SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE QUARTERLY PERIOD ENDED September 30, 2006
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
Incorporation or Organization) Identification 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 by check mark whether the Registrant is a large accelerated filer, an
accelerated filer or non-accelerated filer.
Large accelerated filer Accelerated filer X Non-accelerated filer
----- ----- ----
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). YES NO X
----- -----
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Common stock, par value $1 22,854,806
Class Outstanding at November 3, 2006
INDEPENDENT BANK CORPORATION AND SUBSIDIARIES
INDEX
Number(s)
---------
PART I - Financial Information
Item 1. Consolidated Statements of Financial Condition
September 30, 2006 and December 31, 2005 2
Consolidated Statements of Operations
Three- and Nine-month periods ended September 30,
2006 and 2005 3
Consolidated Statements of Cash Flows
Nine-month periods ended September 30, 2006 and 2005 4
Consolidated Statements of Shareholders' Equity
Nine-month periods ended September 30, 2006 and 2005 5
Notes to Interim Consolidated Financial Statements 6-17
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 18-38
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 38
Item 4. Controls and Procedures 38
PART II - Other Information
Item 2. Changes in securities, use of proceeds and issuer
purchases of equity securities 39
Item 6. Exhibits 39
Any statements in this document that are not historical facts are
forward-looking statements as defined in the Private Securities Litigation
Reform Act of 1995. Words such as "expect," "believe," "intend," "estimate,"
"project," "may" and similar expressions are intended to identify
forward-looking statements. These forward-looking statements are predicated on
management's beliefs and assumptions based on information known to Independent
Bank Corporation's management as of the date of this document and do not purport
to speak as of any other date. Forward-looking statements may include
descriptions of plans and objectives of Independent Bank Corporation's
management for future or past operations, products or services, and forecasts of
our revenue, earnings or other measures of economic performance, including
statements of profitability, business segments and subsidiaries, and estimates
of credit quality trends. Such statements reflect the view of Independent Bank
Corporation's management as of this date with respect to future events and are
not guarantees of future performance; involve assumptions and are subject to
substantial risks and uncertainties, such as the changes in Independent Bank
Corporation's plans, objectives, expectations and intentions. Should one or more
of these risks materialize or should underlying beliefs or assumptions prove
incorrect, our actual results could differ materially from those discussed.
Factors that could cause or contribute to such differences are changes in
interest rates, changes in the accounting treatment of any particular item, the
results of regulatory examinations, changes in industries where we have a
concentration of loans, changes in the level of fee income, changes in general
economic conditions and related credit and market conditions, and the impact of
regulatory responses to any of the foregoing. Forward-looking statements speak
only as of the date they are made. Independent Bank Corporation does not
undertake to update forward-looking statements to reflect facts, circumstances,
assumptions or events that occur after the date the forward-looking statements
are made. For any forward-looking statements made in this document, Independent
Bank Corporation claims the protection of the safe harbor for forward-looking
statements contained in the Private Securities Litigation Reform Act of 1995.
Part I
Item 1.
INDEPENDENT BANK CORPORATION AND SUBSIDIARIES
Consolidated Statements of Financial Condition
September 30, December 31,
2006 2005
------------- ------------
(unaudited)
(in thousands)
Assets
Cash and due from banks $ 81,224 $ 67,586
Securities available for sale 448,751 483,447
Federal Home Loan Bank stock, at cost 15,338 17,322
Loans held for sale 32,393 28,569
Loans
Commercial 1,075,438 1,030,095
Real estate mortgage 872,796 852,742
Installment 344,944 304,053
Finance receivables 390,294 368,871
---------- ----------
Total Loans 2,683,472 2,555,761
Allowance for loan losses (25,364) (23,035)
---------- ----------
Net Loans 2,658,108 2,532,726
Property and equipment, net 67,985 63,173
Bank owned life insurance 40,675 39,451
Goodwill 55,805 55,946
Other intangibles 8,800 10,729
Accrued income and other assets 63,520 56,899
---------- ----------
Total Assets $3,472,599 $3,355,848
========== ==========
Liabilities and Shareholders' Equity
Deposits
Non-interest bearing $ 288,077 $ 295,151
Savings and NOW 911,802 861,277
Time 1,626,328 1,484,629
---------- ----------
Total Deposits 2,826,207 2,641,057
Federal funds purchased 100,786 80,299
Other borrowings 136,304 227,047
Subordinated debentures 64,197 64,197
Financed premiums payable 39,923 35,378
Accrued expenses and other liabilities 44,767 59,611
---------- ----------
Total Liabilities 3,212,184 3,107,589
---------- ----------
Shareholders' Equity
Preferred stock, no par value--
200,000 shares authorized; none
outstanding
Common stock, $1.00 par value--
40,000,000 shares authorized;
issued and outstanding:
22,854,806 shares at September
30, 2006 and 21,991,001 shares
at December 31, 2005 22,855 21,991
Capital surplus 200,035 179,913
Retained earnings 33,616 41,486
Accumulated other comprehensive income 3,909 4,869
---------- ----------
Total Shareholders' Equity 260,415 248,259
---------- ----------
Total Liabilities and Shareholders' Equity $3,472,599 $3,355,848
========== ==========
See notes to interim consolidated financial statements
2
INDEPENDENT BANK CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
Three Months Ended Nine Months Ended
September 30, September 30,
2006 2005 2006 2005
------- ------- -------- --------
(unaudited) (unaudited)
(in thousands, except per share amounts)
Interest Income
Interest and fees on loans $53,845 $46,110 $156,367 $131,280
Securities available for sale
Taxable 2,713 3,304 8,358 10,557
Tax-exempt 2,583 2,789 8,303 8,093
Other investments 191 199 613 534
------- ------- -------- --------
Total Interest Income 59,332 52,402 173,641 150,464
------- ------- -------- --------
Interest Expense
Deposits 22,606 12,686 59,920 32,524
Other borrowings 4,786 5,440 14,817 15,709
------- ------- -------- --------
Total Interest Expense 27,392 18,126 74,737 48,233
------- ------- -------- --------
Net Interest Income 31,940 34,276 98,904 102,231
Provision for loan losses 4,555 1,588 8,852 5,722
------- ------- -------- --------
Net Interest Income After Provision for
Loan Losses 27,385 32,688 90,052 96,509
------- ------- -------- --------
Non-interest Income
Service charges on deposit accounts 5,285 5,172 14,784 14,484
Mepco litigation settlement 2,800
Net gains (losses) on assets
Real estate mortgage loans 1,115 1,508 3,329 4,203
Securities (23) 171 1,228
Title insurance fees 416 494 1,298 1,459
Manufactured home loan origination fees
and commissions 214 294 700 905
VISA check card interchange income 870 713 2,532 2,020
Real estate mortgage loan servicing 561 836 1,835 2,074
Other income 2,260 2,077 6,655 5,905
------- ------- -------- --------
Total Non-interest Income 10,721 11,071 34,104 32,278
------- ------- -------- --------
Non-interest Expense
Compensation and employee benefits 11,846 14,202 38,542 40,858
Occupancy, net 2,295 2,182 7,576 6,523
Furniture, fixtures and equipment 1,718 1,637 5,320 5,150
Data processing 1,447 1,350 4,336 3,740
Advertising 1,061 1,128 3,136 3,206
Goodwill impairment 612
Other expenses 5,932 6,656 20,639 20,022
------- ------- -------- --------
Total Non-interest Expense 24,299 27,155 80,161 79,499
------- ------- -------- --------
Income Before Income Tax 13,807 16,604 43,995 49,288
Income tax expense 3,856 4,556 11,099 13,813
------- ------- -------- --------
Net Income $ 9,951 $12,048 $ 32,896 $ 35,475
======= ======= ======== ========
Net Income Per Share
Basic $ .43 $ .52 $ 1.44 $ 1.52
Diluted .43 .51 1.41 1.49
Dividends Per Common Share
Declared $ .20 .18 .58 .53
Paid .20 .17 .56 .50
See notes to interim consolidated financial statements
3
INDEPENDENT BANK CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Nine months ended
September 30,
---------------------
2006 2005
--------- ---------
(unaudited)
(in thousands)
Net Income $ 32,896 $ 35,475
--------- ---------
Adjustments to Reconcile Net Income
to Net Cash from Operating Activities
Proceeds from sales of loans held for sale 212,316 289,779
Disbursements for loans held for sale (212,811) (288,212)
Provision for loan losses 8,852 5,722
Depreciation and amortization of premiums and accretion of
discounts on securities and loans (6,856) (9,482)
Net gains on sales of real estate mortgage loans (3,329) (4,203)
Net gains on securities (171) (1,228)
Deferred loan fees 122 (607)
Goodwill impairment 612
Increase in accrued income and other assets (9,730) (2,806)
Increase in accrued expenses and other liabilities (8,775) 3,139
--------- ---------
(19,770) (7,898)
--------- ---------
Net Cash from Operating Activities 13,126 27,577
--------- ---------
Cash Flow used in Investing Activities
Proceeds from the sale of securities available for sale 1,283 47,587
Proceeds from the maturity of securities available for sale 11,490 15,484
Proceeds from the redemption of Federal Home Loan Bank stock 1,984 --
Principal payments received on securities available for sale 27,111 44,212
Purchases of securities available for sale (5,267) (66,548)
Portfolio loans originated, net of principal payments (118,569) (248,384)
Capital expenditures (11,081) (9,953)
--------- ---------
Net Cash used in Investing Activities (93,049) (217,602)
--------- ---------
Cash Flow from Financing Activities
Net increase in total deposits 183,640 365,730
Net decrease in short-term borrowings (40,556) (24,986)
Proceeds from Federal Home Loan Bank advances 148,700 472,750
Payments of Federal Home Loan Bank advances (176,900) (592,066)
Repayment of long-term debt (1,500) (1,500)
Net increase (decrease) in financed premiums payable 4,545 (13,111)
Dividends paid (12,964) (11,090)
Repurchase of common stock (11,989) (4,696)
Proceeds from issuance of common stock 585 1,206
--------- ---------
Net Cash from Financing Activities 93,561 192,237
--------- ---------
Net Increase in Cash and Cash Equivalents 13,638 2,212
Cash and Cash Equivalents at Beginning of Period 67,586 72,815
--------- ---------
Cash and Cash Equivalents at End of Period $ 81,224 $ 75,027
========= =========
Cash paid during the period for
Interest $ 70,763 $ 44,993
Income taxes 9,912 12,623
Transfer of loans to other real estate 2,583 3,760
See notes to interim consolidated financial statements
4
INDEPENDENT BANK CORPORATION AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
Nine months ended
September 30,
-------------------
2006 2005
-------- --------
(unaudited)
(in thousands)
Balance at beginning of period $248,259 $230,292
Net income 32,896 35,475
Cash dividends declared (13,311) (12,112)
Issuance of common stock 5,520 3,052
Repurchase of common stock (11,989) (4,696)
Net change in accumulated other comprehensive
income, net of related tax effect (960) (301)
-------- --------
Balance at end of period $260,415 $251,710
======== ========
See notes to interim consolidated financial statements.
5
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. In our opinion, the accompanying unaudited consolidated financial statements
contain all of the adjustments necessary to present fairly our consolidated
financial condition as of September 30, 2006 and December 31, 2005, and the
results of operations for the three and nine-month periods ended September 30,
2006 and 2005. Certain reclassifications have been made in the prior year
financial statements to conform to the current year presentation. Our critical
accounting policies include the assessment for other than temporary impairment
on investment securities, the determination of the allowance for loan losses,
the valuation of derivative financial instruments, the valuation of originated
mortgage loan servicing rights, the valuation of deferred tax assets and the
valuation of goodwill. Refer to our 2005 Annual Report on Form 10-K for a
disclosure of our accounting policies.
2. Our 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 $30.8 million at September 30, 2006, and $18.0
million at December 31, 2005. (See Management's Discussion and Analysis of
Financial Condition and Results of Operations).
3. Comprehensive income for the three- and nine-month periods ended September 30
follows:
Three months ended Nine months ended
September 30, September 30,
------------------ -----------------
2006 2005 2006 2005
------- ------- ------- -------
(in thousands)
Net income $ 9,951 $12,048 $32,896 $35,475
Net change in unrealized gain on securities
available for sale, net of related tax effect 3,662 (1,496) 309 (1,831)
Net change in unrealized gain (loss) on derivative
instruments, net of related tax effect (2,522) 1,394 (1,020) 1,530
Reclassification adjustment for accretion on
settled derivative financial instruments (83) (249)
------- ------- ------- -------
Comprehensive income $11,008 $11,946 $31,936 $35,174
======= ======= ======= =======
The net change in unrealized gain on securities available for sale reflect net
gains and losses reclassified into earnings as follows:
Three months ended Nine months ended
September 30, September 30,
------------------ -----------------
2006 2005 2006 2005
---- ---- ---- ------
(in thousands)
Gain (loss) reclassified into earnings $ $(23) $171 $1,228
Federal income tax expense as a result of the
reclassification of these amounts from
comprehensive income (8) 60 430
4. Our reportable segments are based upon legal entities. We have five
reportable segments: Independent Bank ("IB"), Independent Bank West Michigan
("IBWM"), Independent Bank South Michigan ("IBSM"), Independent Bank East
Michigan ("IBEM") and Mepco Insurance Premium Financing, Inc. ("Mepco"). We
evaluate performance based principally on net income of the respective
reportable segments.
6
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
A summary of selected financial information for our reportable segments as of or
for the three-month and nine-month periods ended September 30, follows:
As of or for the three months ended September 30,
IB IBWM IBSM IBEM Mepco Other(2) Elimination Total
---------- -------- -------- -------- -------- -------- ----------- ----------
(in thousands)
2006
Total assets $1,053,823 $756,657 $506,681 $722,463 $425,705 $350,993 $(343,723) $3,472,599
Interest income 16,695 13,279 8,144 12,078 9,312 5 (181) 59,332
Net interest income 9,420 8,246 4,491 7,102 4,333 (1,610) (42) 31,940
Provision for loan losses 747 1,008 (105) 2,845 60 4,555
Income (loss) before
income tax 4,750 4,814 3,226 722 1,795 (1,544) 44 13,807
Net income (loss) 3,581 3,371 2,397 702 1,114 (1,213) (1) 9,951
2005
Total assets $1,028,668 $739,695 $468,963 $703,981 $387,990 $343,205 $(348,638) $3,323,864
Interest income 14,910 11,374 6,879 10,331 8,986 4 (82) 52,402
Net interest income 9,994 8,270 4,346 7,289 5,829 (1,431) (21) 34,276
Provision for loan losses 69 798 342 233 146 1,588
Income (loss) before
income tax 5,524 4,842 2,594 2,891 3,132 (2,414) 35 16,604
Net income (loss) 4,134 3,391 1,985 2,155 2,052 (1,653) (16) 12,048
As of or for the nine months ended September 30,
IB IBWM IBSM IBEM Mepco(1) Other(2) Elimination Total
---------- -------- -------- -------- -------- -------- ----------- ----------
(in thousands)
2006
Total assets $1,053,823 $756,657 $506,681 $722,463 $425,705 $350,993 $(343,723) $3,472,599
Interest income 48,817 38,391 23,521 35,489 27,864 15 (456) 173,641
Net interest income 29,253 24,996 13,467 21,992 14,042 (4,721) (125) 98,904
Provision for loan losses 1,645 1,831 724 4,028 624 8,852
Income (loss) before
income tax 13,766 14,139 7,622 6,068 3,804 (1,498) 94 43,995
Net income (loss) 10,348 9,920 5,862 4,701 2,358 (253) (40) 32,896
2005
Total assets $1,028,668 $739,695 $468,963 $703,981 $387,990 $343,205 $(348,638) $3,323,864
Interest income 47,661 28,803 19,189 29,587 25,357 17 (150) 150,464
Net interest income 33,072 21,405 12,541 21,678 17,827 (4,257) (35) 102,231
Provision for loan losses 783 1,637 1,840 853 609 5,722
Income (loss) before
income tax 22,322 12,238 6,199 8,368 10,255 (5,027) (5,067) 49,288
Net income (loss) 16,184 8,618 4,856 6,263 6,343 (3,312) (3,477) 35,475
(1) 2006 net income includes $1.6 million of non-interest expense related to
the settlement of litigation involving the former owners of Mepco.
(2) Includes items relating to the Registrant and certain insignificant
operations. Net income for the nine months ended September 30, 2006,
includes $2.8 million of non-interest income related to the settlement of
litigation involving the former owners of Mepco. This amount is not
taxable.
7
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
5. Basic income per share is based on weighted average common shares outstanding
during the period. Diluted income per share includes the dilutive effect of
additional potential common shares to be issued upon the exercise of stock
options and stock units for a deferred compensation plan for non-employee
directors.
A reconciliation of basic and diluted earnings per share for the three-month and
the nine-month periods ended September 30 follows:
Three months Nine months
ended ended
September 30, September 30,
----------------- -----------------
2006 2005 2006 2005
------- ------- ------- -------
(in thousands, except per share
amounts)
Net income $ 9,951 $12,048 $32,896 $35,475
======= ======= ======= =======
Weighted-average shares outstanding 22,885 23,344 22,922 23,374
Effect of stock options 345 424 371 414
Stock units for deferred compensation plan for non-
employee directors 54 51 52 50
------- ------- ------- -------
Weighted-average shares outstanding for
calculation of diluted earnings per share 23,284 23,819 23,345 23,838
======= ======= ======= =======
Net income per share
Basic $ .43 $ .52 $ 1.44 $ 1.52
Diluted .43 .51 1.41 1.49
Weighted average stock options outstanding that were anti-dilutive totaled 0.7
million and 0.01 million for the three-months ended September 30, 2006 and 2005,
respectively. During the nine-month periods ended September 30, 2006 and 2005,
weighted-average anti-dilutive stock options totaled 0.5 million and 0.1 million
respectively.
Per share data has been restated for a 5% stock dividend in 2006.
6. Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities," ("SFAS #133") which was
subsequently amended by SFAS #138, requires companies to record derivatives on
the balance sheet as assets and liabilities measured at their fair value. The
accounting for increases and decreases in the value of derivatives depends upon
the use of derivatives and whether the derivatives qualify for hedge accounting.
8
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
Our derivative financial instruments according to the type of hedge in which
they are designated under SFAS #133 follows:
September 30, 2006
-----------------------------
Average
Notional Maturity Fair
Amount (years) Value
-------- -------- -------
(dollars in thousands)
Fair Value Hedge - pay variable interest-rate swap agreements $499,409 3.3 $(5,838)
======== === =======
Cash Flow Hedge
Pay fixed interest-rate swap agreements $120,500 1.5 $ 1,699
Interest-rate cap agreements 250,500 2.4 2,068
-------- --- -------
Total $371,000 2.1 $ 3,767
======== === =======
No hedge designation
Pay variable interest-rate swap agreements $ 60,000 0.4 $(83)
Interest-rate cap agreements 40,000 2.0 149
Rate-lock real estate mortgage loan commitments 47,579 0.1 61
Mandatory commitments to sell real estate mortgage loans 43,714 0.1 (103)
-------- --- -------
Total $191,293 0.6 $ 24
======== === =======
We have established management objectives and strategies that include
interest-rate risk parameters for maximum fluctuations in net interest income
and market value of portfolio equity. We monitor our interest rate risk position
via simulation modeling reports (See "Asset/liability management"). The goal of
our asset/liability management efforts is to maintain profitable financial
leverage within established risk parameters.
We use variable rate and short-term fixed-rate (less than 12 months) debt
obligations to fund a portion of our balance sheet, which exposes us to
variability in cash flows due to changes in interest rates. To meet our
objectives, we 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 currently include certain
pay-fixed interest-rate swaps and interest-rate cap agreements.
Pay-fixed interest-rate swaps convert the variable-rate cash flows on debt
obligations to fixed-rates. Under interest-rate caps, we will receive cash if
interest rates rise above a predetermined level. As a result, we effectively
have variable rate debt with an established maximum rate.
We record the fair value of Cash Flow Hedges in accrued income and other assets
and accrued expenses and other liabilities. On an ongoing basis, we adjust our
balance sheet 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 hedged items (primarily
variable-rate debt obligations) affect earnings. It is anticipated that
approximately $0.9 million, net of tax, of unrealized gains on Cash Flow Hedges
at September 30, 2006 will be reclassified to earnings over the next twelve
months. To the extent that the Cash Flow Hedges are not effective, the
ineffective portion of the Cash Flow Hedges are immediately recognized as
interest expense. The maximum term of any Cash Flow Hedge at September 30, 2006
is 5.7 years.
9
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
We also use long-term, fixed-rate brokered CDs to fund a portion of our balance
sheet. These instruments expose us to variability in fair value due to changes
in interest rates. To meet our objectives, we may enter into derivative
financial instruments to mitigate exposure to fluctuations in fair values of
such fixed-rate debt instruments ("Fair Value Hedges"). Fair Value Hedges
currently include pay-variable interest rate swaps.
Also, we record Fair Value Hedges at fair value in accrued income and other
assets and accrued expenses and other liabilities. The hedged items (primarily
fixed-rate debt obligations) are also recorded at fair value through the
statement of operations, which offsets the adjustment to Fair Value Hedges. On
an ongoing basis, we will adjust our balance sheet to reflect the then current
fair value of both the Fair Value Hedges and the respective hedged items. To the
extent that the change in value of the Fair Value Hedges do not offset the
change in the value of the hedged items, the ineffective portion is immediately
recognized as interest expense.
Certain financial derivative instruments are not designated as hedges. The fair
value of these derivative financial instruments have been recorded on our
balance sheet and are adjusted on an ongoing basis to reflect their then current
fair value. The changes in the fair value of derivative financial instruments
not designated as hedges, are recognized currently in earnings.
In the ordinary course of business, we enter into rate-lock real estate mortgage
loan commitments with customers ("Rate Lock Commitments"). These commitments
expose us to interest rate risk. We also enter into mandatory commitments to
sell real estate mortgage loans ("Mandatory Commitments") to reduce the impact
of price fluctuations of mortgage loans held for sale and Rate Lock Commitments.
Mandatory Commitments help protect our loan sale profit margin from fluctuations
in interest rates. The changes in the fair value of Rate Lock Commitments and
Mandatory Commitments are recognized currently as part of gains on the sale of
real estate mortgage loans. We obtain market prices from an outside third party
on Mandatory Commitments and Rate Lock Commitments. Net gains on the sale of
real estate mortgage loans, as well as net income may be more volatile as a
result of these derivative instruments, which are not designated as hedges.
10
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
The impact of SFAS #133 on net income and other comprehensive income for the
three-month and nine-month periods ended September 30, 2006 and 2005 is as
follows:
Income (Expense)
--------------------------------
Other
Net Comprehensive
Income Income Total
------ ------------- -------
(in thousands)
Change in fair value during the three-
month period ended September 30, 2006
Interest-rate swap agreements
not designated as hedges $ 67 $ 67
Interest-rate cap agreements
not designated as hedges (188) (188)
Rate Lock Commitments 176 176
Mandatory Commitments (213) (213)
Ineffectiveness of fair value hedges 30 30
Ineffectiveness of cash flow hedges (22) (22)
Cash flow hedges $(4,867) (4,867)
Reclassification adjustment 858 858
----- ------- -------
Total (150) (4,009) (4,159)
Income tax (53) (1,404) (1,457)
----- ------- -------
Net $ (97) $(2,605) $(2,702)
===== ======= =======
Income (Expense)
--------------------------------
Other
Net Comprehensive
Income Income Total
------ ------------- -------
(in thousands)
Change in fair value during the nine-
month period ended September 30, 2006
Interest-rate swap agreements
not designated as hedges $(47) $ (47)
Interest-rate cap agreements
not designated as hedges 68 68
Rate Lock Commitments 28 28
Mandatory Commitments (5) (5)
Ineffectiveness of fair value hedges (9) (9)
Ineffectiveness of cash flow hedges (22) (22)
Cash flow hedges $(4,524) (4,524)
Reclassification adjustment 2,571 2,571
---- -------- -------
Total 13 (1,953) (1,940)
Income tax 4 (684) (680)
---- -------- -------
Net $ 9 $(1,269) $(1,260)
==== ======== =======
11
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
Income (Expense)
--------------------------------
Other
Net Comprehensive
Income Income Total
------ ------------- -------
(in thousands)
Change in fair value during the three-
month period ended September 30, 2005
Interest-rate swap agreements
not designated as hedges $ (5) $ (5)
Rate Lock Commitments 69 69
Mandatory Commitments 392 392
Ineffectiveness of fair value hedges (23) (23)
Cash flow hedges $1,857 1,857
Reclassification adjustment 287 287
---- ------ ------
Total 433 2,144 2,577
Income tax 152 750 902
---- ------ ------
Net $281 $1,394 $1,675
==== ====== ======
Income (Expense)
--------------------------------
Other
Net Comprehensive
Income Income Total
------ ------------- -------
(in thousands)
Change in fair value during the nine-
month period ended September 30, 2005
Interest-rate swap agreements
not designated as hedges $(81) $ (81)
Rate Lock Commitments 134 134
Mandatory Commitments 334 334
Ineffectiveness of fair value hedges (17) (17)
Cash flow hedges $2,334 2,334
Reclassification adjustment 20 20
---- ------ ------
Total 370 2,354 2,724
Income tax 130 824 954
---- ------ ------
Net $240 $1,530 $1,770
==== ====== ======
12
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
7. Statement of Financial Accounting Standards No. 141, "Business Combinations,"
("SFAS #141") and Statement of Financial Accounting Standards No. 142, "Goodwill
and Other Intangible Assets," ("SFAS #142") effects how organizations account
for business combinations and for the goodwill and intangible assets that arise
from those combinations or are acquired otherwise.
Intangible assets, net of amortization, were comprised of the following at
September 30, 2006 and December 31, 2005:
September 30, 2006 December 31, 2005
----------------------- -----------------------
Gross Gross
Carrying Accumulated Carrying Accumulated
Amount Amortization Amount Amortization
-------- ------------ -------- ------------
(dollars in thousands)
Amortized intangible assets
Core deposit $20,545 $13,187 $20,545 $11,709
Customer relationship 2,604 1,923 2,604 1,700
Covenants not to compete 1,520 759 1,520 531
------- ------- ------- -------
Total $24,669 $15,869 $24,669 $13,940
======= ======= ======= =======
Unamortized intangible assets -
Goodwill $55,805 $55,946
======= =======
During the quarter ended June 30, 2006, it was determined (based on a third
party evaluation) that certain goodwill at our IB segment was impaired. As a
result goodwill was written down through a charge to expense of $0.6 million.
Based on our review of all remaining goodwill recorded on the Statement of
Financial Condition, no impairment existed as of September 30, 2006.
Amortization of intangibles, has been estimated through 2011 and thereafter in
the following table, and does not take into consideration any potential future
acquisitions or branch purchases.
(dollars in thousands)
----------------------
Nine months ended December 31, 2006 $ 643
Year ending December 31:
2007 2,382
2008 2,061
2009 966
2010 729
2011 and thereafter 2,019
------
Total $8,800
======
13
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
Changes in the carrying amount of goodwill by reporting segment for the nine
months ended September 30, 2006 and 2005 were as follows:
IB IBWM IBSM IBEM Mepco Other(1) Total
-------- ---- ---- ------- -------- -------- -------
(dollars in thousands)
Goodwill
Balance, December 31, 2005 $9,560 $32 $23,205 $22,806 $343 $55,946
Acquired during period 471(2) 471
Impairment (612) (612)
------ --- ------- ------- ---- -------
Balance, September 30, 2006 $8,948 $32 $23,205 $23,277 $343 $55,805
====== === ======= ======= ==== =======
Balance, December 31, 2004 $9,702 $32 $23,205 $20,035 $380 $53,354
Acquired during period (142)(3) 2,308(2) (37)(4) 2,129
------ --- ------- ------- ---- -------
Balance, September 30, 2005 $9,560 $32 $23,205 $22,343 $343 $55,483
====== === ======= ======= ==== =======
(1) Includes items relating to the Registrant and certain insignificant
operations.
(2) Goodwill associated with contingent consideration accrued pursuant to an
earnout.
(3) Adjustment to goodwill associated with the acquisition of North Bancorp,
Inc.
(4) Adjustment to goodwill associated with the acquisition of Midwest Guaranty
Bancorp, Inc.
8. On January 1, 2006 we adopted Statement of Financial Accounting Standards No.
123 (revised 2004), "Share Based Payment," ("SFAS #123R") which is a revision of
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation," ("SFAS #123"). SFAS #123R supersedes Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees," ("APB #25") and
amends Statement of Financial Accounting Standards No. 95, "Statement of Cash
Flows," ("SFAS #95"). Generally the requirements of SFAS #123R are similar to
the requirements described in SFAS #123. However, SFAS #123R requires all
share-based payments to employees, including grants of employee stock options,
to be recognized in the statement of operations based on their fair values. Pro
forma disclosure is no longer an alternative.
We adopted SFAS #123R using the "modified prospective" method in which
compensation cost is recognized beginning January 1, 2006 (a) based on the
requirements of SFAS #123R for all share-based payments granted after January 1,
2006 and (b) based on the requirements of SFAS #123 for all awards granted to
employees prior to January 1, 2006 that remain unvested on that date.
Prior to the adoption of SFAS #123R we accounted for stock based compensation
under the provisions of SFAS #123 which permitted us to account for share-based
payments to employees using APB #25's intrinsic value method and, as such,
generally recognize no compensation cost for employee stock options. We also
provided pro forma disclosures for our net income and earnings per share as if
we had adopted the fair value accounting method for stock based compensation.
We maintain performance-based compensation plans that includes a long-term
incentive plan that permits the issuance of equity based compensation awards,
including stock options. At the present time, we do not anticipate utilizing
stock option grants in the future, thus the only expense related to stock
options would be associated with the issuance (if any) of new stock options
associated with the "reload" feature of existing outstanding stock options. All
stock options outstanding at December 31, 2005 were fully vested and there were
no new stock option grants during the nine month period ended September 30,
2006.
14
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
Prior to January 1, 2006 we granted options to our non-employee directors as
well as certain officers. Options that were granted had vesting periods of up to
one year, a price equal to the fair market value of the common stock on the date
of grant, and expire not more than ten years after the date of grant. The per
share weighted-average fair value of stock options was obtained using the
Black-Scholes options pricing model. The following table summarizes the
assumptions used and values obtained for the periods ended September 30,
2005(1):
Three months ended Nine months ended
September 30, 2005 September 30, 2005
------------------ ------------------
Expected dividend yield 2.57%
Risk-free interest rate 4.20
Expected life (in years) 9.73
Expected volatility 32.02%
Per share weighted-average fair value $ 9.94
(1) No stock options were granted during the nine months ended September 30,
2006.
The following table summarizes the impact on our net income had compensation
cost included the fair value of options at the grant date for the periods ended
September 30, 2005:
Three months ended Nine months ended
September 30, 2005 September 30, 2005
------------------ ------------------
(in thousands except per share amounts)
Net income - as reported $12,048 $35,475
Stock based compensation expense determined under
fair value based method, net of related tax effect (41) (1,667)
------- -------
Pro-forma net income $12,007 $33,808
======= =======
Income per share
Basic
As reported $ .52 $ 1.52
Pro-forma .51 1.45
Diluted
As reported $ .51 $ 1.49
Pro-forma .50 1.42
A summary of outstanding stock option grants and transactions for the nine-month
period ended September 30, 2006 follows:
Average
Number Exercise
of shares Price
--------- --------
Outstanding at January 1, 2006 1,596,399 $19.65
Granted
Exercised 57,315 10.20
Forfeited 5,381 25.97
--------- ------
Outstanding at September 30, 2006 1,533,703 $19.98
========= ======
The aggregate intrinsic value and weighted-average remaining contractual term of
outstanding options at September 30, 2006 were $8.0 million and 6.61 years,
respectively.
15
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
Common shares issued upon exercise of stock options come from currently
authorized but unissued shares. The following summarizes certain information
regarding options exercised during the three and nine-month periods ending
September 30, 2006 and 2005:
Three months ended Nine months ended
September 30, September 30,
------------------ -----------------
2006 2005 2006 2005
---- ---- ---- ------
(in thousands)
Intrinsic value $225 $164 $842 $1,761
==== ==== ==== ======
Cash proceeds $166 $ 26 $585 $1,099
==== ==== ==== ======
Tax benefit realized $ 79 $ 4 $295 $ 404
==== ==== ==== ======
9. In March 2006, the FASB issued Statement of Financial Accounting Standards
No. 156, "Accounting for Servicing of Financial Assets, an amendment of FASB
Statement No. 140," ("SFAS #156"). This statement amends SFAS #140, "Accounting
for Transfers and Servicing of Financial Assets and Extinguishment of
Liabilities", to permit entities to choose to either subsequently measure
servicing rights at fair value and report changes in fair value in earnings, or
amortize servicing rights in proportion to and over the estimated net servicing
income or loss and assess the rights for impairment or the need for an increased
obligation. In addition, this statement (1) clarifies when a servicer should
separately recognize servicing assets and liabilities, (2) requires all
separately recognized servicing assets and liabilities to be initially measured
at fair value, (3) permits at the date of adoption, a one-time reclassification
of available for sale ("AFS") securities to trading securities without calling
into question the treatment of other AFS securities under SFAS #115, "Accounting
for Certain Investments in Debt and Equity Securities" and (4) requires
additional disclosures for all separately recognized servicing assets and
liabilities. This statement is effective as of the beginning of an entities
first fiscal year that begins after September 15, 2006. Early adoption is
permitted as of the beginning of an entities fiscal year, provided the entity
has not yet issued financial statements for any interim period of that fiscal
year. We expect to adopt SFAS #156 on January 1, 2007.
In June 2006, the FASB issued Interpretation No. 48, "Accounting for Uncertainty
in Income Taxes - an Interpretation of FASB Statement No. 109," ("FIN #48"),
which clarifies the accounting for uncertainty in income taxes recognized in a
company's financial statements in accordance with SFAS #109, "Accounting for
Income Taxes". FIN #48 prescribes a recognition and measurement threshold for a
tax position taken or expected to be taken in a tax return. FIN #48 also
provides guidance on derecognition, classification, interest and penalties,
accounting in interim periods, disclosure, and transition. FIN #48 is effective
for fiscal years beginning after December 15, 2006. We have not completed our
evaluation of the impact of the adoption of FIN #48.
In September 2006, the Securities and Exchange Commission released Staff
Accounting Bulletin (SAB) #108. This SAB provides detailed guidance to
registrants in the determination of what is material to their financial
statements. This SAB is required to be applied to financial statements issued
after November 15, 2006. Upon adoption, the cumulative effect of applying the
new guidance is to be reflected as an adjustment to opening retained earnings as
of the beginning of the current fiscal year. We have not completed our
evaluation of the impact of SAB #108.
10. On November 6, 2006 we entered into a Branch Purchase Agreement (the
"Agreement") with TCF National Bank ("TCF") for IB and IBSM to acquire 10
branches from TCF with deposits totaling approximately $235 million. The
branches to be acquired are located in Bay
16
City, Saginaw and Battle Creek, Michigan. The deposit base at these 10 branches
is currently comprised of approximately $34 million in non-interest bearing
demand deposit accounts, $38 million in interest bearing demand deposit
accounts, $80 million in savings and money market accounts, and $83 million in
certificates of deposit. Under the terms of the Agreement we expect to pay a
premium equal to 11.50% of the deposits assumed (or approximately
$27 million based on the current level of deposits at the 10 branches)
and also pay approximately $4.2 million for the associated real property
and furniture, fixtures and equipment at the branches. We do not expect
this transaction to have a material impact on our earnings per
share in 2007 and we intend to use the proceeds from the deposit liabilities
being assumed to pay down short term borrowings or maturing brokered
certificates of deposit. The closing of this transaction is expected to occur in
March 2007, subject to receipt of regulatory approvals and the satisfaction of
other customary closing conditions.
11. The results of operations for the three- and nine-month periods ended
September 30, 2006, are not necessarily indicative of the results to be expected
for the full year.
17
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following section presents additional information that may be necessary to
assess our financial condition and results of operations. This section should be
read in conjunction with our consolidated financial statements contained
elsewhere in this report as well as our 2005 Annual Report on Form 10-K. The
Form 10-K includes a list of risk factors that you should consider in connection
with any decision to buy or sell our securities.
FINANCIAL CONDITION
SUMMARY Our total assets increased by $116.8 million during the first nine
months of 2006. Loans, excluding loans held for sale ("Portfolio Loans"),
totaled $2.683 billion at September 30, 2006, an increase of $127.7 million from
December 31, 2005. This was driven by increases in all categories of Portfolio
Loans. (See "Portfolio Loans and asset quality.")
Deposits totaled $2.826 billion at September 30, 2006, compared to $2.641
billion at December 31, 2005. The $185.2 million increase in total deposits
during the period principally reflects increases in savings and NOW accounts and
time deposits partially offset by a decline in non-interest bearing demand
deposits. Other borrowings totaled $136.3 million at September 30, 2006, a
decrease of $90.7 million from December 31, 2005. This was primarily
attributable to the payoff of maturing borrowings with federal funds purchased
and brokered certificates of deposit ("Brokered CD's).
SECURITIES We maintain diversified securities portfolios, which may include
obligations of the U.S. Treasury and government-sponsored agencies as well as
securities issued by states and political subdivisions, corporate securities,
mortgage-backed securities and asset-backed securities. We also invest in
capital securities, which include preferred stocks and trust preferred
securities. We regularly evaluate asset/liability management needs and attempt
to maintain a portfolio structure that provides sufficient liquidity and cash
flow. We believe that the unrealized losses on securities available for sale are
temporary in nature and due primarily to changes in interest rates and are
expected to be recovered within a reasonable time period. We also believe that
we have the ability to hold securities with unrealized losses to maturity or
until such time as the unrealized losses reverse. (See "Asset/liability
management.")
SECURITIES
Unrealized
Amortized --------------- Fair
Cost Gains Losses Value
--------- ------ ------ --------
(in thousands)
Securities available for sale
September 30, 2006 $444,541 $9,100 $4,890 $448,751
December 31, 2005 479,713 8,225 4,491 483,447
Securities available for sale declined during the first nine months of 2006
because loan growth supplanted the need for any significant purchases of new
investment securities, and the flat yield curve has created a difficult
environment for constructing investment security transactions that meet our
profitability objectives. Generally we cannot earn the same interest-rate spread
on
18
securities as we can on Portfolio Loans. As a result, purchases of securities
will tend to erode some of our profitability measures, including our return on
assets.
At September 30, 2006 and December 31, 2005, we had $13.4 million and $15.3
million, respectively, of asset-backed securities included in securities
available for sale. All of our asset-backed securities are backed by mobile home
loans and all are rated as investment grade (by the major rating agencies)
except for one security with a book value of $1.8 million at September 30, 2006
that was down graded during 2004 to a below investment grade rating. We did not
record any impairment charges on this security during the first nine months of
2006 but during the first nine months of 2005 (in the first quarter) we recorded
an impairment charge of $0.2 million on this security due primarily to credit
related deterioration on the underlying mobile home loan collateral. We continue
to closely monitor this particular security as well as our entire mobile home
loan asset-backed securities portfolio. We do not foresee, at the present time,
any significant risk of loss (related to credit issues) with respect to any of
our other asset-backed securities. We did not record impairment charges on any
other investment securities during the first nine months of 2006 but during the
first nine months of 2005 we recorded an additional $0.2 million impairment
charge on Fannie Mae and Freddie Mac preferred securities. At September 30,
2006, we had a remaining book balance of $26.0 million in Fannie Mae and Freddie
Mac preferred securities.
Sales of securities available for sale were as follows (See "Non-interest
income."):
Three months ended Nine months ended
September 30, September 30,
------------------ -----------------
2006 2005 2006 2005
---- ------- ------ -------
(in thousands)
Proceeds $11,617 $1,283 $47,587
======== ====== =======
Gross gains $ 35 $ 171 $ 2,067
Gross losses 25 423
Impairment charges 33 416
------- ------ -------
Net gains (losses) $ (23) $ 171 $ 1,228
======== ====== =======
PORTFOLIO LOANS AND ASSET QUALITY We believe that our decentralized loan
origination structure provides important advantages in serving the credit needs
of our principal lending markets. In addition to the communities served by our
bank branch networks, principal lending markets include nearby communities and
metropolitan areas. Subject to established underwriting criteria, we also
participate in commercial lending transactions with certain non-affiliated banks
and may also purchase real estate mortgage loans from third-party originators.
Our 2003 acquisition of Mepco added the financing of insurance premiums for
businesses and the provision of payment plans to purchase vehicle service
contracts for consumers (warranty business) to our lending activities. These are
relatively new lines of business for us and expose us to new risks. Mepco
conducts its lending activities across the United States. Mepco generally does
not evaluate the creditworthiness of the individual customer but instead
primarily relies on the loan/payment plan collateral (the unearned insurance
premium or vehicle service contract) in the event of default. As a result, we
have established and monitor counterparty concentration limits in order to
manage our collateral exposure. The counterparty concentration limits are
primarily based on the AM Best rating and statutory surplus level for an
insurance company and on other factors, including financial evaluation and
distribution of concentrations, for warranty administrators and warranty
sellers.
19
The sudden failure of one of Mepco's major counterparties (an insurance company
or warranty administrator/seller) could expose us to significant losses. In
particular, at September 30, 2006 we had an exposure of approximately $4.8
million with one warranty business counterparty that was created due primarily
to an increased level of cancellations on existing vehicle service contract
payment plans and insufficient holdbacks on more recently funded vehicle service
contract payment plans. We have established a repayment plan with this warranty
business counterparty and continue to work with them to fully resolve this
matter. Further, there is approximately $6.3 million in a collateral account
that has been pledged to secure this warranty business counterparty's
obligations to Mepco and there exists certain third party guarantees of this
counterparties obligations. We are carefully monitoring our relationship with
this warranty counterparty and if necessary, will pursue appropriate future
actions to collect all outstanding funds including withdrawals from the
collateral account, pursuing other guarantors of this counterparty's obligations
and legal action. While we currently do not anticipate incurring any loss
related to our exposure with this warranty business counterparty, adverse future
events such as higher cancellations of existing vehicle service contract payment
plans, litigation amongst the parties or the failure or bankruptcy of this
entity could result in a loss.
Mepco also has established procedures for loan servicing and collections,
including the timely cancellation of the insurance policy or vehicle service
contract, in order to protect our collateral position in the event of default.
Mepco also has established procedures to attempt to prevent and detect fraud
since the loan/payment plan origination activities and initial customer contact
is entirely done through unrelated third parties (primarily insurance agents,
automobile warranty administrators or direct marketers). There can be no
assurance that the aforementioned risk management policies and procedures will
prevent us from incurring significant credit or fraud related losses in this
business segment.
Although the management and board of directors of each of our banks retain
authority and responsibility for credit decisions, we have adopted uniform
underwriting standards. Further, our loan committee structure as well as the
centralization of commercial loan credit services and the loan review process,
provides requisite controls and promotes compliance with such established
underwriting standards. Such centralized functions also facilitate compliance
with consumer protection laws and regulations. There can be no assurance that
the aforementioned centralization of certain lending procedures and the use of
uniform underwriting standards will prevent us from the possibility of incurring
significant credit losses in our lending activities.
We generally retain loans that may be profitably funded within established risk
parameters. (See "Asset/liability management.") As a result, we may hold
adjustable-rate and balloon real estate mortgage loans as Portfolio Loans, while
15- and 30-year, fixed-rate obligations are generally sold to mitigate exposure
to changes in interest rates. (See "Non-interest income.") During the first nine
months of 2006 our balance of real estate mortgage loans held in portfolio
increased by $20.1 million.
The $45.3 million increase in commercial loans during the nine months ended
September 30, 2006, principally reflects our emphasis on lending opportunities
within this category of loans and an increase in commercial lending staff. Loans
secured by real estate comprise the majority of new commercial loans.
The $390.3 million of finance receivables at September 30, 2006, are comprised
principally of loans to businesses to finance insurance premiums and payment
plans offered to individuals to purchase vehicle service contracts. The growth
in this category of loans is primarily due to the geographic expansion of
Mepco's lending activities and the addition of sales staff to call on insurance
agencies and automobile warranty administrators. During the first quarter of
2006 we instituted pricing increases and certain funding changes in the warranty
business of Mepco. In April 2006, Mepco experienced a number of changes in key
personnel. Between April 2006 and
20
July 2006 a senior vice president from one of our banks served as Mepco's
president. In late July 2006 this individual accepted a position as president of
a community bank in Michigan. As a result, Robert Shuster, the Company's current
chief financial officer, has been assigned additional responsibilities as
Mepco's president and CEO. Unrelated to these management changes, certain key
employees in the warranty division resigned. While we have replaced those former
employees with individuals in which we have the utmost confidence, it is
possible that these changes in management, as well as recent pricing increases
and funding changes in Mepco's warranty business, could negatively impact
Mepco's operations. This, in turn, could have an adverse impact on our results
of operations. We are aggressively taking action to mitigate the impact from
these changes in management, including the close monitoring of our relationships
with key counter parties in the warranty business. To date we are not aware of
any significant loss of warranty business other than with one warranty business
counterparty described above. During the third quarter of 2006 finance
receivables declined by $20.8 million. We do not believe that this decline is
due in any part to the aforementioned management changes, but rather, reflects
our decision to not compete for higher balance loans in the premium finance
business that, due to competitive conditions, currently have low margins.
Future growth of overall Portfolio Loans is dependent upon a number of
competitive and economic factors. Declines in Portfolio Loans or competition
leading to lower relative pricing on new Portfolio Loans could adversely impact
our future operating results. We continue to view loan growth consistent with
prevailing quality standards as a major short and long-term challenge.
NON-PERFORMING ASSETS
September 30, December 31,
2006 2005
------------- ------------
(dollars in thousands)
Non-accrual loans $25,470 $13,057
Loans 90 days or more past due and
still accruing interest 5,226 4,862
Restructured loans 65 84
------- -------
Total non-performing loans 30,761 18,003
Other real estate 2,541 2,147
------- -------
Total non-performing assets $33,302 $20,150
======= =======
As a percent of Portfolio Loans
Non-performing loans 1.15% 0.70%
Allowance for loan losses 0.95 0.90
Non-performing assets to total assets 0.96 0.60
Allowance for loan losses as a percent of
non-performing loans 82 128
During the third quarter of 2006 two significant commercial loans became
non-performing. The first relationship totaled $3.5 million and is
collateralized with accounts receivables, inventory, equipment and real estate
and was originated in June 2004. We have determined that this borrower
transferred, diverted or misrepresented the amount of assets collateralizing
this loan in contravention of the loan documents. As a result, based on an
assessment of the existing collateral, $2.1 million of this loan was charged off
in the third quarter of 2006 leaving a remaining balance in non-performing loans
of $1.4 million. A receiver has been appointed and we are in the process of
liquidating collateral and also pursuing legal action against the borrower. At
the present time, no additional loss is expected on this credit. The second
commercial loan totaled $8.7 million, of which $5.0 million has been
participated out to other financial institutions, leaving a balance of $3.7
million. This loan is secured by vacant land in southeastern
21
Michigan that is zoned for mixed use. A specific reserve of $0.6 million has
been established on this loan in the third quarter of 2006 based on an
impairment analysis. This impairment analysis assumed a one year disposal
period, a collateral liquidation price equal to 65% of appraised value and
liquidation and holding costs (including lost interest) equal to approximately
23% of the loan balance. Also during the third quarter of 2006 a commercial real
estate loan with a balance of $3.6 million (that was included in non-performing
commercial loans at June 30, 2006) that was secured by a low/moderate income
apartment complex was paid off at a discount of approximately $0.3 million. A
specific allowance had previously been established for this loss.
Also contributing to the rise in non-performing loans was a $3.7 million
increase in consumer and real estate mortgage non-performing loans during the
first nine months of 2006 that primarily reflects weak economic conditions in
Michigan which have resulted in increased delinquencies, bankruptcies and
foreclosures. Non-performing finance receivables increased by $2.0 million due
primarily to cancellations of a few larger commercial premium finance loans on
which the Company is awaiting receipt of the return premium. No significant loss
is anticipated on any of the finance receivables. Non-performing loans do not
include the $4.8 million which is due from a counter party in Mepco's warranty
payment plan business that is discussed above. Other real estate and repossessed
assets totaled $2.5 million at September 30, 2006 compared to $2.1 million at
December 31, 2005.
We will place a loan that is 90 days or more past due on non-accrual, unless we
believe the loan is both well secured and in the process of collection.
Accordingly, we have determined that the collection of the accrued and unpaid
interest on any loans that are 90 days or more past due and still accruing
interest is probable.
The ratio of loan net charge-offs to average loans was 0.34% on an annualized
basis in the first nine months of 2006 compared to 0.24% for the corresponding
period in 2005. The increase in loan net charge-offs is principally due to a
$2.0 million increase in the level of commercial loan net charge-offs due
primarily to the $2.1 million charge-off in the third quarter of 2006 on the
commercial lending relationship discussed above.
At September 30, 2006, the allowance for loan losses totaled $25.4 million, or
0.95% of Portfolio Loans compared to $23.0 million, or 0.90% of Portfolio Loans
at December 31, 2005.
Impaired loans totaled approximately $13.7 million and $18.4 million at
September 30, 2006 and 2005, respectively. At those same dates, certain impaired
loans with balances of approximately $8.7 million and $16.0 million,
respectively had specific allocations of the allowance for loan losses, which
totaled approximately $2.3 million and $5.0 million, respectively. Our average
investment in impaired loans was approximately $10.6 million and $17.1 million
for the nine-month periods ended September 30, 2006 and 2005, respectively. Cash
receipts on impaired loans on non-accrual status are generally applied to the
principal balance. Interest income recognized on impaired loans was
approximately $0.2 million and $0.3 million in the first nine months of 2006 and
2005, respectively, of which the majority of these amounts were received in
cash.
22
ALLOWANCE FOR LOAN LOSSES
Nine months ended
September 30,
---------------------------------------------
2006 2005
--------------------- ---------------------
Loan Unfunded Loan Unfunded
Losses Commitments Losses Commitments
------- ----------- ------- -----------
(in thousands)
Balance at beginning of period $23,035 $1,820 $24,737 $1,846
Additions (deduction)
Provision charged to operating expense 9,028 (176) 5,854 (132)
Recoveries credited to allowance 1,671 1,181
Loans charged against the allowance (8,370) (5,422)
------- ------- ------- ------
Balance at end of period $25,364 $1,644 $26,350 $1,714
======= ======= ======= ======
Net loans charged against the allowance to
average Portfolio Loans (annualized) 0.34% 0.24%
In determining the allowance and the related provision for loan losses, we
consider four principal elements: (i) specific allocations based upon probable
losses identified during the review of the loan portfolio, (ii) allocations
established for other adversely rated loans, (iii) allocations based principally
on historical loan loss experience, and (iv) additional allowances based on
subjective factors, including local and general economic business factors and
trends, portfolio concentrations and changes in the size, mix and/or the general
terms of the loan portfolios.
The first element reflects our estimate of probable losses based upon our
systematic review of specific loans. These estimates are based upon a number of
objective factors, such as payment history, financial condition of the borrower,
and discounted collateral exposure.
The second element reflects the application of our loan rating system. This
rating system is similar to those employed by state and federal banking
regulators. Loans that are rated below a certain predetermined classification
are assigned a loss allocation factor for each loan classification category that
is based upon a historical analysis of losses incurred. The lower the rating
assigned to a loan or category, the greater the allocation percentage that is
applied.
The third element is determined by assigning allocations based principally upon
the ten-year average of loss experience for each type of loan. Recent years are
weighted more heavily in this average. Average losses may be further adjusted
based on the current delinquency rate. Loss analyses are conducted at least
annually.
The fourth element is based on factors that cannot be associated with a specific
credit or loan category and reflects our attempt to ensure that the overall
allowance for loan losses appropriately reflects a margin for the imprecision
necessarily inherent in the estimates of expected credit losses. We consider a
number of subjective factors when determining the unallocated portion, including
local and general economic business factors and trends, portfolio concentrations
and changes in the size, mix and the general terms of the loan portfolios. (See
"Provision for credit losses.")
Mepco's allowance for loan losses is determined in a similar manner as discussed
above and takes into account delinquency levels, net charge-offs, unsecured
exposure and other subjective factors deemed relevant to their lending
activities.
23
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
September 30, December 31,
2006 2005
------------- ------------
(in thousands)
Specific allocations $ 2,345 $ 1,418
Other adversely rated loans 8,119 8,466
Historical loss allocations 7,408 6,693
Additional allocations based on subjective factors 7,492 6,458
------- -------
$25,364 $23,035
======= =======
DEPOSITS AND BORROWINGS Our competitive position within many of the markets
served by our bank branch networks limits the ability to materially increase
deposits without adversely impacting the weighted-average cost of core deposits.
Accordingly, we compete principally on the basis of convenience and personal
service, while employing pricing tactics that are intended to enhance the value
of core deposits.
To attract new core deposits, we have implemented a high-performance checking
program that utilizes a combination of direct mail solicitations, in-branch
merchandising, gifts for customers opening new checking accounts or referring
business to our banks and branch staff sales training. This program has
generated increases in customer relationships as well as deposit service
charges. We believe that the new relationships that result from these marketing
and sales efforts provide valuable opportunities to cross sell related financial
products and services.
Over the past two to three years we have also expanded our treasury management
products and services for commercial businesses and municipalities or other
governmental units and have also increased our sales calling efforts in order to
attract additional deposit relationships from these sectors. Despite these
efforts our core deposit growth has not kept pace with the growth of our
Portfolio Loans and we have primarily utilized Brokered CD's to fund this
Portfolio Loan growth. We view long-term core deposit growth as a significant
challenge. Core deposits generally provide a more stable and lower cost source
of funds than alternate sources such as short-term borrowings. More recently,
and we believe due primarily to rising short-term interest rates, our customers
have been transferring funds from lower yielding savings and money market
accounts into higher yielding certificates of deposit. The continued funding of
Portfolio Loan growth with alternative sources of funds (as opposed to core
deposits) may erode certain of our profitability measures, such as return on
assets, and may also adversely impact our liquidity. (See "Liquidity and capital
resources.")
On November 6, 2006 we entered into a Branch Purchase Agreement (the
"Agreement") with TCF National Bank ("TCF") for IB and IBSM to acquire 10
branches from TCF with deposits totaling approximately $235 million. The
branches to be acquired are located in Bay City, Saginaw and Battle Creek,
Michigan. The deposit base at these 10 branches is currently comprised of
approximately $34 million in non-interest bearing demand deposit accounts, $38
million in interest bearing demand deposit accounts, $80 million in savings and
money market accounts, and $83 million in certificates of deposit. Under the
terms of the Agreement we expect to pay a premium equal to 11.50% of the
deposits assumed (or approximately $27 million based on the current level of
deposits at the 10 branches) and also pay approximately $4.2 million for the
associated real property and furniture, fixtures and equipment at the branches.
We do not expect this transaction to have a material impact on our earnings per
share in 2007 and we intend to use the proceeds from the deposit liabilities
being assumed to pay down short term borrowings or maturing brokered
certificates of deposit. The closing of this transaction is expected to occur in
March 2007, subject to receipt of regulatory approvals and the satisfaction of
other customary closing conditions.
We have implemented strategies that incorporate federal funds purchased, other
borrowings and Brokered CDs to fund a portion of our increases in interest
earning assets. The use of such alternate sources of funds supplements our core
deposits and is also an integral part of our asset/liability management efforts.
24
ALTERNATIVE SOURCE OF FUNDS
September 30, December 31,
2006 2005
------------------------------ ------------------------------
Average Average
Amount Maturity Rate Amount Maturity Rate
---------- --------- ----- ---------- --------- -----
(dollars in thousands)
Brokered CDs(1) $1,099,213 2.0 years 4.66% $1,009,804 1.8 years 3.79%
Fixed rate FHLB advances(1) 48,325 5.8 years 5.75 51,525 6.2 years 5.65
Variable rate FHLB advances(1) 25,000 0.5 years 4.18
Securities sold under agreements to
Repurchase(1) 66,910 0.1 years 5.25 137,903 0.1 years 4.41
Federal funds purchased 100,786 1 day 5.50 80,299 1 day 4.23
---------- --------- ---- ---------- --------- ----
Total $1,315,234 1.9 years 4.80% $1,304,531 1.7 years 3.96%
========== ========= ==== ========== ========= ====
(1) Certain of these items have had their average maturity and rate altered
through the use of derivative instruments, including pay-fixed and
pay-variable interest rate swaps.
Other borrowed funds, principally advances from the Federal Home Loan Bank (the
"FHLB") and securities sold under agreements to repurchase ("Repurchase
Agreements"), totaled $136.3 million at September 30, 2006, compared to $227.0
million at December 31, 2005. The $90.7 million decrease in other borrowed funds
principally reflects the payoff of maturing variable rate FHLB advances and
Repurchase Agreements with proceeds from Brokered CD's and federal funds
purchased.
Derivative financial instruments are employed to manage our exposure to changes
in interest rates. (See "Asset/liability management.") At September 30, 2006, we
employed interest-rate swaps with an aggregate notional amount of $680.0 million
and interest rate caps with an aggregate notional amount of $290.5 million. (See
note #6 of Notes to Interim Consolidated Financial Statements.)
LIQUIDITY AND CAPITAL RESOURCES Liquidity risk is the risk of being unable to
timely meet obligations as they come due at a reasonable funding cost or without
incurring unacceptable losses. Our liquidity management involves the measurement
and monitoring of a variety of sources and uses of funds. Our Consolidated
Statements of Cash Flows categorize these sources and uses into operating,
investing and financing activities. We primarily focus our liquidity management
on developing access to a variety of borrowing sources to supplement our deposit
gathering activities and provide funds for growing our investment and loan
portfolios as well as to be able to respond to unforeseen liquidity needs.
Our sources of funds include a stable deposit base, secured advances from the
Federal Home Loan Bank of Indianapolis, both secured and unsecured federal funds
purchased borrowing facilities with other commercial banks, an unsecured holding
company credit facility and access to the capital markets (for trust preferred
securities and Brokered CD's).
At September 30, 2006, we had $898.4 million of time deposits that mature in the
next twelve months. Historically, a majority of these maturing time deposits are
renewed by our customers or are Brokered CD's that we expect to replace.
Additionally, $1.200 billion of our deposits at September 30, 2006, were in
account types from which the customer could withdraw the funds on demand.
Changes in the balances of deposits that can be withdrawn upon demand are
usually predictable and the total balances of these accounts have generally
grown over time as a result of our marketing and promotional activities and the
addition of new branch facilities. There can be no assurance that historical
patterns of renewing time deposits or overall growth in deposits will continue
in the future.
We have developed contingency funding plans that stress tests our liquidity
needs that may arise from certain events such as an adverse credit event, rapid
loan growth or a disaster recovery situation. Our liquidity management also
includes periodic monitoring of each bank that segregates assets between liquid
and illiquid and classifies liabilities as core and non-core. This analysis
compares our total level of illiquid assets to our core funding. It is our goal
to have core funding sufficient to finance illiquid assets.
25
Over the past several years our Portfolio Loans have grown more rapidly than our
core deposits. In addition much of this growth has been in loan categories that
cannot generally be used as collateral for FHLB advances (such as commercial
loans and finance receivables). As a result, we have become more dependent on
wholesale funding sources (such as Brokered CD's and Repurchase Agreements). In
order to reduce this greater reliance on wholesale funding we may complete a
securitization of finance receivables in early 2007. It is likely that a
securitization facility would have a higher total cost than our current
wholesale funding sources, which would adversely impact our future net interest
income. However, we believe that the improved liquidity will likely outweigh the
adverse impact on our net interest income.
Effective management of capital resources is critical to our mission to create
value for our shareholders. The cost of capital is an important factor in
creating shareholder value and, accordingly, our capital structure includes
unsecured debt and cumulative trust preferred securities.
We also believe that a diversified portfolio of quality loans will provide
superior risk-adjusted returns. Accordingly, we have implemented balance sheet
management strategies that combine efforts to originate Portfolio Loans with
disciplined funding strategies. Acquisitions have also been an integral
component of our capital management strategies. (See "Acquisitions.")
We have three special purpose entities that have issued $62.4 million of
cumulative trust preferred securities outside of Independent Bank Corporation
that currently qualifies as Tier 1 capital. These entities have also issued
common securities and capital to Independent Bank Corporation. Independent Bank
Corporation, in turn, issued subordinated debentures to these special purpose
entities equal to the trust preferred securities, common securities and capital
issued. The subordinated debentures represent the sole asset of the special
purpose entities. The common securities, capital and subordinated debentures are
included in our Consolidated Statements of Financial Condition at September 30,
2006, and December 31, 2005.
In March 2005, the Federal Reserve Board issued a final rule that retains trust
preferred securities in the Tier 1 capital of bank holding companies. After a
transition period ending March 31, 2009, the aggregate amount of trust preferred
securities and certain other capital elements will be limited to 25 percent of
Tier 1 capital elements, net of goodwill (net of any associated deferred tax
liability). The amount of trust preferred securities and certain other elements
in excess of the limit could be included in the Tier 2 capital, subject to
restrictions. Based upon our existing levels of Tier 1 capital, trust preferred
securities and goodwill, this final Federal Reserve Board rule would have no
effect on our Tier 1 capital to average assets ratio at September 30, 2006.
To supplement our balance sheet and capital management activities, we
periodically repurchase our common stock. The level of share repurchases in a
given year generally reflects changes in our need for capital associated with
our balance sheet growth. We previously announced that our board of directors
had authorized the repurchase of up to 750 thousand shares. This authorization
expires on December 31, 2006. During the first nine months of 2006 we
repurchased 112 thousand shares at a weighted average price of $25.53 per share.
26
CAPITALIZATION
September 30, December 31,
2006 2005
------------- ------------
(in thousands)
Unsecured debt $ 5,500 $ 7,000
-------- --------
Subordinated debentures 64,197 64,197
Amount not qualifying as regulatory capital (1,847) (1,847)
-------- --------
Amount qualifying as regulatory capital 62,350 62,350
-------- --------
Shareholders' Equity
Preferred stock, no par value
Common stock, par value $1.00 per share 22,855 21,991
Capital surplus 200,035 179,913
Retained earnings 33,616 41,486
Accumulated other comprehensive income 3,909 4,869
-------- --------
Total shareholders' equity 260,415 248,259
-------- --------
Total capitalization $328,265 $317,609
======== ========
We are subject to various debt covenant requirements under our loan agreements
with The Northern Trust Company ("Northern") related to the unsecured credit
facilities at our holding (parent) company. One of these debt covenants requires
that our allowance for loan losses be equal to or greater than our level of
non-performing loans. We did not meet this debt covenant requirement at
September 30, 2006, however we obtained a written waiver, until December 31,
2006 from Northern regarding this requirement.
Total shareholders' equity at September 30, 2006 increased $12.2 million from
December 31, 2005, due primarily to the retention of earnings and the issuance
of common stock pursuant to certain compensation plans that was partially offset
by share repurchases and cash dividends that we declared as well as a $1.0
million decrease in accumulated other comprehensive income. Shareholders' equity
totaled $260.4 million, equal to 7.50% of total assets at September 30, 2006. At
December 31, 2005, shareholders' equity totaled $248.3 million, which was equal
to 7.40% of assets.
CAPITAL RATIOS
September 30, December 31,
2006 2005
------------- ------------
Equity capital 7.50% 7.40%
Tier 1 leverage (tangible equity capital) 7.57 7.40
Tier 1 risk-based capital 9.48 9.31
Total risk-based capital 10.49 10.27
ASSET/LIABILITY MANAGEMENT Interest-rate risk is created by differences in the
cash flow characteristics of our 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.
Our asset/liability management efforts identify and evaluate opportunities to
structure the balance sheet in a manner that is consistent with our mission to
maintain profitable financial leverage within established risk parameters. We
evaluate various opportunities and alternate balance-sheet strategies carefully
and consider the likely impact on our risk profile as well as the anticipated
contribution to earnings. The marginal cost of funds is a principal
consideration in the implementation of our balance-sheet management strategies,
but such evaluations further consider interest-rate and liquidity risk as well
as other pertinent factors. We have established parameters for interest-rate
risk. We regularly monitor our interest-rate risk and report quarterly to our
respective banks' boards of directors.
We employ simulation analyses to monitor each bank's interest-rate risk profiles
and evaluate potential changes in each banks' net interest income and market
value of portfolio equity that result from changes in interest rates. The
purpose of these simulations is to identify sources of interest-rate risk
inherent in our balance sheets. The simulations do not anticipate any actions
that we might initiate in response to changes in interest rates and,
accordingly, the simulations do not provide a reliable forecast of anticipated
results. The simulations are predicated on immediate, permanent and parallel
shifts in interest rates and generally assume that current loan and deposit
pricing relationships remain constant. The simulations further incorporate
assumptions relating to changes in customer behavior, including changes in
prepayment rates on certain assets and liabilities.
27
RESULTS OF OPERATIONS
SUMMARY Net income totaled $10.0 million and $32.9 million during the three- and
nine-month periods ended September 30, 2006. The decreases in net income from
the comparative periods in 2005 are primarily a result of decreases in net
interest income and net gains on the sale of real estate mortgage loans and an
increase in the provision for loan losses. Partially offsetting these items were
increases in VISA check card interchange income and other non-interest income
and a decrease in income tax expense. The third quarter of 2006 also included a
$2.2 million reduction in our accruals for incentive compensation (employee
stock ownership plan contribution, cash bonuses and equity based awards) that
was the primary reason for a $2.9 million decline in non-interest expenses. Year
to date 2006 results also include $2.8 million of other income and $1.6 million
of non-interest expense related to the settlement of litigation involving the
former owners of Mepco. (See "Litigation Matters.")
KEY PERFORMANCE RATIOS
Three months ended Nine months ended
September 30, September 30,
------------------ -----------------
2006 2005 2006 2005
------ ------ ------ ------
Net income to
Average assets 1.15% 1.47% 1.29% 1.48%
Average equity 15.20 19.26 17.28 19.48
Earnings per common share
Basic $ 0.43 $ 0.52 $ 1.44 $ 1.52
Diluted 0.43 0.51 1.41 1.49
We believe that our earnings per share growth rate over a long period of time
(five years or longer) is the best single measure of our performance. We strive
to achieve an average annual long term earnings per share growth rate of
approximately 10% to 15%. Accordingly, our focus is on long-term results taking
into consideration that certain components of our revenues are cyclical in
nature (such as mortgage-banking) which can cause fluctuations in our earnings
per share from one period to another. For the period from 2001 through 2005 our
compound average annual earnings per share growth rate was approximately 17%.
Our primary strategies for achieving long-term growth in earnings per share
include: earning asset growth (both organic and through acquisitions),
diversification of revenues (within the financial services industry), effective
capital management (efficient use of our shareholders' equity) and sound risk
management (credit, interest rate, liquidity and regulatory risks). As we have
grown in size, and also considering the relatively low economic growth rates in
Michigan (our primary market for banking), we believe achieving a 10% to 15%
growth rate in earnings per share will be challenging without future
acquisitions. In addition, due primarily to the flat yield curve environment and
competition for loans and deposits, our net interest margin has been declining
recently which has adversely impacted our ability to meet our earnings per share
growth rate goals during the first nine months of 2006.
NET INTEREST INCOME Net interest income is the most important source of our
earnings and thus is critical in evaluating our results of operations. Changes
in our tax equivalent net interest income are primarily influenced by our level
of interest-earning assets and the income or yield that we earn on those assets
and the manner by which we fund (and the related cost of funding) such
interest-earning assets. Certain macro-economic factors can also influence our
net interest income such as the level and direction of interest rates, the
difference between short-term and long-term interest rates (the steepness of the
yield curve) and the general strength of the economies in which we are doing
business. Finally, risk management plays an important role in
28
our level of net interest income. The ineffective management of credit risk and
interest-rate risk in particular can adversely impact our net interest income.
Tax equivalent net interest income decreased by 6.7% to $33.5 million and by
2.9% to $103.9 million, respectively, during the three- and nine-month periods
in 2006 compared to 2005. These decreases reflect a decline in tax equivalent
net interest income as a percent of average interest-earning assets ("Net
Yield") that was partially offset by an increase in average interest-earning
assets.
We review yields on certain asset categories and our net interest margin on a
fully taxable equivalent basis. This presentation is not in accordance with
generally accepted accounting principles ("GAAP") but is customary in the
banking industry. In this non-GAAP presentation, net interest income is adjusted
to reflect tax-exempt interest income on an equivalent before-tax basis. This
measure ensures comparability of net interest income arising from both taxable
and tax-exempt sources. The adjustments to determine tax equivalent net interest
income were $1.6 million for both of the third quarters of 2006 and 2005,
respectively, and were $5.0 million and $4.8 million for the first nine months
of 2006 and 2005, respectively. These adjustments were computed using a 35% tax
rate.
Average interest-earning assets totaled $3.162 billion and $3.137 billion during
the three- and nine-month periods in 2006, respectively. The increases in
average interest-earning assets are due primarily to growth in all categories of
loans.
Our Net Yield decreased by 53 basis points to 4.22% for the third quarter of
2006 and also by 43 basis points to 4.42% for the first nine months of 2006 as
compared to the like periods in 2005. These declines primarily reflect a
flattening yield curve as short-term interest rates have increased significantly
over the past eighteen months while long-term interest rates have increased
modestly. Our yields on interest-earning assets have increased in 2006 compared
to 2005 which primarily reflects the aforementioned rise in short-term interest
rates that has resulted in variable rate loans re-pricing at higher rates.
However, the increases in the yields on average interest-earning assets were
more than offset by rises in our interest expense as a percentage of average
interest-earning assets (the "cost of funds"). The increase in our cost of funds
also primarily reflects the rise in short-term interest rates that has resulted
in higher rates on certain short-term and variable rate borrowings and higher
rates on deposits.
29
AVERAGE BALANCES AND TAX EQUIVALENT RATES
Three Months Ended
September 30,
-----------------------------------------------------------
2006 2005
---------------------------- ----------------------------
Average Average
Balance Interest Rate Balance Interest Rate
---------- -------- ---- ---------- -------- ----
(dollars in thousands)
Assets
Taxable loans (1) $2,689,894 $53,761 7.92% $2,465,256 $46,036 7.43%
Tax-exempt loans (1,2) 7,296 129 7.01 6,019 114 7.51
Taxable securities 202,905 2,713 5.30 257,707 3,304 5.09
Tax-exempt securities (2) 245,972 4,102 6.62 261,829 4,396 6.66
Other investments 15,580 191 4.86 17,322 199 4.56
---------- ------- ---------- -------
Interest Earning Assets 3,161,647 60,896 7.66 3,008,133 54,049 7.14
------- -------
Cash and due from banks 53,384 60,870
Other assets, net 214,081 192,710
---------- ----------
Total Assets $3,429,112 $3,261,713
========== ==========
Liabilities
Savings and NOW $ 863,260 3,664 1.68 $ 866,789 2,209 1.01
Time deposits 1,621,978 18,942 4.63 1,268,303 10,477 3.28
Long-term debt 3,995 47 4.67 5,995 69 4.57
Other borrowings 300,416 4,739 6.26 488,942 5,371 4.36
---------- ------- ---------- -------
Interest Bearing Liabilities 2,789,649 27,392 3.90 2,630,029 18,126 2.73
------- -------
Demand deposits 283,518 294,108
Other liabilities 96,158 89,459
Shareholders' equity 259,787 248,117
---------- ----------
Total liabilities and shareholders' equity $3,429,112 $3,261,713
========== ==========
Tax Equivalent Net Interest Income $33,504 $35,923
======= =======
Tax Equivalent Net Interest Income
as a Percent of Earning Assets 4.22% 4.75%
==== ====
(1) All domestic
(2) Interest on tax-exempt loans and securities is presented on a fully tax
equivalent basis assuming a marginal tax rate of 35%
30
AVERAGE BALANCES AND TAX EQUIVALENT RATES
Nine Months Ended
September 30,
-----------------------------------------------------------
2006 2005
---------------------------- ----------------------------
Average Average
Balance Interest Rate Balance Interest Rate
---------- -------- ---- ---------- -------- ----
(dollars in thousands)
Assets
Taxable loans (1) $2,652,591 $156,140 7.86% $2,383,723 $131,051 7.34%
Tax-exempt loans (1,2) 6,594 349 7.08 6,294 352 7.48
Taxable securities 211,640 8,358 5.28 283,090 10,557 4.99
Tax-exempt securities (2) 249,624 13,133 7.03 253,885 12,738 6.71
Other investments 16,787 613 4.88 17,359 534 4.11
---------- -------- ---------- --------
Interest Earning Assets 3,137,236 178,593 7.61 2,944,351 155,232 7.04
-------- --------
Cash and due from banks 53,664 60,448
Other assets, net 209,686 191,196
---------- ----------
Total Assets $3,400,586 $3,195,995
========== ==========
Liabilities
Savings and NOW $ 864,102 9,729 1.51 $ 875,335 5,750 0.88
Time deposits 1,561,147 50,191 4.30 1,181,408 26,774 3.03
Long-term debt 4,491 156 4.64 6,491 223 4.59
Other borrowings 340,492 14,661 5.76 519,081 15,486 3.99
---------- -------- ---------- --------
Interest Bearing Liabilities 2,770,232 74,737 3.61 2,582,315 48,233 2.50
-------- --------
Demand deposits 278,845 280,498
Other liabilities 97,006 89,735
Shareholders' equity 254,503 243,447
---------- ----------
Total liabilities and shareholders' equity $3,400,586 $3,195,995
========== ==========
Tax Equivalent Net Interest Income $103,856 $106,999
======== ========
Tax Equivalent Net Interest Income
as a Percent of Earning Assets 4.42% 4.85%
==== ====
(1) All domestic
(2) Interest on tax-exempt loans and securities is presented on a fully tax
equivalent basis assuming a marginal tax rate of 35%
PROVISION FOR LOAN LOSSES The provision for loan losses was $4.6 million and
$1.6 million during the three months ended September 30, 2006 and 2005,
respectively. During the nine-month periods ended September 30, 2006 and 2005,
the provision was $8.9 million and $5.7 million, respectively. The provisions
reflect our assessment of the allowance for loan losses taking into
consideration factors such as loan mix, levels of non-performing and classified
loans and net charge-offs. While we use relevant information to recognize losses
on loans, additional provisions for related losses may be necessary based on
changes in economic conditions, customer circumstances and other credit risk
factors. (See "Portfolio loans and asset quality.")
NON-INTEREST INCOME Non-interest income is a significant element in assessing
our results of operations. On a long-term basis we are attempting to grow
non-interest income in order to diversify our revenues within the financial
services industry. We regard net gains on real estate mortgage loan sales as a
core recurring source of revenue but they are quite cyclical and volatile. We
regard net gains (losses) on securities as a "non-operating" component of
non-interest income. As a result, we believe it is best to evaluate our success
in growing non-interest income and diversifying our revenues by also comparing
non-interest income when excluding net gains (losses) on assets (real estate
mortgage loans and securities).
Non-interest income totaled $10.7 million during the three months ended
September 30, 2006, a $0.4 million decrease from the comparable period in 2005.
This decrease was primarily due to declines in net gains on the sale of real
estate mortgage loans and in income from real estate mortgage loan servicing
that were partially offset by increases in VISA check card interchange income
and other non-interest income. Non-interest income increased to $34.1 million
during the nine months ended September 30, 2006, from $32.3 million a year
earlier due primarily to the first quarter of 2006 including $2.8 million of
non-recurring income from the litigation settlement described earlier. The
balance of changes in the components of non-interest income for the comparative
year to date periods are generally commensurate with the quarterly comparative
changes.
31
NON-INTEREST INCOME
Three months ended Nine months ended
September 30, September 30,
------------------ -----------------
2006 2005 2006 2005
------- ------- ------- -------
(in thousands)
Service charges on deposit accounts $ 5,285 $ 5,172 $14,784 $14,484
Mepco litigation settlement 2,800
Net gains (losses) on assets
Real estate mortgage loans 1,115 1,508 3,329 4,203
Securities (23) 171 1,228
Title insurance fees 416 494 1,298 1,459
VISA check card interchange income 870 713 2,532 2,020
Bank owned life insurance 402 393 1,195 1,150
Manufactured home loan origination fees
and commissions 214 294 700 905
Mutual fund and annuity commissions 324 276 970 973
Real estate mortgage loan servicing 561 836 1,835 2,074
Other 1,534 1,408 4,490 3,782
------- ------- ------- -------
Total non-interest income $10,721 $11,071 $34,104 $32,278
======= ======= ======= =======
Service charges on deposit accounts increased by 2.2% to $5.3 million and by
2.1% to $14.8 million during the three- and nine-month periods ended September
30, 2006, respectively, from the comparable periods in 2005. The increases in
such service charges principally relates to growth in checking accounts as a
result of deposit account promotions, including direct mail solicitations.
Partially as a result of a leveling off in our growth rate of new checking
accounts, we would expect the growth rate, if any, of service charges on
deposits to be moderate in future periods.
Our mortgage lending activities have a substantial impact on total non-interest
income. Net gains on the sale of real estate mortgage loans decreased by $0.4
million during the three months ended September 30, 2006 from the same period in
2005 and decreased by $0.9 million on a year to date comparative basis. Based on
current interest rates and economic conditions in Michigan, we would expect the
level of mortgage loan origination and sales activity in 2006 to be below 2005
levels and would therefore also anticipate somewhat lower levels of gains on
loan sales during the balance of 2006 compared to the same period in 2005.
REAL ESTATE MORTGAGE LOAN ACTIVITY
Three months ended Nine months ended
September 30, September 30,
------------------- -------------------
2006 2005 2006 2005
-------- -------- -------- --------
(in thousands)
Real estate mortgage loans originated $146,384 $174,113 $400,818 $508,073
Real estate mortgage loans sold 75,517 101,703 208,987 285,576
Real estate mortgage loans sold with
servicing rights released 13,678 11,945 30,058 33,467
Net gains on the sale of real estate
mortgage loans 1,115 1,508 3,329 4,203
Net gains as a percent of real estate
mortgage loans sold ("Loan Sale Margin") 1.48% 1.48% 1.59% 1.47%
SFAS #133 adjustments included in the Loan
Sale Margin (0.05%) 0.08% 0.01% 0.04%
32
The volume of loans sold is dependent upon our ability to originate real estate
mortgage loans as well as the demand for fixed-rate obligations and other loans
that we 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 our
ability to effectively manage exposure to changes in interest rates. As a result
this category of revenue can be quite cyclical and volatile.
The nine month period ended September 30, 2005 included $1.2 million of
securities gains due primarily to a second quarter gain of approximately $1.4
million from the liquidation of our portfolio of four different bank stocks.
The declines in title insurance fees in 2006 compared to 2005 primarily reflect
the changes in our mortgage loan origination volume.
VISA check card interchange income increased in 2006 compared to 2005. These
results can be primarily attributed to an increase in the size of our card base
due to growth in checking accounts. In addition, the frequency of use of our
VISA check card product by our customer base has increased due to our marketing
efforts.
Manufactured home loan origination fees and commissions declined in 2006
compared to 2005. This industry has faced a challenging environment as several
buyers of this type of loan have exited the market or materially altered the
guidelines under which they will purchase such loans. Further, regulatory
changes have reduced the opportunity to generate revenues on the sale of
insurance related to this type of lending. As a result, the lower level of
revenue recorded in the first three quarters of 2006 from this activity is
likely to be fairly reflective of ensuing quarters, at least in the short-term.
(Also see the discussion below under "Non-interest expense" of a goodwill
impairment charge recorded in the second quarter of 2006 associated with our
mobile home lending subsidiary).
Real estate mortgage loan servicing generated income of $0.6 million and $1.8
million in the third quarter and first nine months of 2006 respectively,
compared to $0.8 million and $2.1 million in the corresponding periods of 2005,
respectively. These variances are primarily due to changes in the impairment
reserve on and the amortization of capitalized mortgage loan servicing rights.
The period end impairment reserve is based on a third-party valuation of our
real estate mortgage loan servicing portfolio and the amortization is primarily
impacted by prepayment activity.
Activity related to capitalized mortgage loan servicing rights is as follows:
CAPITALIZED REAL ESTATE MORTGAGE LOAN SERVICING RIGHTS
Three months ended Nine months ended
September 30, September 30,
------------------ -----------------
2006 2005 2006 2005
------- ------- ------- -------
(in thousands)
Balance at beginning of period $14,128 $12,315 $13,439 $11,360
Originated servicing rights capitalized 742 875 2,136 2,454
Amortization (398) (510) (1,114) (1,468)
(Increase)/decrease in impairment reserve (19) 378 (8) 712
------- ------- ------- -------
Balance at end of period $14,453 $13,058 $14,453 $13,058
------- ------- ------- -------
Impairment reserve at end of period $ 19 $ 54 $ 19 $ 54
======= ======= ======= =======
33
The declines in originated mortgage loan servicing rights capitalized are due to
the lower level of real estate mortgage loan sales in 2006 compared to 2005. The
changes in the impairment reserve reflect the valuation of capitalized mortgage
loan servicing rights at each quarter end. At September 30, 2006, we were
servicing approximately $1.54 billion in real estate mortgage loans for others
on which servicing rights have been capitalized. This servicing portfolio had a
weighted average coupon rate of approximately 5.96%, a weighted average service
fee of 25.8 basis points and an estimated fair market value of $19.5 million.
Other non-interest income has increased in 2006 compared to 2005. Increases in
ATM, merchant deposit and money order fees have accounted for the majority of
this growth. The growth is generally reflective of the overall expansion of the
organization in terms of numbers of customers and accounts.
NON-INTEREST EXPENSE Non-interest expense is an important component of our
results of operations. However, we primarily focus on revenue growth, and while
we strive to efficiently manage our cost structure, our non-interest expenses
will generally increase from year to year because we are expanding our
operations through acquisitions and by opening new branches and loan production
offices.
Non-interest expense decreased by $2.9 million to $24.3 million and increased by
$0.7 million to $80.2 million during the three- and nine-month periods ended
September 30, 2006, respectively, compared to the like periods in 2005. The
first nine months of 2006 includes a $0.6 million goodwill impairment charge as
described below and $1.6 million of claims expense at Mepco (see "Litigation
Matters" below). Also, the third quarter and first nine months of 2006 include
$2.5 million and $4.6 million of declines in incentive based compensation
expense, respectively, when compared to the like periods in 2005 as described in
greater detail below. Growth associated with new branch offices and loan
production offices account for much of the other increases in non-interest
expense for the third quarter and first nine months of 2006 compared to the same
periods in 2005.
NON-INTEREST EXPENSE
Three months ended Nine months ended
September 30, September 30,
------------------ -----------------
2006 2005 2006 2005
------- ------- ------- -------
(in thousands)
Salaries $ 9,529 $ 9,487 $28,408 $26,525
Performance-based compensation and benefits (100) 2,089 2,194 6,207
Other benefits 2,417 2,626 7,940 8,126
------- ------- ------- -------
Compensation and employee benefits 11,846 14,202 38,542 40,858
Occupancy, net 2,295 2,182 7,576 6,523
Furniture, fixtures and equipment 1,718 1,637 5,320 5,150
Data processing 1,447 1,350 4,336 3,740
Advertising 1,061 1,128 3,136 3,206
Credit card and bank service fees 999 868 3,012 2,270
Loan and collection 931 1,034 2,771 3,118
Communications 933 989 2,912 2,973
Amortization of intangible assets 642 693 1,928 2,080
Goodwill impairment 612
Supplies 551 537 1,608 1,761
Legal and professional 577 729 1,569 2,082
Mepco claims expense 1,600
Other 1,299 1,806 5,239 5,738
------- ------- ------- -------
Total non-interest expense $24,299 $27,155 $80,161 $79,499
======= ======= ======= =======
34
The increases in salaries in 2006 compared to 2005 is primarily attributable to
an increased number of employees resulting from the addition of new branch and
loan production offices as well as to merit pay increases at the beginning of
2006.
We accrue for performance based compensation (expected annual cash bonuses,
equity based compensation and the employee stock ownership plan contribution)
based on the provisions of our incentive compensation plan and the performance
targets established by our Board of Directors. Based on our actual operating
results for the first nine months of 2006 as compared to the established
incentive compensation plan targets, we have substantially eliminated all
accruals for incentive based compensation in 2006 which accounts for the
declines in performance based compensation and benefits in 2006 compared to
2005.
Occupancy, furniture, fixtures and equipment and data processing expenses all
generally increased in 2006 compared to 2005 as a result of the growth of the
organization through the opening of new branch and loan production offices.
Credit card and bank service fees have increased due to growth in the number of
vehicle service payment plans at Mepco. Since most customers utilize credit
cards to make monthly payments on these plans, Mepco incurs charges related to
processing these credit card payments.
The first nine months of 2006 includes a goodwill impairment charge of $0.6
million (recorded in the second quarter) at First Home Financial (FHF) which was
acquired in 1998. FHF is a loan origination company based in Grand Rapids,
Michigan that specializes in the financing of manufactured homes located in
mobile home parks or communities. As described above (see "Not-interest income")
revenues and profits have declined at FHF over the last few years and have
continued to decline in 2006. We test goodwill for impairment and based on the
fair value of FHF (as determined by a valuation completed by a third party) the
goodwill associated with FHF was reduced from $1.5 million to $0.9 million.
Since we acquired the stock of FHF, no income tax benefit was recorded related
to the $0.6 million goodwill impairment charge.
The declines in other non-interest expenses in 2006 compared to 2005 is spread
out over a wide variety of expense categories; however the most significant was
in Michigan Single Business Tax as a result of an adjustment in our accruals at
the banks due to our expected tax base for the full year.
The first nine months of 2006 also includes $0.4 million (recorded in the second
quarter of 2006) in other non-interest expenses related to the potential refund
by Mepco of finance charges that were determined by us to be in excess of
permissible rates or otherwise not in compliance with the premium finance laws
of certain states. We continue to review other aspects of Mepco's operations to
verify compliance with the variety of premium finance and related laws in the
states
35
in which Mepco operates. At this time, we cannot reasonably estimate the costs
or expenses, if any, including any fines or penalties that could result from any
non-compliance.
INCOME TAX EXPENSE Our effective income tax rate was slightly higher during the
third quarter of 2006 compared to the third quarter of 2005 due primarily to a
decline in tax exempt income. However, our effective income tax was lower during
the first nine months of 2006 compared to the like period in 2005 primarily
because the $2.8 million in income recorded for the litigation settlement in the
first quarter of 2006 (see "Litigation Matters" below) is not taxable. The
primary reason for the difference between our statutory and effective income tax
rates results from tax exempt interest income.
CRITICAL ACCOUNTING POLICIES
Our accounting and reporting policies are in accordance with accounting
principles generally accepted within the United States of America and conform to
general practices within the banking industry. Accounting and reporting policies
for other than temporary impairment of investment securities, the allowance for
loan losses, originated real estate mortgage loan servicing rights, derivative
financial instruments, income taxes and goodwill are deemed critical since they
involve the use of estimates and require significant management judgments.
Application of assumptions different than those that we have used could result
in material changes in our financial position or results of operations.
We are required to assess our investment securities for "other than temporary
impairment" on a periodic basis. The determination of other than temporary
impairment for an investment security requires judgment as to the cause of the
impairment, the likelihood of recovery and the projected timing of the recovery.
Our assessment process during the third quarter and for the first nine months of
2006 resulted in no impairment charges for other than temporary impairment on
various investment securities within our portfolio (we had $0.03 million and
$0.4 million of such impairment charges during the third quarter and first nine
months of 2005, respectively). We believe that our assumptions and judgments in
assessing other than temporary impairment for our investment securities are
reasonable and conform to general industry practices.
Our methodology for determining the allowance and related provision for loan
losses is described above in "Financial Condition - Portfolio Loans and asset
quality." In particular, this area of accounting requires a significant amount
of judgment because a multitude of factors can influence the ultimate collection
of a loan or other type of credit. It is extremely difficult to precisely
measure the amount of losses that are probable in our loan portfolio. We use a
rigorous process to attempt to accurately quantify the necessary allowance and
related provision for loan losses, but there can be no assurance that our
modeling process will successfully identify all of the losses that are probable
in our loan portfolio. As a result, we could record future provisions for loan
losses that may be significantly different than the levels that we have recorded
in the most recent quarter.
At September 30, 2006 we had approximately $14.5 million of real estate mortgage
loan servicing rights capitalized on our balance sheet. There are several
critical assumptions involved in establishing the value of this asset including
estimated future prepayment speeds on the underlying real estate mortgage loans,
the interest rate used to discount the net cash flows from the real estate
mortgage loan servicing, the estimated amount of ancillary income that will be
received in the future (such as late fees) and the estimated cost to service the
real estate mortgage loans. We utilize an outside third party (with expertise in
the valuation of real estate mortgage loan servicing rights) to assist us in our
valuation process. We believe the assumptions that we utilize in our valuation
are reasonable based upon accepted industry practices for valuing mortgage
servicing rights and represent neither the most conservative or aggressive
assumptions.
36
We use a variety of derivative instruments to manage our interest rate risk.
These derivative instruments include interest rate swaps, collars, floors and
caps and mandatory forward commitments to sell real estate mortgage loans. Under
SFAS #133 the accounting for increases or decreases in the value of derivatives
depends upon the use of the derivatives and whether the derivatives qualify for
hedge accounting. At September 30, 2006 we had approximately $870.4 million in
notional amount of derivative financial instruments that qualified for hedge
accounting under SFAS #133. As a result, generally, changes in the fair market
value of those derivative financial instruments qualifying as cash flow hedges
are recorded in other comprehensive income. The changes in the fair value of
those derivative financial instruments qualifying as fair value hedges are
recorded in earnings and, generally, are offset by the change in the fair value
of the hedged item which is also recorded in earnings. The fair value of
derivative financial instruments qualifying for hedge accounting was a negative
$2.1 million at September 30, 2006.
Our accounting for income taxes involves the valuation of deferred tax assets
and liabilities primarily associated with differences in the timing of the
recognition of revenues and expenses for financial reporting and tax purposes.
At December 31, 2005 we had recorded a net deferred tax asset of $7.2 million,
which included a net operating loss carryforward of $5.7 million. We have
recorded no valuation allowance on our net deferred tax asset because we believe
that the tax benefits associated with this asset will more likely than not, be
realized. However, changes in tax laws, changes in tax rates and our future
level of earnings can adversely impact the ultimate realization of our net
deferred tax asset.
At September 30, 2006 we had recorded $55.8 million of goodwill. Under SFAS
#142, amortization of goodwill ceased, and instead this asset must be
periodically tested for impairment. Our goodwill primarily arose from the 2004
acquisitions of two banks, the 2003 acquisition of Mepco and the past
acquisitions of other banks and a mobile home loan origination company. We test
our goodwill for impairment utilizing the methodology and guidelines established
in SFAS #142. This methodology involves assumptions regarding the valuation of
the business segments that contain the acquired entities. We believe that the
assumptions we utilize are reasonable. However, we may incur impairment charges
related to our goodwill in the future due to changes in business prospects or
other matters that could affect our valuation assumptions. As described above
under "Non-interest expense" we recorded a goodwill impairment charge of $0.6
million in the second quarter of 2006.
LITIGATION MATTERS
On March 16, 2006, we entered into a settlement agreement with the former
shareholders of Mepco, (the "Former Shareholders") and Edward, Paul, and Howard
Walder (collectively referred to as the "Walders") for purposes of resolving and
dismissing all pending litigation between the parties. Under the terms of the
settlement, on April 3, 2006, the Former Shareholders paid us a sum of $2.8
million, half of which was paid in the form of cash and half of which was paid
in shares of our common stock. In return, we released 90,766 shares of
Independent Bank Corporation common stock held pursuant to an escrow agreement
among the parties that was previously entered into for the purpose of funding
certain contingent liabilities that were, in part, the subject of the pending
litigation. As a result of settlement of the litigation, we recorded other
income of $2.8 million and an additional claims expense of approximately $1.7
million (related to the release of the shares held in escrow) in the first
quarter of 2006.
The settlement covers both the claim filed by the Walders against Independent
Bank Corporation and Mepco in the Circuit Court of Cook County, Illinois, as
well as the litigation filed by
37
Independent Bank Corporation and Mepco against the Walders in the Ionia County
Circuit Court of Michigan.
As permitted under the terms of the merger agreement under which we acquired
Mepco, on April 3, 2006, we paid the accelerated earn-out payments for the last
three years of the performance period ending April 30, 2008. Those payments
totaled approximately $8.9 million, which was included in accrued expenses and
other liabilities. Also, under the terms of the merger agreement, the second
year of the earn out for the year ended April 30, 2005, in the amount of $2.7
million was paid on March 21, 2006. As a result of the settlement and these
payments, no future payments are due under the terms of the merger agreement
under which we acquired Mepco.
We are also involved in various other litigation matters in the ordinary course
of business and at the present time, we do not believe that any of these matters
will have a significant impact on our financial condition or results of
operations.
Item 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
No material changes in the market risk faced by the Registrant have occurred
since December 31, 2005.
Item 4.
CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures.
With the participation of management, our chief executive officer and chief
financial officer, after evaluating the effectiveness of our disclosure
controls and procedures (as defined in Exchange Act Rules 13a - 15(e) and
15d - 15(e)) for the period ended September 30, 2006, have concluded that,
as of such date, our disclosure controls and procedures were effective.
(b) Changes in Internal Controls.
During the quarter ended September 30, 2006, there were no changes in our
internal control over financial reporting that materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
38
Part II
Item 2. Changes in securities, use of proceeds and issuer purchases of equity
securities
The following table shows certain information relating to purchases of
common stock for the three-months ended September 30, 2006 pursuant to our
share repurchase plan:
Remaining
Total Number of Number of
Shares Purchased Shares
as Part of a Authorized for
Total Number of Average Price Publicly Purchase Under
Period Shares Purchased(1) Paid Per Share Announced Plan(2) the Plan
- -------------- ------------------- -------------- ----------------- --------------
July 2006 391 25.60
August 2006 110,000 25.55
September 2006 1,359 24.28
------- ----- -------
Total 111,750 25.53 293,997
======= ===== =======
(1) Includes shares purchased to fund our Deferred Compensation and Stock
Purchase Plan for Non-employee Directors.
(2) Our current stock repurchase plan authorizes the purchase up to 750,000
shares of our common stock. The repurchase plan expires on December 31,
2006.
Item 6. Exhibits
(a) The following exhibits (listed by number corresponding to the Exhibit Table
as Item 601 in Regulation S-K) are filed with this report:
11. Computation of Earnings Per Share.
31.1 Certificate of the Chief Executive Officer of Independent Bank
Corporation pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
(18 U.S.C. 1350).
31.2 Certificate of the Chief Financial Officer of Independent Bank
Corporation pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
(18 U.S.C. 1350).
32.1 Certificate of the Chief Executive Officer of Independent Bank
Corporation pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(18 U.S.C. 1350).
32.2 Certificate of the Chief Financial Officer of Independent Bank
Corporation pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(18 U.S.C. 1350).
39
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date November 7, 2006 By /s/ Robert N. Shuster
-------------------------------------
Robert N. Shuster, Principal
Financial Officer
Date November 7, 2006 By /s/ James J. Twarozynski
-------------------------------------
James J. Twarozynski, Principal
Accounting Officer
40
Exhibit Index
Exhibit No. Description
- ----------- ------------------------------------------------------------------
11. Computation of Earnings Per Share.
31.1 Certificate of the Chief Executive Officer of Independent Bank
Corporation pursuant to Section 302 of the Sarbanes-Oxley Act of
2002 (18 U.S.C. 1350).
31.2 Certificate of the Chief Financial Officer of Independent Bank
Corporation pursuant to Section 302 of the Sarbanes-Oxley Act of
2002 (18 U.S.C. 1350).
32.1 Certificate of the Chief Executive Officer of Independent Bank
Corporation pursuant to Section 906 of the Sarbanes-Oxley Act of
2002 (18 U.S.C. 1350).
32.2 Certificate of the Chief Financial Officer of Independent Bank
Corporation pursuant to Section 906 of the Sarbanes-Oxley Act of
2002 (18 U.S.C. 1350).