1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2001
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Commission file number 0-7818
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INDEPENDENT BANK CORPORATION
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Michigan 38-2032782
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(State or jurisdiction of (I.R.S. Employer Identification
Incorporation or Organization) Number)
230 West Main Street, P.O. Box 491, Ionia, Michigan 48846
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(Address of principal executive offices)
(616) 527-9450
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(Registrant's telephone number, including area code)
NONE
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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
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Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class Outstanding at May 11, 2001
- -------------------------------- ---------------------------------------------
Common stock, par value $1 11,459,595
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INDEPENDENT BANK CORPORATION AND SUBSIDIARIES
INDEX
Page
Number(s)
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PART I - Financial Information
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Item 1. Consolidated Statements of Financial Condition
March 31, 2001 and December 31, 2000 2
Consolidated Statements of Operations
Three-month periods ended March 31, 2001 and 2000 3
Consolidated Statements of Cash Flows
Three-month periods ended March 31, 2001 and 2000 4
Consolidated Statements of Shareholders' Equity
Three-month periods ended March 31, 2001 and 2000 5
Notes to Interim Consolidated Financial Statements
Three-month periods ended March 31, 2001 and 2000 6-11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12-20
Item 3. Quantitative and Qualitative Disclosures about Market Risk 20
PART II - Other Information
-----------------
Item 6. Exhibits & Reports on Form 8-K 21
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Part I.
INDEPENDENT BANK CORPORATION AND SUBSIDIARIES
Consolidated Statements of Financial Condition
March 31, December 31,
2001 2000
---------------- ----------------
(unaudited)
---------------- ----------------
Assets (in thousands)
Cash and due from banks $ 48,871 $ 58,149
Securities available for sale 233,858 217,447
Securities held to maturity (fair value of $20.1 million at December 31, 2000) 20,098
Federal Home Loan Bank stock, at cost 19,612 19,612
Loans held for sale 41,080 20,817
Loans
Commercial 404,424 381,066
Real estate mortgage 742,085 772,223
Installment 229,921 226,375
------------- --------------
Total Loans 1,376,430 1,379,664
Allowance for loan losses (14,322) (13,982)
------------- --------------
Net Loans 1,362,108 1,365,682
Property and equipment, net 34,619 34,757
Accrued income and other assets 48,205 47,229
------------- --------------
Total Assets $ 1,788,353 $ 1,783,791
============= ==============
Liabilities and Shareholders' Equity
Deposits
Non-interest bearing $ 135,478 $ 140,945
Savings and NOW 582,898 576,621
Time 635,416 672,334
------------- --------------
Total Deposits 1,353,792 1,389,900
Federal funds purchased 7,450 27,550
Other borrowings 250,944 196,032
Guaranteed preferred beneficial interests in Company's subordinated
debentures 17,250 17,250
Accrued expenses and other liabilities 30,540 24,723
------------- --------------
Total Liabilities 1,659,976 1,655,455
------------- --------------
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: 11,487,876 shares at March 31, 2001
and 11,609,524 shares at December 31, 2000 11,488 11,610
Capital surplus 74,546 77,255
Retained earnings 40,962 37,544
Accumulated other comprehensive income 1,381 1,927
------------- --------------
Total Shareholders' Equity 128,377 128,336
------------- --------------
Total Liabilities and Shareholders' Equity $ 1,788,353 $ 1,783,791
============= ==============
See notes to interim consolidated financial statements.
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INDEPENDENT BANK CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
Three Months Ended
March 31,
2001 2000
----------- -----------
(unaudited)
-------------------------
(in thousands,
except per share amounts)
Interest Income
Interest and fees on loans $ 31,188 $ 28,486
Securities available for sale
Taxable 2,272 1,670
Tax-exempt 1,403 1,500
Securities held to maturity
Taxable 795
Tax-exempt 163
Other investments 389 391
----------- -----------
Total Interest Income 35,252 33,005
----------- -----------
Interest Expense
Deposits 12,931 11,741
Other borrowings 4,185 4,106
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Total Interest Expense 17,116 15,847
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Net Interest Income 18,136 17,158
Provision for loan losses 633 557
----------- -----------
Net Interest Income After Provision for Loan Losses 17,503 16,601
----------- -----------
Non-interest Income
Service charges on deposit accounts 1,818 1,501
Net gains (losses) on asset sales
Real estate mortgage loans 995 380
Securities 35 (16)
Other income 2,158 2,279
----------- -----------
Total Non-interest Income 5,006 4,144
----------- -----------
Non-interest Expense
Salaries and employee benefits 8,622 8,392
Occupancy, net 1,290 1,178
Furniture and fixtures 1,058 1,141
Other expenses 4,153 4,000
----------- -----------
Total Non-interest Expense 15,123 14,711
----------- -----------
Income Before Federal Income Tax 7,386 6,034
Federal income tax expense 2,093 1,548
----------- -----------
Net Income Before Cumulative Effect of Change in Accounting Principle 5,293 4,486
Cumulative effect of change in accounting principle, net of tax (35)
----------- -----------
Net Income $ 5,258 $ 4,486
=========== ===========
Net Income Per Share Before Cumulative Effect of Change in
Accounting Principle
Basic $ .46 $ .38
Diluted .45 .38
Net Income Per Share
Basic $ .46 $ .38
Diluted .45 .38
Dividends Per Common Share
Declared $ .16 $ .14
Paid .15 .14
See notes to interim consolidated financial statements.
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INDEPENDENT BANK CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Three months ended
March 31,
2001 2000
----------------------------
(unaudited)
----------------------------
(in thousands)
Net Income $ 5,258 $ 4,486
--------------- -------------
Adjustments to Reconcile Net Income
to Net Cash from Operating Activities
Proceeds from sales of loans held for sale 67,509 28,155
Disbursements for loans held for sale (86,777) (27,816)
Provision for loan losses 633 557
Deferred loan fees 11 122
Depreciation and amortization of premiums and accretion of
discounts on securities and loans 1,700 1,605
Net gains on sales of real estate mortgage loans (995) (380)
Net (gains) losses on sales of securities (35) 16
Decrease in accrued income and other assets (1,404) (853)
Increase in accrued expenses and other liabilities 6,586 3,182
--------------- -------------
Total Adjustments (12,772) 4,588
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Net Cash from Operating Activities (7,514) 9,074
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Cash Flow from Investing Activities
Proceeds from the sale of securities available for sale 2,163 4,933
Proceeds from the maturity of securities available for sale 5,930 345
Proceeds from the maturity of securities held to maturity 1,010
Principal payments received on securities available for sale 7,411 2,968
Principal payments received on securities held to maturity 4,269
Purchases of securities available for sale (8,503) (19,242)
Principal payments on portfolio loans purchased 1,286 905
Portfolio loans made to customers, net of principal payments received 1,644 (22,524)
Capital expenditures (1,058) (215)
--------------- -------------
Net Cash from Investing Activities 8,873 (27,551)
--------------- -------------
Cash Flow from Financing Activities
Net increase (decrease) in total deposits (36,108) 38,387
Net decrease in short-term borrowings (25,022) (29,755)
Proceeds from Federal Home Loan Bank advances 232,500 147,770
Payments of Federal Home Loan Bank advances (176,350) (148,331)
Retirement of long-term debt (500) (500)
Dividends paid (1,740) (1,572)
Proceeds from issuance of common stock 286 293
Repurchase of common stock (3,703) (806)
--------------- -------------
Net Cash from Financing Activities (10,637) 5,486
--------------- -------------
Net Decrease in Cash and Cash Equivalents (9,278) (12,991)
Cash and Cash Equivalents at Beginning of Period 58,149 58,646
--------------- -------------
Cash and Cash Equivalents at End of Period $ 48,871 $ 45,655
=============== =============
Cash paid during the period for
Interest $ 13,274 $ 16,144
Income taxes 686
Transfer of loans to other real estate 671 1,534
Transfer of securities held to maturity to available for sale 20,098
See notes to interim consolidated financial statements
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INDEPENDENT BANK CORPORATION AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
Three months ended
March 31,
2001 2000
----------- ------------
(unaudited)
------------------------
(in thousands)
Balance at beginning of period $ 128,336 $ 113,746
Net income 5,258 4,486
Cash dividends declared (1,839) (1,684)
Issuance of common stock 871 335
Repurchase of common stock (3,703) (806)
Net change in accumulated other comprehensive
Income (loss), net of related tax effect (note 4) (546) 431
----------- ------------
Balance at end of period $ 128,377 $ 116,508
=========== ============
See notes to interim consolidated financial statements.
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NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. In the opinion of management of the Registrant, the accompanying unaudited
consolidated financial statements contain all the adjustments (consisting only
of normal recurring accruals) necessary to present fairly the consolidated
financial condition of the Registrant as of March 31, 2001 and December 31,
2000, and the results of operations for the three-month periods ended March 31,
2001 and 2000.
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 $7.6 million at March 31, 2001,
and $7.0 million at December 31, 2000. (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 for the three-month periods ending March 31 follows:
Three months ended
March 31,
2001 2000
----------- ------------
(in thousands)
Net income $ 5,258 $ 4,486
Net change in unrealized gain on securities available
for sale, net of related tax effect 2,216 431
Net change in unrealized loss on derivative
instruments, net of related tax effect (2,762)
----------- ------------
Comprehensive income $ 4,712 $ 4,917
=========== ============
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.
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NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
A summary of selected financial information for the Registrant's reportable
segments for the three-month periods ended March 31, follows:
Three months ended March 31,
IB IBWM IBSM IBEM IBMSB OTHER(1) TOTAL
--------------------------------------------------------------------------------------------
(in thousands)
2001
Total assets $ 455,587 $ 353,835 $ 218,301 $ 307,312 $ 448,960 $ 4,358 $ 1,788,353
Interest income 9,053 7,731 4,425 5,936 8,101 6 35,252
Net interest income 5,223 4,564 2,483 3,401 3,044 (579) 18,136
Provision for loan losses 150 150 90 150 93 633
Income (loss) before
Income tax 2,459 2,408 1,117 1,350 1,063 (1,011) 7,386
Net income (loss) before
change in accounting
principle 1,727 1,636 828 1,044 798 (740) 5,293
Net income (loss) 1,720 1,564 828 1,087 799 (740) 5,258
2000
Total assets $ 421,335 $ 329,536 $ 201,223 $ 306,848 $ 471,525 $ 8,545 $ 1,739,012
Interest income 8,091 7,037 3,934 5,601 8,340 2 33,005
Net interest income 4,725 4,159 2,224 3,276 3,395 (621) 17,158
Provision for loan losses 150 135 60 120 92 557
Income (loss) before
Income tax 1,978 1,663 884 1,169 1,476 (1,136) 6,034
Net income (loss) 1,415 1,157 683 920 1,106 (795) 4,486
(1) Includes items relating to the Registrant and certain insignificant
operations.
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NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
6. A reconciliation of basic and diluted earnings per share for the three-month
month periods ending March 31 follows:
Three months ended
March 31,
2001 2000
------------ -----------
(in thousands, except per share amounts)
Net income before cumulative effect of change in
accounting principle $ 5,293 $ 4,486
============ ===========
Net income $ 5,258 $ 4,486
============ ===========
Shares outstanding (Basic) (1) 11,548 11,751
Effect of dilutive securities - stock options 138 85
------------ -----------
Shares outstanding (Diluted) 11,686 11,836
============ ===========
Net income per share before cumulative effect of
change in accounting principle
Basic $ .46 $ .38
Diluted .45 .38
Net income per share
Basic $ .46 $ .38
Diluted .45 .38
(1) Shares outstanding have been adjusted for a 5% stock dividend in 2000.
7. The Registrant adopted Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities," ("SFAS #133") on
January 1, 2001. SFAS #133, which was 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 derivatives depends upon the use of derivatives and
whether the derivatives will qualify for hedge accounting.
The Registrant's derivative financial instruments according to the type of hedge
in which they are designated under SFAS #133 follows:
March 31, 2001
Notional WAM Fair
Amount (yrs) Value
--------------------------------------
(dollars in thousands)
FAIR VALUE HEDGE - pay variable interest-rate swap agreements $62,000 6.6 $(1,594)
======================================
CASH FLOW HEDGE
Pay fixed interest-rate swap agreements $166,000 2.6 $(3,916)
Interest-rate collar agreements 10,000 2.6
(282)
--------------------------------------
Total $176,000 2.6 $(4,198)
======================================
NO HEDGE DESIGNATION
Pay variable interest-rate swap agreements $ 75,000 0.2 $ 299
Pay fixed interest-rate swap agreements 42,000 0.6 (318)
Interest-rate cap agreements 47,000 1.2 1
Interest-rate floor agreements 13,000 1.2 0
Rate-lock real estate mortgage loan commitments 39,000 .1 (112)
Mandatory commitments to sell real estate mortgage loans 72,000 .1 60
--------------------------------------
Total $288,000 0.4 $ (70)
======================================
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NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
Risk Management Objectives and Strategies
The Banks have established interest-rate risk parameters for maximum
fluctuations in net interest income and market value of portfolio equity.
Management continually monitors the Banks' interest rate risk position via
simulation modeling reports (See "Asset/liability management"). The goal of the
Banks' asset/liability management efforts is to maintain profitable financial
leverage within established risk parameters.
Cash Flow Hedges
The Banks use variable rate and short-term (less than 12 months) debt
obligations to fund a portion of their balance sheets, which expose the Banks to
variability in interest rates.
To meet its objective, the Banks may periodically enter into derivative
financial instruments to mitigate exposure to fluctuations in cash flows
resulting from changes in interest rates ("Cash Flow Hedges"). Cash Flow Hedges
include pay-fixed interest-rate swaps and interest-rate collars.
Pay-fixed interest-rate swaps convert the variable-rate cash flows on variable
rate and short-term debt obligations to fixed-rates. Under interest-rate
collars, the Banks will receive cash if interest rates rise above a
predetermined level while the Banks will make cash payments if interest rates
fall below a predetermined level. The Banks effectively have variable rate debt
with an established maximum and minimum rate.
Upon adoption of SFAS #133, the Banks recorded the fair value of Cash Flow
Hedges in accrued expenses and other liabilities. On an ongoing basis, the banks
will adjust their balance sheets to reflect the then current fair value of Cash
Flow Hedges. The related gains or losses are reported in other comprehensive
income and are subsequently reclassified into earnings, as a yield adjustment in
the same period in which the related interest on the debt obligations affect
earnings. It is anticipated that approximately $1.2 million, net of tax, of
unrealized losses on Cash Flow Hedges at March 31, 2001 will become realized
over the next twelve months. To the extent that the change in value of the Cash
Flow Hedges do not perfectly offset the change in the value of the debt
obligations, the ineffective portion of the Cash Flow Hedges are immediately
recognized as interest expense. The maximum term of any Cash Flow Hedge is 8.3
years.
Fair Value Hedges
The Banks use long-term, fixed-rate brokered CDs to fund a portion of their
balance sheets. These instruments expose the Banks to variability in fair value
due to changes in interest rates. To meet their asset/liability management
objectives, the Banks may enter into pay-variable interest-rate swaps to
mitigate fluctuations in fair values of such fixed-rate debt instruments ("Fair
Value Hedges").
Upon adoption of SFAS #133, the Banks recorded Fair Value Hedges at fair value
in accrued expenses and other liabilities. The hedged instruments were also
recorded at fair value, which offsets the adjustment to Fair Value Hedges. On an
ongoing basis, the Banks will adjust its balance sheets to reflect the then
current fair value. To the extent that the change in value of the Fair Value
Hedges does not perfectly offset the change in the value of the hedged
instruments, the ineffective portion is immediately recognized as interest
expense.
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NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
No Hedge Designation
Certain financial derivative instruments, discussed in the following paragraphs,
were not designated as hedges. The fair value of these derivative instruments
have been recorded on the Banks' balance sheets and will be adjusted on an
ongoing basis to reflect their then current fair value. The changes in the fair
value of interest rate swap agreements and option contracts are recognized
currently as interest expense. The changes in the fair value of Rate Lock
Commitments and Mandatory Commitments are recognized currently in gains on the
sale of real estate mortgage loans. Interest expense and net gains on the sale
of mortgage loans, as well as net income may be more volatile as a result of
derivative instruments, which are not designated as hedges.
Interest rate caps are used to help manage fluctuations in cash flows resulting
from interest rate risk on certain short-term debt obligations. Under these
agreements, the Banks will receive cash if interest rates rise above a
predetermined level. Pay-fixed interest-rate swaps are also used to manage
fluctuations in cash flows resulting from changes in interest rates on certain
short term debt obligations. Certain pay-variable swaps are also used to
synthetically create sub-LIBOR debt. These swaps convert fixed rate brokered CDs
with an original term of 1 year to 3 month LIBOR by entering into receive fixed,
pay-variable interest-rate swaps.
In the ordinary course of business, the Banks enter into rate-lock real estate
mortgage loan commitments with customers ("Rate Lock Commitments"). These
commitments expose the Banks to interest rate risk. The Banks also enter into
mandatory commitments to sell real estate mortgage loans ("Mandatory
Commitments") to hedge price fluctuations of mortgage loans held for sale and
Rate Lock Commitments. Mandatory Commitments help protect the Banks' loan sale
profit margin from fluctuations in interest rates.
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NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
Implementation Effect
The impact of adopting SFAS #133 on net income and other comprehensive income is
as follows:
Income (Expense)
Other
Comprehensive
Net Income Income Total
------------------ ------------------- -------------------
(in thousands)
CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING PRINCIPLE
Fair value adjustments of
Option contracts not designated as
hedges $ (215) $ (215)
Interest rate swap agreements not
designated as hedges 310 310
Fair value hedges (39) (39)
Cash flow hedges (110) $ (1,107) (1,217)
------------------ ------------------- -------------------
Total (54) (1,107) (1,161)
Federal income tax (19) (376) (395)
------------------ ------------------- -------------------
Net $ (35) $ (731) $ (766)
================== =================== ===================
CHANGE IN FAIR VALUE DURING THE QUARTER
Option contracts not designated as
hedges $ (27) $ (27)
Interest rate swap agreements not
designated as hedges (329) (329)
Rate Lock Commitments (112) (112)
Mandatory Commitments 60 60
Fair value hedges (4) (4)
Ineffectiveness of cash flow hedges 4 4
Cash flow hedges 33 $ (3,034) (3,001)
Reclassification adjustment (43) (43)
-------------------------------------------------------------
Total (375) (3,077) (3,452)
Federal income tax (131) (1,046) (1,177)
------------------ ------------------- -------------------
Net $ (244) $ (2,031) $ (2,275)
================== =================== ===================
The Banks transferred securities held to maturity with book values and market
values of $20.1 million to available for sale upon adoption of SFAS #133.
8. The results of operations for the three-month period ended March 31, 2001,
are not necessarily indicative of the results to be expected for the full year.
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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 2001 Annual Report on Form 10-K.
FINANCIAL CONDITION
SUMMARY Loans, excluding loans held for sale ("Portfolio Loans"), totaled $1.376
billion at March 31, 2001, and were largely unchanged from December 31, 2000, as
a decline in real estate mortgage loans offset increases in commercial and
installment loans. Commercial loans totaled $404.4 million at March 31, 2001,
compared to $381.1 million at December 31, 2000. At those same dates, real
estate mortgage loans totaled $742.1 million and $772.2 million, respectively.
(See "Portfolio loans and asset quality.")
Deposits totaled $1.354 billion at March 31, 2001, compared to $1.390 billion at
December 31, 2001. The $36.1 million decline in total deposits during the period
principally reflects a decline in brokered certificates of deposits ("Brokered
CDs") and a corresponding increase in advances from the Federal Home Loan Bank
("FHLB Advances").
SECURITIES The Banks maintain diversified securities portfolios, which include
obligations of the U.S. Treasury and government-sponsored agencies as well as
securities issued by states and political subdivisions, corporate securities and
mortgage-backed securities. Management continually evaluates the Banks'
asset/liability management needs and attempts to maintain a portfolio structure
that provides sufficient liquidity and cash flow.
(See "Asset/liability management.")
SECURITIES
Unrealized
----------------------------
Amortized Fair
Cost Gains Losses Value
------------- ------------- ------------- -------------
(in thousands)
Securities available for sale
March 31, 2001 $227,485 $ 6,627 $254 $233,858
December 31, 2000 214,526 3,486 565 217,447
Securities held to maturity
December 31, 2000 $20,098 $ 200 $187 $20,111
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As permitted by Statement of Financial Accounting Standards, No. 133,
"Accounting for Derivative Instruments and Hedging Activities," ("SFAS #133")
securities that were previously designated as held to maturity were reclassified
to available for sale as of January 1, 2001. (See note #7 to interim
consolidated financial statements.)
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 $2.1 million during the three months ended
March 31, 2001. The Banks sold securities with a market value of $4.9 million
during the corresponding period of 2000.
SALES OF SECURITIES AVAILABLE FOR SALE
Three months ended
March 31,
2001 2000
-------------- -------------
(in thousands)
Proceeds $2,163 $4,933
============== =============
Gross gains $35 $ 7
Gross losses (23)
-------------- -------------
Net Gains $35 $(16)
============== =============
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 "Liquidity and capital resources.") As a
result, the Banks often retain adjustable-rate and balloon real estate mortgage
loans, while 15- and 30-year, fixed-rate obligations are sold to mitigate
exposure to changes in interest rates. (See "Asset/liability management.") The
$30.1 million decrease in real estate mortgage loans during the three months
ended March 31, 2001, reflects an increase in prepayments, which has accompanied
the recent decrease in interest rates.
The $23.4 million increase in commercial loans during the three months ended
March 31, 2001, principally reflects Management's emphasis on lending
opportunities within the Lansing and Grand Rapids markets. Loans secured by real
estate comprise the majority of new commercial
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loans. Continued growth within this segment of Portfolio Loans is dependent upon
a number of competitive and economic factors.
NON-PERFORMING ASSETS
March 31, December 31,
2001 2000
----------------- -----------------
(dollars in thousands)
Non-accrual loans $5,416 $5,200
Loans 90 days or more past due and
still accruing interest 1,901 1,571
Restructured loans 251 260
----------------- -----------------
Total non-performing loans 7,568 7,031
Other real estate 2,425 2,174
----------------- -----------------
Total non-performing assets $9,993 $9,205
================= =================
As a percent of Portfolio Loans
Non-performing loans 0.55 % 0.51 %
Non-performing assets 0.73 0.67
Allowance for loan losses 1.04 1.01
Allowance for loan losses as a percent of
non-performing loans 189 199
Impaired loans totaled approximately $4.1 million at March 31, 2001. 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 $200,000. The Banks' average investment in impaired loans was
approximately $3.9 million for the three-month period ended March 31, 2001. Cash
receipts on impaired loans on non-accrual status are generally applied to the
principal balance. Interest recognized on impaired loans during that three-month
period was approximately $40,000.
ALLOWANCE FOR LOAN LOSSES
Three months ended
March 31,
2001 2000
------------- ------------
(in thousands)
Balance at beginning of period $13,982 $12,985
Additions (deduction)
Provision charged to operating expense 633 557
Recoveries credited to allowance 156 160
Loans charged against the allowance (449) (425)
------------- ------------
Balance at end of period $14,322 $13,277
============= ============
Net loans charged against the allowance to
average Portfolio Loans (annualized) 0.08% 0.08%
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
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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 slow down in the economy.
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
March 31, December 31,
2001 2000
----------------------------------------
Specific allocations $ 100,000 $ 100,000
Other adversely rated loans 3,318,000 3,166,000
Historical loss allocations 4,636,000 4,717,000
Additional allocations based on subjective factors 6,268,000 5,999,000
----------------------------------------
$14,322,000 $13,982,000
========================================
Loans charged against the allowance for loan losses, net of recoveries, were
equal to .08% of average loans during the three months ended March 31, 2001 and
2000. (See "Provision for loan losses.")
DEPOSITS AND BORROWINGS The Banks' competitive position within many of the
markets served by the branch networks limits the ability to materially increase
deposits without adversely impacting the weighted-average cost of core deposits.
Accordingly, the Banks compete on the basis of convenience and personal service,
while employing pricing tactics that are intended to enhance the value of core
deposits.
The Banks have implemented funding strategies that incorporate other borrowings
and Brokered CDs to finance a portion of the Portfolio Loans. The use of such
alternate sources of funds supplements the Banks' core deposits and is also an
integral part of the Banks' asset/liability management efforts. The decline in
Brokered CDs during the three months ended March 31, 2001 principally reflects
the competitive cost of FHLB Advances. (See "Liquidity and capital resources.")
March 31, 2001 December 31, 2000
-------------------------------- ----------------------------------
Average Average
Amount Maturity Rate Amount Maturity Rate
-------------------------------- ----------------------------------
(dollars in thousands)
Brokered CDs $164,787 2.6 years 6.41% $212,010 3.5 years 6.73%
Fixed rate FHLB advances 135,238 4.3 years 5.70 68,743 7.9 years 6.33
Variable rate FHLB advances 104,000 0.4 years 5.46 114,345 0.2 years 6.69
Federal funds purchased 7,450 1 day 5.62 27,550 1 day 6.85
-------------------------------- ----------------------------------
Total $411,475 2.6 years 5.92 $422,648 3.1 years 6.67
================================ ==================================
Derivative financial instruments are employed to manage the Banks' exposure to
changes in interest rates. (See "Asset/liability management".) At March 31,
2001, the Company employed interest-rate caps, floors and collars with an
aggregate notional amount of $71.0 million. The Banks also employed
interest-rate swaps with an aggregate notional amount of $345.0 million. (See
note #7 to interim consolidated financial statements.)
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
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important factor in creating shareholder value and, accordingly, the
Registrant's capital structure includes unsecured debt and Preferred Securities.
Management believes that diversified portfolios of quality commercial and
consumer loans will provide superior risk-adjusted returns. Accordingly, the
Banks have implemented balance sheet management strategies that combine efforts
to originate Portfolio Loans with disciplined funding strategies. Acquisitions
have also been integral components of Management's capital management
strategies.
To supplement its balance sheet management activities, the Company adopted a
share repurchase plan on September 19, 2000, which authorizes open market
purchases of up to 500,000 shares of common stock through September 30, 2001.
The Company purchased 349,000 shares at an average price of $18.83 since
adoption of the plan and purchased 182,000 shares at an average price of $20.35
per share during the three months ended March 31, 2001.
CAPITALIZATION
March 31, December 31,
2001 2000
------------------- ------------------
(in thousands)
Unsecured debt $11,000 $11,500
Preferred Securities 17,250 17,250
Shareholders' Equity
Preferred stock, no par value
Common Stock, par value $1.00 per share 11,488 11,610
Capital surplus 74,546 77,255
Retained earnings 40,962 37,544
Accumulated other comprehensive income 1,381 1,927
-------- --------
Total shareholders' equity 128,377 128,336
-------- --------
Total capitalization $156,627 $157,086
======== ========
Total shareholders' equity at March 31, 2001 was largely unchanged from December
31, 2000, as the retention of earnings was offset by open market purchases of
common stock and a decline in accumulated other comprehensive income.
Shareholders' equity totaled $128.4 million, equal to 7.18% of total assets at
March 31, 2001. At December 31, 2000, shareholders' equity totaled $128.3
million, which was equal to 7.19% of assets.
CAPITAL RATIOS
March 31, 2001 December 31, 2000
----------------------- ----------------------
Equity capital 7.18% 7.19%
Average shareholders equity to average assets(1) 7.35 6.92
Tier 1 leverage (tangible equity capital) 7.39 7.26
Tier 1 risk-based capital 9.67 9.68
Total risk-based capital 10.74 10.74
(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.
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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.
RESULTS OF OPERATIONS
SUMMARY Net income totaled $5.3 million during the three months ended March 31,
2001, compared to $4.5 million during the comparable period in 2000. The
increase in net income reflects increases in net interest income and
non-interest income, which were partially offset by increases in non-interest
expense and the provision for loan losses.
The Company implemented SFAS #133 on January 1, 2001. Pursuant to SFAS #133, the
Company recorded certain charges, which are the result of accounting for
derivatives at fair value. These net charges reduced the Company's net interest
income and its net gains on the sale of real estate mortgage loans by
approximately $300,000 and $50,000 respectively. An additional $35,000, net of
taxes, has been recorded as a cumulative effect of change in accounting
principle. (See note #7 to interim consolidated financial statements.)
KEY PERFORMANCE RATIOS
Three months
ended March 31,
2001 2000
----------------------------
Net income to
Average assets 1.21% 1.05%
Average equity 16.45 15.74
Earnings per common share
Basic $0.46 $.38
Diluted 0.45 .38
NET INTEREST INCOME Tax equivalent net interest income totaled $19.0 million
during the three months ended March 31, 2001. The increase from $18.1 million
during the comparable period of 2000 principally reflects an increase in average
earning assets. Increases in loans as a percent of average earning assets also
contributed to the increase in tax equivalent net interest income. Pursuant to
SFAS #133, the Company recorded certain charges, which reduced tax equivalent
net interest income by approximately $300,000.
Average earning assets totaled $1.659 billion during the three-month period in
2001. The $56.6 million increase from $1.603 billion during the comparable
period in 2000 reflects an increase in Portfolio Loans.
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Tax equivalent net interest income as a percent of average earning assets ("Net
Yield") was equal to 4.60% of average earning assets during the three months
ended March 31, 2001, compared to 4.52% during the corresponding period of 2000.
A portion of the 8 basis point increase in Net Yield may be attributed to an
increase in Portfolio Loans as a percent of average earning assets. Portfolio
Loans were equal to 84.7% and 81.8% of average earning assets for the three
months ended March 31, 2001 and 2000, respectively. The scheduled maturity of
certain low-yielding assets and high-cost liabilities at the former Mutual
Savings Bank, which was acquired in 1999, also contributed to the increase in
Net Yield.
NET INTEREST INCOME AND SELECTED RATIOS
Three months
ended March 31,
2001 2000
--------------- ------------
Average earning assets (in thousands) $1,659,363 $1,602,804
Tax equivalent net interest income 19,040 18,111
As a percent of average earning assets
Tax equivalent interest income 8.78 % 8.50 %
Interest expense 4.18 3.98
Tax equivalent net interest income 4.60 4.52
Average earning assets as a
percent of average assets 94.05 % 93.48 %
Free-funds ratio 10.52 % 8.58 %
PROVISION FOR LOAN LOSSES The provision for loan losses was $633,000 during the
three months ended March 31, 2001, compared to $557,000 during the three-month
period in 2000. The increase in the provision reflects Management's assessment
of the allowance for loan losses. (See "Asset quality.")
NON-INTEREST INCOME Non-interest income, including net gains on the sale of real
estate mortgage loans, grew to $5.0 million during the three months ended March
31, 2001. The $862,000 increase from $4.1 million during the comparable period
of 2000 principally reflects a $615,000 increase in net gains on the sale of
real estate mortgage loans. A $317,000 increase in service charges on deposit
accounts also contributed to the increase in non-interest income.
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NON-INTEREST INCOME
Three months ended
March 31,
2001 2000
------------ -------------
(in thousands)
Service charges on deposit
accounts $1,818 $1,501
Net gains on asset sales
Real estate mortgage loans 995 380
Securities 35 (16)
Manufactured home loan origination 353 508
fees and commissions
Title insurance fees 286 160
Real estate mortgage loan
servicing fees 391 376
Mutual fund and annuity
commissions 172 405
Other 956 830
------------ -------------
Total non-interest income $5,006 $4,144
============ =============
The increase in net gains on the sale of real estate mortgage loans principally
reflects an increase in the volume of loans sold. An increase in the sale of
servicing rights also contributed to the increase in net gains. Pursuant to SFAS
#133, the Company recorded certain charges, which reduced net gains on the sale
of real estate mortgage loans by approximately $50,000.
Three months ended
March 31,
2001 2000
------------- ----------
(in thousands)
Real estate mortgage loans originated $115,971 $66,954
Real estate mortgage loan sales 66,514 27,775
Real estate mortgage loan servicing rights sold 57,919 2,642
Net gains on the sale of real estate mortgage loans 995 380
Net gains as a percent of real estate mortgage loans sold 1.50% 1.37%
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 $70,000 and $200,000 of related servicing
rights during the three-month periods ended March 31, 2001 and 2000,
respectively. Amortization of capitalized servicing rights for those periods was
$271,000 and $267,000, respectively. The book value of capitalized mortgage
servicing rights was $4.4 million at March 31, 2001. The fair value of
capitalized servicing rights, which relate to approximately $770 million of
loans sold and
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serviced, approximated $5.5 million at that same date, and therefore, no
valuation allowance was considered necessary.
Service charges on deposit accounts increased by 21% to $1.8 million during the
three months ended March 31, 2001, from $1.5 million during the comparable
period in 2000. The increase in service charges principally relate to certain
deposit account promotions, which include direct mail solicitations, at each of
the Banks.
Mutual fund and annuity commissions declined by $233,000 to $172,000 during the
three months ended March 31, 2001, from $405,000 during the comparable period in
2000. The decline in such commissions reflects an industry-wide reduction in
sales activity as well as the resignation of certain commission sales personnel.
Fees associated with the origination of manufactured home loans totaled $353,000
during the three months ended March 31, 2001. The $155,000 decline from $508,000
during the comparable period of 2000 principally reflects a decline in loan
volumes.
NON-INTEREST EXPENSE Non-interest expense totaled $15.1 million during the three
months ended March 31, 2001. Increases in salaries and employee benefits
accounted for $230,000 of the $412,000 increase in non-interest expense from
$14.7 million during the comparable period in 2000.
NON-INTEREST EXPENSE
Three months ended
March 31,
2001 2000
------------ ------------
(in thousands)
Salaries $ 6,180 $ 5,824
Performance-based compensation and benefits 1,085 1,201
Other benefits 1,357 1,367
------------ ------------
Salaries and benefits 8,622 8,392
Occupancy, net 1,290 1,178
Furniture and fixtures 1,058 1,141
Communications 588 565
Data processing 554 693
Advertising 501 457
Loan and collection 465 307
Amortization of intangible assets 427 432
Supplies 423 395
Other 1,195 1,151
------------ ------------
Total non-interest expense $15,123 $14,711
============ ============
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, 2000.
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Item 6. Exhibits & Reports on Form 8-K
(a) Exhibit Number & Description
11. Computation of Earnings Per Share
(b) Reports on Form 8-K
During the quarter ended March 31, 2001, there were no reports filed on
Form 8-K.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date May 11, 2001 By s/William R. Kohls
-------------------------- ----------------------------------------
William R. Kohls, Principal Financial
Officer
Date May 11, 2001 By s/James J. Twarozynski
-------------------------- ----------------------------------------
James J. Twarozynski, Principal
Accounting Officer
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Exhibit Index
Exhibit No. Description
- ----------- -----------
11 Computation of Earnings Per Share