for Mutual Savings Bank, f.s.b. Exhibit 99.2 Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1999 for Mutual Savings Bank, f.s.b. Exhibit 99.3 Current Report on Form 8-K, dated March 26, 1999, filed by Mutual Savings Bank, f.s.b. 19 21 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Date August 10, 1999 By s/William R. Kohls -------------------------------- ---------------------------------- William R. Kohls, Principal Financial Officer Date August 10, 1999 By s/James J. Twarozynski -------------------------------- ---------------------------------- James J. Twarozynski, Principal Accounting Officer 20 22 Exhibit Index -------------
Exhibit No. Description - ---------- ----------- 11 Computation of Earnings Per Share 27 Financial Data Schedule
EX-11 2 COMPUTATION OF EARNINGS PER SHARE 1 Exhibit 11 A reconciliation of basic and diluted earnings per share for the three-month and six-month periods ending June 30 follows:
Three months ended Six months ended June 30, June 30, 1999 1998 1999 1998 ------------- ------------- ------------- ------------- Net income $ 2,843,000 $ 2,539,000 $ 5,608,000 $ 4,972,000 ============= ============= ============= ============= Shares outstanding (Basic) (1) 7,451,000 7,351,000 7,431,000 7,308,000 Effect of dilutive securities - stock options 39,000 90,000 48,000 91,000 ------------- ------------- ------------- ------------- Shares outstanding (Diluted) 7,490,000 7,441,000 7,479,000 7,399,000 ============= ============= ============= ============= Earnings per share Basic $ .38 $ .35 $ .75 $ .68 Diluted .38 .34 .75 .67
(1) Shares outstanding have been adjusted for a three-for-two stock split and a 5% stock Dividend in 1998. EX-27 3 FINANCIAL DATA SCHEDULE
9 1,000 6-MOS DEC-31-1999 JUN-30-1999 33,281 0 0 0 110,874 14,076 14,460 831,920 10,183 1,077,328 836,694 133,213 14,680 19,750 0 0 7,475 65,516 1,077,328 39,124 3,611 498 43,233 12,923 17,381 25,852 1,030 14 24,478 7,854 7,854 0 0 5,608 0.75 0.75 5.48 2,776 1,686 274 3,200 9,714 848 287 10,183 4,728 0 5,455
-----END PRIVACY-ENHANCED MESSAGE-----