1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2001 ------------- Commission file number 0-7818 -------------- INDEPENDENT BANK CORPORATION - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Michigan 38-2032782 - -------------------------------------------------------------------------------- (State or jurisdiction of (I.R.S. Employer Identification Incorporation or Organization) Number) 230 West Main Street, P.O. Box 491, Ionia, Michigan 48846 ------------------ ---------------------------------------------------------- (Address of principal executive offices) (616) 527-9450 -------------- (Registrant's telephone number, including area code) NONE - -------------------------------------------------------------------------------- Former name, address and fiscal year, if changed since last report. Indicate by check mark whether the registrant (1) has filed all documents and reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO ----- ----- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. <TABLE> <S> <C> Common stock, par value $1 11,509,350 - -------------------------------- --------------------------------------------- Class Outstanding at August 10, 2001 </TABLE>
2 INDEPENDENT BANK CORPORATION AND SUBSIDIARIES INDEX <TABLE> <CAPTION> Page Number(s) --------- <S> <C> <C> PART I - Financial Information Item 1. Consolidated Statements of Financial Condition June 30, 2001 and December 31, 2000 2 Consolidated Statements of Operations Three- and six-month periods ended June 30, 2001 and 2000 3 Consolidated Statements of Cash Flows Six-month periods ended June 30, 2001 and 2000 4 Consolidated Statements of Shareholders' Equity Six-month periods ended June 30, 2001 and 2000 5 Notes to Interim Consolidated Financial Statements Three- and six-month periods ended June 30, 2001 and 2000 6-12 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 13-21 Item 3. Quantitative and Qualitative Disclosures about Market Risk 21 PART II - Other Information Item 4. Submission of Matters to a Vote of Security-Holders 22 Item 6. Exhibits & Reports on Form 8-K 22 </TABLE>
3 Part I Item 1. INDEPENDENT BANK CORPORATION AND SUBSIDIARIES Consolidated Statements of Financial Condition <TABLE> <CAPTION> June 30, December 31, 2001 2000 ---------- ----------- (unaudited) ---------- ----------- (in thousands) <S> <C> <C> Assets Cash and due from banks $ 42,116 $ 58,149 Securities available for sale 239,889 217,447 Securities held to maturity (fair value of $20.1 million at December 31, 2000) 20,098 Federal Home Loan Bank stock, at cost 19,627 19,612 Loans held for sale 39,270 20,817 Loans Commercial 424,363 381,066 Real estate mortgage 758,111 772,223 Installment 239,467 226,375 ---------- ---------- Total Loans 1,421,941 1,379,664 Allowance for loan losses (15,149) (13,982) ---------- ---------- Net Loans 1,406,792 1,365,682 Property and equipment, net 34,187 34,757 Accrued income and other assets 47,840 47,229 ---------- ---------- Total Assets $1,829,721 $1,783,791 ========== ========== Liabilities and Shareholders' Equity Deposits Non-interest bearing $ 143,694 $ 140,945 Savings and NOW 574,512 576,621 Time 583,626 672,334 ---------- ---------- Total Deposits 1,301,832 1,389,900 Federal funds purchased 13,850 27,550 Other borrowings 337,765 196,032 Guaranteed preferred beneficial interests in Company's subordinated debentures 17,250 17,250 Accrued expenses and other liabilities 27,602 24,723 ---------- ---------- Total Liabilities 1,698,299 1,655,455 ---------- ---------- Shareholders' Equity Preferred stock, no par value -- 200,000 shares authorized; none outstanding Common stock, $1.00 par value -- 30,000,000 shares authorized; issued and outstanding: 11,497,110 shares at June 30, 2001 and 11,609,524 shares at December 31, 2000 11,497 11,610 Capital surplus 74,209 77,255 Retained earnings 45,372 37,544 Accumulated other comprehensive income 344 1,927 ---------- ---------- Total Shareholders' Equity 131,422 128,336 ---------- ---------- Total Liabilities and Shareholders' Equity $1,829,721 $1,783,791 ========== ========== </TABLE> See notes to interim consolidated financial statements 2
4 INDEPENDENT BANK CORPORATION AND SUBSIDIARIES Consolidated Statements of Operations <TABLE> <CAPTION> Three Months Ended Six Months Ended June 30, June 30, 2001 2000 2001 2000 -------- -------- -------- -------- (unaudited) (unaudited) --------------------- --------------------- (in thousands, except per share amounts) <S> <C> <C> <C> <C> Interest Income Interest and fees on loans $ 31,502 $ 29,624 $ 62,690 $ 58,110 Securities available for sale Taxable 2,086 1,823 4,358 3,493 Tax-exempt 1,438 1,446 2,841 2,946 Securities held to maturity Taxable 710 1,505 Tax-exempt 144 307 Other investments 379 389 768 780 -------- -------- -------- -------- Total Interest Income 35,405 34,136 70,657 67,141 -------- -------- -------- -------- Interest Expense Deposits 11,428 12,482 24,359 24,223 Other borrowings 4,788 4,098 8,973 8,204 -------- -------- -------- -------- Total Interest Expense 16,216 16,580 33,332 32,427 -------- -------- -------- -------- Net Interest Income 19,189 17,556 37,325 34,714 Provision for loan losses 1,261 1,392 1,894 1,949 -------- -------- -------- -------- Net Interest Income After Provision for Loan Losses 17,928 16,164 35,431 32,765 -------- -------- -------- -------- Non-interest Income Service charges on deposit accounts 2,265 1,710 4,083 3,211 Net gains (losses) on asset sales Real estate mortgage loans 2,052 534 3,047 914 Securities 123 158 (16) Other income 2,898 2,580 5,056 4,859 -------- -------- -------- -------- Total Non-interest Income 7,338 4,824 12,344 8,968 -------- -------- -------- -------- Non-interest Expense Salaries and employee benefits 9,791 8,297 18,413 16,689 Occupancy, net 1,183 1,119 2,473 2,297 Furniture and fixtures 1,109 1,092 2,167 2,233 Other expenses 4,964 4,253 9,117 8,253 -------- -------- -------- -------- Total Non-interest Expense 17,047 14,761 32,170 29,472 -------- -------- -------- -------- Income Before Federal Income Tax 8,219 6,227 15,605 12,261 Federal income tax expense 1,970 1,591 4,063 3,139 -------- -------- -------- -------- Net Income Before Cumulative Effect of Change in Accounting Principle 6,249 4,636 11,542 9,122 Cumulative effect of change in accounting principle, net of tax (35) -------- -------- -------- -------- Net Income $ 6,249 $ 4,636 $ 11,507 $ 9,122 ======== ======== ======== ======== Net Income Per Share Before Cumulative effect of Change in Accounting Principle Basic $ .54 $ .39 $ 1.00 $ .78 Diluted .54 .39 .99 .77 Net Income Per Share Basic $ .54 $ .39 $ 1.00 $ .78 Diluted .54 .39 .99 .77 Dividends Per Common Share Declared $ .16 $ .14 $ .32 $ .29 Paid .16 .14 .31 .28 </TABLE> See notes to interim consolidated financial statements. 3
5 INDEPENDENT BANK CORPORATION AND SUBSIDIARIES Consolidated Statements of Cash Flows <TABLE> <CAPTION> Six months ended June 30, 2001 2000 ---------- ---------- (unaudited) ------------------------- (in thousands) <S> <C> <C> Net Income $ 11,507 $ 9,122 ---------- ---------- Adjustments to Reconcile Net Income to Net Cash from Operating Activities Proceeds from sales of loans held for sale 197,634 69,804 Disbursements for loans held for sale (213,040) (74,128) Provision for loan losses 1,894 1,949 Depreciation and amortization of premiums and accretion of discounts on securities and loans 3,219 2,846 Net gains on sales of real estate mortgage loans (3,047) (914) Net (gains) losses on sales of securities (158) 16 (Increase) decrease in deferred loan fees 70 232 (Increase) decrease in accrued income and other assets (1,464) 1,882 Increase (decrease) in accrued expenses and other liabilities (677) 3,647 ---------- ---------- Total Adjustments (15,569) 5,334 ---------- ---------- Net Cash from Operating Activities (4,062) 14,456 ---------- ---------- Cash Flow from Investing Activities Proceeds from the sale of securities available for sale 5,084 5,830 Proceeds from the maturity of securities available for sale 10,946 1,430 Proceeds from the maturity of securities held to maturity 3,079 Principal payments received on securities available for sale 11,582 5,452 Principal payments received on securities held to maturity 13,252 Purchases of securities available for sale (27,396) (31,292) Portfolio loans purchased (36,480) Principal payments on portfolio loans purchased 1,314 1,255 Portfolio loans made to customers, net of principal payments received (7,908) (54,438) Capital expenditures (1,652) (315) ---------- ---------- Net Cash from Investing Activities (44,510) (55,747) ---------- ---------- Cash Flow from Financing Activities Net increase (decrease) in total deposits (88,068) 59,410 Net decrease in short-term borrowings (18,570) (15,022) Proceeds from Federal Home Loan Bank advances 465,500 203,866 Payments of Federal Home Loan Bank advances (317,897) (210,331) Retirement of long-term debt (1,000) (1,000) Dividends paid (3,579) (3,255) Proceeds from issuance of common stock 1,110 413 Repurchase of common stock (4,957) (806) ---------- ---------- Net Cash from Financing Activities 32,539 33,275 ---------- ---------- Net Decrease in Cash and Cash Equivalents (16,033) (8,016) Cash and Cash Equivalents at Beginning of Period 58,149 58,646 ---------- ---------- Cash and Cash Equivalents at End of Period $ 42,116 $ 50,630 ========== ========== Cash paid during the period for Interest $ 36,513 $ 30,409 Income taxes 4,296 1,300 Transfer of loans to other real estate 1,336 1,816 Transfer of securities held to maturity to available for sale 20,098 </TABLE> See notes to interim consolidated financial statements 4
6 INDEPENDENT BANK CORPORATION AND SUBSIDIARIES Consolidated Statements of Shareholders' Equity <TABLE> <CAPTION> Six months ended June 30, 2001 2000 -------- -------- (unaudited) -------- -------- (in thousands) <S> <C> <C> Balance at beginning of period $128,336 $113,746 Net income 11,507 9,122 Cash dividends declared (3,679) (3,369) Issuance of common stock 1,798 457 Repurchase of common stock (4,957) (806) Net change in accumulated other comprehensive income (loss), net of related tax effect (note 4) (1,583) 645 -------- -------- Balance at end of period $131,422 $119,795 ======== ======== </TABLE> See notes to interim consolidated financial statements. 5
7 NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 1. In the opinion of management of the Registrant, the accompanying unaudited consolidated financial statements contain all the adjustments (consisting only of normal recurring accruals) necessary to present fairly the consolidated financial condition of the Registrant as of June 30, 2001 and December 31, 2000, and the results of operations for the six-month periods ended June 30, 2001 and 2000. 2. Management's assessment of the allowance for loan losses is based on an evaluation of the loan portfolio, recent loss experience, current economic conditions and other pertinent factors. Loans on non-accrual status, past due more than 90 days, or restructured amounted to $7.4 million at June 30, 2001, and $7.0 million at December 31, 2000. (See Management's Discussion and Analysis of Financial Condition and Results of Operations). 3. The provision for income taxes represents federal income tax expense calculated using annualized rates on taxable income generated during the respective periods. The provision for income taxes for the three-month period ended June 30, 2001 also includes a benefit in the amount of $402,000 resulting from an adjustment of net deferred tax assets associated with an increase in the Registrant's statutory tax rate from 34% to 35%. 4. Comprehensive income for the three-month and the six-month periods ended June 30 follows: <TABLE> <CAPTION> Three months ended Six months ended June 30, June 30, 2001 2000 2001 2000 -------- -------- -------- -------- (in thousands) <S> <C> <C> <C> <C> Net income $ 6,249 $ 4,636 $ 11,507 $ 9,122 Net change in unrealized gain on securities available for sale, net of related tax effect (524) 214 1,692 645 Cumulative effect of change in accounting principle, net of related tax effect (731) Net change in unrealized loss on derivative instruments, net of related tax effect (513) (2,544) -------- -------- -------- -------- Comprehensive income $ 5,212 $ 4,850 $ 9,924 $ 9,767 ======== ======== ======== ======== </TABLE> 5. The Registrant's reportable segments are based upon legal entities. The Registrant has five reportable segments: Independent Bank ("IB"), Independent Bank West Michigan ("IBWM"), Independent Bank South Michigan ("IBSM"), Independent Bank East Michigan ("IBEM") and Independent Bank MSB ("IBMSB"), collectively the "Banks". The Registrant evaluates performance based principally on net income of the respective reportable segments. The Registrant anticipates that IB and IBMSB will be consolidated during the third quarter of this year. The consolidation is not expected to have a material impact on the Registrant's financial condition or results of operations. 6
8 NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (continued) (unaudited) A summary of selected financial information for the Registrant's reportable segments for the three-month and six-month periods ended June 30, follows: <TABLE> <CAPTION> Three months ended June 30, IB IBWM IBSM IBEM IBMSB OTHER(1) TOTAL ---------- ---------- ---------- ---------- ---------- ---------- ---------- (in thousands) <S> <C> <C> <C> <C> <C> <C> <C> 2001 Total assets $ 468,495 $ 359,526 $ 227,979 $ 324,443 $ 462,999 $ (13,721) $1,829,721 Interest income 9,229 7,855 4,457 5,809 8,046 9 35,405 Net interest income 5,560 5,024 2,540 3,450 3,138 (523) 19,189 Provision for loan losses 530 150 90 250 241 1,261 Income (loss) before income tax 2,609 2,747 1,272 1,328 1,162 (899) 8,219 Net income (loss) 1,842 1,871 943 1,038 879 (324) 6,249 2000 Total assets $ 426,345 $ 348,981 $ 211,964 $ 308,237 $ 470,154 $ 6,548 $1,772,229 Interest income 8,483 7,426 4,215 5,726 8,278 8 34,136 Net interest income 4,940 4,453 2,371 3,366 3,236 (810) 17,556 Provision for loan losses 845 135 200 120 92 1,392 Income (loss) before income tax 1,850 2,040 929 1,194 1,321 (1,107) 6,227 Net income (loss) 1,353 1,403 708 940 1,010 (778) 4,636 </TABLE> <TABLE> <CAPTION> Six months ended June 30, IB IBWM IBSM IBEM IBMSB OTHER(1) TOTAL ---------- ---------- ---------- ---------- ---------- ---------- ---------- (in thousands) <S> <C> <C> <C> <C> <C> <C> <C> 2001 Total assets $ 468,495 $ 359,526 $ 227,979 $ 324,443 $ 462,999 $ (13,721) $ 1,829,721 Interest income 18,282 15,586 8,882 11,745 16,147 15 70,657 Net interest income 10,783 9,588 5,023 6,851 6,182 (1,102) 37,325 Provision for loan losses 680 300 180 400 334 1,894 Income (loss) before income tax 5,068 5,155 2,389 2,678 2,225 (1,910) 15,605 Net income (loss) before change in accounting principle 3,569 3,507 1,771 2,082 1,677 (1,064) 11,542 Net income (loss) 3,562 3,435 1,771 2,125 1,678 (1,064) 11,507 2000 Total assets $ 426,345 $ 348,981 $ 211,964 $ 308,237 $ 470,154 $ 6,548 $ 1,772,229 Interest income 16,574 14,463 8,149 11,327 16,618 10 67,141 Net interest income 9,665 8,612 4,595 6,642 6,631 (1,431) 34,714 Provision for loan losses 995 270 260 240 184 1,949 Income (loss) before income tax 3,828 3,703 1,813 2,363 2,797 (2,243) 12,261 Net income (loss) 2,768 2,560 1,391 1,860 2,116 (1,573) 9,122 </TABLE> (1) Includes items relating to the Registrant and certain insignificant operations. 7
9 NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (continued) (unaudited) 6. A reconciliation of basic and diluted earnings per share for the three-month and the six-month periods ended June 30 follows: <TABLE> <CAPTION> Three months ended Six months ended June 30, June 30, 2001 2000 2001 2000 -------- -------- -------- -------- (in thousands, except per share amounts) <S> <C> <C> <C> <C> Net income before cumulative effect of change in accounting principle $ 6,249 $ 4,636 $ 11,542 $ 9,122 ======== ======== ======== ======== Net income $ 6,249 $ 4,636 $ 11,507 $ 9,122 ======== ======== ======== ======== Shares outstanding (Basic) (1) 11,482 11,764 11,515 11,758 Effect of dilutive securities - stock options 158 67 148 75 -------- -------- -------- -------- Shares outstanding (Diluted) 11,640 11,831 11,663 11,833 ======== ======== ======== ======== Net income per share before cumulative effect of change in accounting principle Basic $ .54 $ .39 $ 1.00 $ .78 Diluted .54 .39 .99 .77 Net income per share Basic $ .54 $ .39 $ 1.00 $ .78 Diluted .54 .39 .99 .77 </TABLE> (1) Shares outstanding have been adjusted for a 5% stock dividend in 2000. 7. The Registrant adopted Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities," ("SFAS #133") on January 1, 2001. SFAS #133, which was subsequently amended by SFAS #137 and SFAS #138, requires companies to record derivatives on the balance sheet as assets and liabilities measured at fair value. The accounting for increases and decreases in the value of derivatives depends upon the use of derivatives and whether the derivatives will qualify for hedge accounting. The Registrant's derivative financial instruments according to the type of hedge in which they are designated under SFAS #133 follows: <TABLE> <CAPTION> June 30, 2001 Average Notional Maturity Fair Amount (years) Value ------------------------------- (dollars in thousands) <S> <C> <C> <C> Fair Value Hedge - pay variable interest-rate swap agreements $ 51,000 6.6 $ (1,189) =============================== Cash Flow Hedge Pay fixed interest-rate swap agreements $176,000 2.3 $ (4,646) Interest-rate collar agreements 10,000 2.4 (316) ------------------------------- Total $186,000 2.3 $ (4,962) =============================== No hedge designation Pay variable interest-rate swap agreements $ 30,000 0.1 $ 43 Pay fixed interest-rate swap agreements 39,000 0.4 (370) Interest-rate cap agreements 47,000 1.0 0 Interest-rate floor agreements 13,000 1.3 0 Rate-lock real estate mortgage loan commitments 28,000 0.1 (390) Mandatory commitments to sell real estate mortgage loans 63,000 0.1 313 ------------------------------- Total $220,000 0.4 $ (404) =============================== </TABLE> 8
10 NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (continued) (unaudited) Risk Management Objectives and Strategies The Banks have established interest-rate risk parameters for maximum fluctuations in net interest income and market value of portfolio equity. Management monitors the Banks' interest rate risk position via simulation modeling reports (See "Asset/liability management"). The goal of the Banks' asset/liability management efforts is to maintain profitable financial leverage within established risk parameters. Cash Flow Hedges The Banks use variable rate and short-term fixed-rate (less than 12 months) debt obligations to fund a portion of their balance sheets, which expose the Banks to variability in interest rates. To meet their objectives, the Banks may periodically enter into derivative financial instruments to mitigate exposure to fluctuations in cash flows resulting from changes in interest rates ("Cash Flow Hedges"). Cash Flow Hedges currently include certain pay-fixed interest-rate swaps and interest-rate collars. Pay-fixed interest-rate swaps convert the variable-rate cash flows on debt obligations to fixed-rates. Under interest-rate collars, the Banks will receive cash if interest rates rise above a predetermined level while the Banks will make cash payments if interest rates fall below a predetermined level. The Banks effectively have variable rate debt with an established maximum and minimum rate. Upon adoption of SFAS #133, the Banks recorded the fair value of Cash Flow Hedges in accrued expenses and other liabilities. On an ongoing basis, the Banks will adjust their balance sheets to reflect the then current fair value of Cash Flow Hedges. The related gains or losses are reported in other comprehensive income and are subsequently reclassified into earnings, as a yield adjustment in the same period in which the related interest on the debt obligations affect earnings. It is anticipated that approximately $2.7 million, net of tax, of unrealized losses on Cash Flow Hedges at June 30, 2001 will become realized 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 is 6.3 years. Fair Value Hedges The Banks use long-term, fixed-rate brokered CDs to fund a portion of their balance sheets. These instruments expose the Banks to variability in fair value due to changes in interest rates. To meet their asset/liability management objectives, the Banks may enter into pay-variable interest-rate swaps to mitigate fluctuations in fair values of such fixed-rate debt instruments ("Fair Value Hedges"). Upon adoption of SFAS #133, the Banks recorded Fair Value Hedges at fair value in accrued expenses and other liabilities. The hedged instruments were also recorded at fair value through the statement of operations, which offsets the adjustment to Fair Value Hedges. On an ongoing basis, the Banks will adjust their respective balance sheets to reflect the then current fair value. To the extent that the change in value of the Fair Value Hedges does not offset the change in the value of the hedged instruments, the ineffective portion is immediately recognized as interest expense. 9
11 NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (continued) (unaudited) No Hedge Designation Certain financial derivative instruments, discussed in the following paragraphs, were not designated as hedges. The fair value of these derivative instruments have been recorded on the Banks' balance sheets and will be adjusted on an ongoing basis to reflect their then current fair value. The changes in the fair value of interest rate swap agreements and option contracts, not designated as hedges, are recognized currently as interest expense. Interest rate caps are used to help manage fluctuations in cash flows resulting from interest rate risk on certain short-term debt obligations. Under these agreements, the Banks will receive cash if interest rates rise above a predetermined level. Pay-fixed interest-rate swaps are also used to manage fluctuations in cash flows resulting from changes in interest rates on certain short-term debt obligations. Certain pay-variable swaps are also used to synthetically create sub-LIBOR debt. These swaps convert fixed rate brokered CDs with an original term of 1 year to 3 month LIBOR by entering into receive fixed, pay-variable interest-rate swaps. In the ordinary course of business, the Banks enter into rate-lock real estate mortgage loan commitments with customers ("Rate Lock Commitments"). These commitments expose the Banks to interest rate risk. The Banks also enter into mandatory commitments to sell real estate mortgage loans ("Mandatory Commitments") to hedge price fluctuations of mortgage loans held for sale and Rate Lock Commitments. Mandatory Commitments help protect the Banks' loan sale profit margin from fluctuations in interest rates. The changes in the fair value of Rate Lock Commitments and Mandatory Commitments are recognized currently in gains on the sale of real estate mortgage loans. Interest expense and net gains on the sale of real estate mortgage loans, as well as net income may be more volatile as a result of derivative instruments, which are not designated as hedges. 10
12 NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (continued) (unaudited) The impact of SFAS #133 on net income and other comprehensive income for the three- and six-months ended June 30, 2001 is as follows: <TABLE> <CAPTION> Other Comprehensive Net Income Income Total ------------------------------------ (in thousands) <S> <C> <C> <C> Change in fair value during the three-month period Option contracts not designated as hedges $ (1) $ (1) Interest rate swap agreements not designated as hedges (308) (308) Rate Lock Commitments (278) (278) Mandatory Commitments 253 253 Fair value hedges 0 0 Ineffectiveness of cash flow hedges (23) (23) Cash flow hedges 13 $ (777) (764) Reclassification adjustment (464) (464) ------- ------- ------- Total (344) (1,241) (1,585) Federal income tax (120) (434) (554) ------- ------- ------- Net $ (224) $ (807) $(1,031) ======= ======= ======= </TABLE> <TABLE> <CAPTION> Other Comprehensive Net Income Income Total ------------------------------------ (in thousands) <S> <C> <C> <C> Change in fair value during the six-month period Option contracts not designated as hedges $ (28) $ (28) Interest rate swap agreements not designated as hedges (637) (637) Rate Lock Commitments (390) (390) Mandatory Commitments 313 313 Fair value hedges (4) (4) Ineffectiveness of cash flow hedges (19) (19) Cash flow hedges 46 $(3,811) (3,765) Reclassification adjustment (507) (507) ------- ------- -------- Total (719) (4,318) (5,037) Federal income tax (251) (1,480) (1,731) ------- ------- -------- Net $ (468) $(2,838) $ (3,306) ======= ======= ======== </TABLE> The Banks transferred securities held to maturity with book values and market values of $20.1 million to available for sale upon adoption of SFAS #133. 11
13 NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (continued) (unaudited) 8. On July 20, 2001, the Financial Accounting Standards Board issued 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"). These two statements will have a profound effect on how organizations account for business combinations and for the purchased goodwill and intangible assets that arise from those combinations or are acquired otherwise. SFAS #141 is effective for all business combinations initiated after June 30, 2001, and for all purchase method business combinations completed after June 30, 2001, and requires that such combinations be accounted for using the purchase method of accounting. SFAS #142 is effective for fiscal years beginning after December 15, 2001 and requires that the amortization of goodwill cease and that goodwill instead be reviewed for impairment. Management is currently reviewing these statements and their impact on the Registrant's financial position and results of operations. Emerging Issues Task Force ("EITF") 99-20, "Recognition of Interest Income and Impairment of Purchased and Retained Beneficial Interest in Securitized Financial Assets," ("EITF 99-20") was effective for the Registrant's quarter ended June 30, 2001. The adoption of EITF 99-20 did not have a material impact on the Registrant's financial condition or results of operations. 9. The results of operations for the three- and six-month periods ended June 30, 2001, are not necessarily indicative of the results to be expected for the full year. 12
14 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management's discussion and analysis of financial condition and results of operations contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Actual results could differ materially from those projected in such forward-looking statements. The following section presents additional information that may be necessary to assess the financial condition and results of operations of the Registrant and its subsidiary banks (the "Banks"). This section should be read in conjunction with the consolidated financial statements contained elsewhere in this report as well as the Registrant's 2000 Annual Report on Form 10-K. FINANCIAL CONDITION SUMMARY Assets totaled $1.830 billion at June 30, 2001 compared to $1.784 billion at December 31, 2000. Increases in loans held for sale, commercial loans and installment loans were partially offset by declines in cash and due from banks and real estate mortgage loans. Loans, excluding loans held for sale, ("Portfolio Loans") increased to $1.422 billion at June 30, 2001, from $1.380 billion at December 31, 2000. Commercial loans grew by $43.3 million to $424.4 million at June 30, 2001. Installment loans increased by $13.1 million and real estate mortgage loans decreased by $14.1 million in the first six months of 2001. See "Portfolio loans and asset quality." Other borrowings increased $141.7 million in the first six months of 2001 due primarily to a shift in funding sources, as brokered certificates of deposits ("Brokered CDs"), which are included in time deposits, declined from $212.0 million at December 31, 2000 to $104.2 million at June 30, 2001. See "Deposits and borrowings." SECURITIES The Banks maintain diversified securities portfolios, which include obligations of the U.S. Treasury and government-sponsored agencies as well as securities issued by states and political subdivisions, corporate securities and mortgage-backed securities. The Banks also invest in capital securities, which include preferred stocks and trust preferred securities. Management continually evaluates the Banks' asset/liability management needs and attempts to maintain a portfolio structure that provides sufficient liquidity and cash flow. See "Asset/liability management." SECURITIES <TABLE> <CAPTION> Amortized Unrealized Fair Cost Gains Losses Value --------- -------- -------- -------- (in thousands) <S> <C> <C> <C> <C> Securities available for sale June 30, 2001 $234,408 $ 5,698 $ 217 $239,889 December 31, 2000 214,526 3,486 565 217,447 Securities held to maturity December 31, 2000 $ 20,098 $ 200 $ 187 $ 20,111 </TABLE> As permitted by Statement of Financial Accounting Standards, No. 133, "Accounting for Derivative Instruments and Hedging Activities," ("SFAS #133") securities that were previously 13
15 designated as held to maturity were reclassified to available for sale as of January 1, 2001. (See note #7 to Interim Consolidated Financial Statements.) The purchase or sale of securities is dependent upon Management's assessment of investment and funding opportunities as well as the Banks' asset/liability management needs. The Banks sold securities designated as available for sale with aggregate market values of $2.9 million (at a net gain of $123,000) and $0.9 million (at no net gain or loss) for the three months ended June 30, 2001 and 2000, respectively. The Banks sold securities designated as available for sale with aggregate market values of $5.1 million (at a net gain of $158,000) and $5.8 million (at a net loss of $16,000) for the six months ended June 30, 2001 and 2000, respectively. PORTFOLIO LOANS AND ASSET QUALITY Management believes that the Registrant's decentralized structure provides important advantages in serving the credit needs of the Banks' principal lending markets. In addition to the communities served by the Banks' branch networks, principal lending markets include nearby communities and metropolitan areas. Subject to established underwriting criteria, the Banks also participate in commercial lending transactions with certain non-affiliated banks and may also purchase real estate mortgage loans from third-party originators. Commercial loan participations with non-affiliated banks totaled approximately $7.2 million at June 30, 2001. Purchased real estate mortgage loans totaled approximately $68.9 million at June 30, 2001. During the second quarter of 2001, the Banks purchased $36.5 million of adjustable rate real estate mortgage loans from a non-affiliated bank. The properties securing these loans were located primarily in North Carolina, South Carolina and Virginia. Although the Management and Board of Directors of each Bank retain authority and responsibility for credit decisions, each of the Banks has adopted uniform underwriting standards. Further, the Registrant's loan committee, as well as the centralization of commercial loan credit services and loan review functions, promotes compliance with these established underwriting standards. The centralization of retail loan services also provides for consistent service quality and facilitates compliance with consumer protection laws and regulations. The Banks generally retain loans that may be profitably funded within established risk parameters. See "Asset/liability management." As a result, the Banks may hold adjustable-rate and balloon real estate mortgage loans as Portfolio Loans, while 15- and 30-year, fixed-rate real estate mortgage loans are generally sold to mitigate exposure to changes in interest rates. See "Non-interest income." LOAN PORTFOLIO COMPOSITION <TABLE> <CAPTION> June 30, December 31, 2001 2000 ---------- ------------ (in thousands) <S> <C> <C> Real estate Residential first mortgages $ 587,513 $ 597,472 Residential home equity and other junior mortgages 183,161 177,343 Construction and land development 155,546 144,401 Other(1) 281,949 262,246 Consumer 120,579 111,147 Commercial 74,620 66,574 Agricultural 18,573 20,481 ---------- ---------- Total loans $1,421,941 $1,379,664 ========== ========== </TABLE> (1) Includes loans secured by multi-family residential and non-farm, non-residential property. The increase in construction and land development, other real estate and commercial loans principally reflects Management's emphasis on lending opportunities in these categories 14
16 particularly within the Lansing and Grand Rapids, Michigan markets. The increase in consumer loans is primarily due to growth in automobile and recreational vehicle indirect lending. The decline in real estate mortgage loans is primarily due to a significant increase in principal payoffs due to refinancing activity associated with lower interest rates. Continued overall growth of Portfolio Loans is dependent upon a number of competitive and economic factors. NON-PERFORMING ASSETS <TABLE> <CAPTION> June 30, December 31, 2001 2000 -------- ------------ (dollars in thousands) <S> <C> <C> Non-accrual loans $ 5,368 $ 5,200 Loans 90 days or more past due and still accruing interest 1,748 1,571 Restructured loans 251 260 -------- -------- Total non-performing loans 7,367 7,031 Other real estate 2,369 2,174 -------- -------- Total non-performing assets $ 9,736 $ 9,205 ======== ======== As a percent of Portfolio Loans Non-performing loans 0.52% 0.51% Non-performing assets 0.68 0.67 Allowance for loan losses 1.07 1.01 Allowance for loan losses as a percent of non-performing loans 206 199 </TABLE> Non-performing loans increased by $0.3 million from December 31, 2000 and totaled $7.4 million, or 0.52%, of total Portfolio Loans at June 30, 2001. The increase in non-performing loans is primarily due to an increase in delinquencies on residential real estate mortgage loans. Management believes that such loans are well secured and do not represent a significant increase in risk of loss. Other real estate increased from $2.2 million at December 31, 2000 to $2.4 million at June 30, 2001. Impaired loans totaled approximately $3.1 million at June 30, 2001. At that same date, certain impaired loans with a balance of approximately $0.2 million, had specific allocations of the allowance for loan losses, which totaled approximately $0.1 million. The Banks' average investment in impaired loans was approximately $3.6 million, for the six-month period ended June 30, 2001. Cash receipts on impaired loans on non-accrual status are generally applied to the principal balance. Interest recognized on impaired loans during the six-month period ended June 30, 2001 was approximately $80,000. ALLOWANCE FOR LOAN LOSSES <TABLE> <CAPTION> Six months ended June 30, 2001 2000 -------- -------- (in thousands) <S> <C> <C> Balance at beginning of period $ 13,982 $ 12,985 Additions (deduction) Provision charged to operating expense 1,894 1,949 Recoveries credited to allowance 302 355 Loans charged against the allowance (1,029) (1,883) -------- -------- Balance at end of period $ 15,149 $ 13,406 ======== ======== Net loans charged against the allowance to average Portfolio Loans (annualized) 0.10% 0.23% </TABLE> 15
17 In determining the allowance and the related provision for loan losses, Management considers four principal elements: (i) specific allocations based upon probable losses identified during the review of the loan portfolio, (ii) allocations established for other adversely rated loans, (iii) allocations based principally on historical loan loss experience and (iv) additional allowances based on subjective factors, including local and general economic business factors and trends, portfolio concentrations and changes in the size and/or the general terms of the loan portfolios. In its recent assessment of subjective factors, Management considered national and local economic trends, the performance of major stock indices, changes in consumer spending and consumer confidence and national and local employment trends which may indicate a slow down in the economy. Management also considered recent trends in adversely rated loans as well as the impact of slower economic conditions on the business prospects of the Banks' commercial customers. ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES <TABLE> <CAPTION> June 30, December 31, 2001 2000 -------- ------------ (in thousands) <S> <C> <C> Specific allocations $ 100 $ 100 Other adversely rated loans 3,674 3,166 Historical loss allocations 4,972 4,717 Additional allocations based on subjective factors 6,403 5,999 -------- -------- $ 15,149 $ 13,982 ======== ======== </TABLE> Loans charged against the allowance for loan losses, net of recoveries, were equal to an annualized 0.10% of average loans during the six months ended June 30, 2001, compared to an annualized 0.23% during the comparable period of 2000. The decline in net loans charged against the allowance in 2001 compared to 2000 relates primarily to a $0.9 million charge-off on a real estate development loan that was incurred in the second quarter of 2000. See "Provision for loan losses." DEPOSITS AND BORROWINGS The Banks' competitive position within many of the markets served by the branch networks limits the ability to materially increase deposits without adversely impacting the weighted-average cost of core deposits. Accordingly, the Banks compete on the basis of convenience and personal service, while employing pricing tactics that are intended to enhance the value of core deposits. Deposits, excluding Brokered CDs, totaled $1.198 billion at June 30, 2001, compared to $1.178 billion at December 31, 2000. The Banks have implemented strategies that incorporate federal funds purchased, other borrowings and Brokered CDs to fund a portion of the Portfolio Loans. The use of such alternate sources of funds supplements the Banks' core deposits and is also an integral part of the Banks' asset/liability management efforts. Derivative financial instruments are employed to manage the Banks' exposure to changes in interest rates. (See "Asset/liability management".) <TABLE> <CAPTION> June 30, 2001 December 31, 2000 ----------------------------- ----------------------------- Average Average Amount Maturity Rate Amount Maturity Rate -------- --------- ---- -------- --------- ---- (dollars in thousands) <S> <C> <C> <C> <C> <C> <C> Brokered CDs $104,192 3.4 years 6.15% $212,010 3.5 years 6.73% Fixed rate FHLB advances 182,191 3.2 years 5.12 68,743 7.9 years 6.33 Variable rate FHLB advances 144,000 0.3 years 4.53 114,345 0.2 years 6.69 Federal Funds purchased 13,850 1 day 4.27 27,550 1 day 6.85 ---------------------------------------------------------------- Total $444,233 2.2 years 5.14 $422,648 3.1 years 6.67 ================================================================ </TABLE> 16
18 Other borrowed funds, principally advances from the Federal Home Loan Bank (the "FHLB") increased to $337.8 million at June 30, 2001, from $196.0 million at December 31, 2000. The increase in FHLB borrowings primarily reflects a shift away from Brokered CDs, the rates on which have lagged the general decline in market interest rates. Brokered CD's declined by $107.8 million during the first six months of 2001. In July 2001 the rates on Brokered CD's became more comparable to similar term FHLB borrowings. In the third quarter of 2001 the Banks anticipate swapping approximately $50 million of seasoned real estate mortgage loans for Federal Home Loan Mortgage Corporation ("FHLMC") mortgage backed securities ("MBS"). The Banks may utilize the FHLMC MBS as security for reverse repurchase agreements, providing an additional source of liquidity. LIQUIDITY AND CAPITAL RESOURCES Effective management of capital resources is critical to Management's mission to create value for the Registrant's shareholders. The cost of capital is an important factor in creating shareholder value and, accordingly, the Registrant's capital structure includes unsecured debt and Preferred Securities. To profitably deploy capital within existing markets, the Banks have implemented balance sheet management strategies that combine efforts to originate Portfolio Loans with disciplined funding strategies. Acquisitions of the Registrant's common stock are also an integral component of Management's capital management strategies. On July 18, 2001 the Registrant announced that its Board of Directors had authorized it to acquire an additional 500,000 shares of its common stock in open market transactions. The Registrant's authority to purchase shares of its common stock under this authorization expires on July 16, 2002. The Registrant has purchased approximately 409,000 shares of its common stock from September 1, 2000 to June 30, 2001 at an average price of $19.14 per share pursuant to a previously announced repurchase program, which also authorized the purchase of up to 500,000 shares. This repurchase program expires on September 30, 2001. Shares acquired by the Registrant pursuant to these repurchase plans will be used for stock dividends and for the Registrant's obligations to issue shares under various incentive or stock option plans. CAPITALIZATION <TABLE> <CAPTION> June 30, December 31, 2001 2000 -------- ------------ (in thousands) <S> <C> <C> Unsecured debt $ 10,500 $ 11,500 Preferred Securities 17,250 17,250 Shareholders' Equity Preferred stock, no par value Common Stock, par value $1.00 per share 11,497 11,610 Capital surplus 74,209 77,255 Retained earnings 45,372 37,544 Accumulated other comprehensive income 344 1,927 -------- -------- Total shareholders' equity 131,422 128,336 -------- -------- Total capitalization $159,172 $157,086 ======== ======== </TABLE> Shareholders' equity totaled $131.4 million at June 30, 2001. The increase from $128.3 million at December 31, 2000 reflects the retention of earnings as well as the issuance of common stock pursuant to various equity-based incentive compensation plans, partially offset by cash dividends declared, stock repurchases and a decline in other comprehensive income. Shareholders' equity was equal to 7.18% of total assets at June 30, 2001, compared to 7.19% at December 31, 2000. 17
19 CAPITAL RATIOS <TABLE> <CAPTION> June 30, 2001 December 31, 2000 ------------- ----------------- <S> <C> <C> Equity capital 7.18% 7.19% Average shareholders equity to average assets(1) 7.27 6.92 Tier 1 leverage (tangible equity capital) 7.58 7.26 Tier 1 risk-based capital 9.75 9.68 Total risk-based capital 10.85 10.74 </TABLE> (1) Based on year to date average balances for the respective periods ASSET/LIABILITY MANAGEMENT Interest-rate risk is created by differences in the pricing characteristics of the Banks' assets and liabilities. Options embedded in certain financial instruments, including caps on adjustable-rate loans as well as borrowers' rights to prepay fixed-rate loans also create interest-rate risk. The asset/liability management efforts of the Registrant and the Banks are intended to identify sources of interest-rate risk and to evaluate opportunities to structure the balance sheet in a manner that is consistent with Management's mission to maintain profitable financial leverage. The marginal cost of funds is a principal consideration in the implementation of the Banks' balance sheet management strategies, but such evaluations further consider interest-rate and liquidity risk as well as other pertinent factors. Management employs simulation analyses to monitor the Banks' interest-rate risk profiles and evaluate potential changes in the Banks' net interest income and market value of portfolio equity that result from changes in interest rates. (See note #7 to Interim Consolidated Financial Statements.) RESULTS OF OPERATIONS SUMMARY Net income totaled $6,249,000 and $11,507,000 during the three- and six-month periods ended June 30, 2001. Increases from the comparable periods in 2000 principally reflect increases in net interest income, service charges on deposit accounts and net gains on the sale of real estate mortgage loans, partially offset by an increase in non-interest expense. KEY PERFORMANCE RATIOS <TABLE> <CAPTION> Three months Six months ended June 30, ended June 30, 2001 2000 2001 2000 ------------------ ------------------ <S> <C> <C> <C> <C> Net income to Average assets 1.41% 1.07% 1.31% 1.06% Average equity 19.47 15.74 18.01 15.76 Earnings per common share Basic $ 0.54 $ 0.39 $ 1.00 $ .78 Diluted 0.54 0.39 0.99 .77 </TABLE> NET INTEREST INCOME Tax equivalent net interest income increased by 8.8% to $20.1 million and by 7.0% to $39.2 million, respectively, during the three- and six-month periods in 2001. Increases from the comparable periods of 2000 reflect increases in average earning assets as well as an increase in tax equivalent net interest income as a percent of average earning assets ("Net Yield"). 18
20 Average earning assets totaled $1.671 billion and $1.665 billion during the three- and six-month periods in 2001, respectively. The increases from the corresponding periods of 2000 principally reflect increases in Portfolio Loans. Net Yield increased by 27 basis points to 4.82% during the three-month period in 2001 and by 17 basis points to 4.71% during the six-month period in 2001 compared to the like periods in 2000. In addition to an increase in Portfolio Loans as a percent of average earning assets, the increase in Net Yield is also due to a decline in the Banks' cost of funds due to lower rates on borrowings associated with the decline in market interest rates and increased levels of lower cost core deposits. NET INTEREST INCOME AND SELECTED RATIOS <TABLE> <CAPTION> Three months Six months ended June 30, ended June 30, 2001 2000 2001 2000 ---------- ---------- ---------- ---------- <S> <C> <C> <C> <C> Average earning assets (in thousands) $1,670,563 $1,626,282 $1,664,557 $1,614,544 Tax equivalent net interest income 20,128 18,494 39,168 36,605 As a percent of average earning assets Tax equivalent interest income 8.71% 8.64% 8.75% 8.58% Interest expense 3.89 4.09 4.04 4.04 Tax equivalent net interest income 4.82 4.55 4.71 4.54 Average earning assets as a percent of average assets 93.86% 93.71% 93.97% 93.58% Free-funds ratio 11.01% 9.23% 10.74% 8.91% </TABLE> PROVISION FOR LOAN LOSSES The provision for loan losses was $1.3 million during the three months ended June 30, 2001, compared to $1.4 million during the three-month period in 2000. During the six-month periods ended June 30, 2001 and 2000, the provision was $1.9 million and $2.0 million, respectively. The decrease in the provision reflects Management's assessment of the allowance for loan losses. The second quarter 2001 provision reflects the overall growth and change in mix in Portfolio Loans and the internal classification of certain multi-family real estate mortgage loans into a higher risk category due to lower debt service coverage ratios. The provision in the second quarter of 2000 reflected the default by a land development company on loans totaling $2.2 million. See "Portfolio Loans and asset quality." NON-INTEREST INCOME Non-interest income totaled $7.3 million during the three months ended June 30, 2001, a $2.5 million increase from $4.8 million during the comparable period in 2000. Non-interest income increased to $12.3 million during the six months ended June 30, 2001, from $9.0 million a year earlier. A significant increase in the Banks' mortgage lending activities (due primarily to increased refinancing activity spurred by lower interest rates) has had a substantial impact on total non-interest income. Net gains on the sale of real estate mortgage loans increased by $1.5 million and $2.1 million during the three and six months ended June 30, 2001 compared to the same periods in 2000. During the second quarter of 2001, the volume of real estate mortgage loans originated and sold increased by $95.5 million and $87.0 million, respectively, compared to the second quarter of 2000. Net gains as a percentage of real estate mortgage loans sold increased to 1.60% in the second quarter of 2001 from 1.30% in the second quarter of 2000. The increase in gains as a percentage of real estate mortgage loans sold is primarily due to the Banks sale of a majority of real estate mortgage loans on a "service-released" basis. As a result, the Banks are retaining less servicing rights, compared to prior periods, which may result in continued declines in mortgage 19
21 loan servicing income in future periods. Service charges on deposit accounts increased by 32% to $2.3 million and by 27% to $4.1 million during the three- and six-month periods ended June 30, 2001, respectively compared to the same periods in 2000. Increases in service charges principally relate to growth in checking accounts as a result of deposit account promotions, which include direct mail solicitations. Title insurance fees increased substantially for both the three- and six-month periods in 2001 compared to 2000 as a result of the growth in mortgage lending volume associated with increased refinancing activity. Real estate mortgage loan servicing fees declined in 2001 compared to 2000. The second quarter of 2001 included $150,000 in additional amortization of capitalized mortgage servicing rights as a result of an acceleration in prepayment activity. In addition, the average balance of mortgage loans serviced for others has declined as the Banks are selling the majority of newly originated mortgage loans on a "service-released" basis. Mutual fund and annuity commissions have also declined in 2001 compared to 2000 due primarily to lower sales volumes. NON-INTEREST INCOME <TABLE> <CAPTION> Three months ended Six months ended June 30, June 30, 2001 2000 2001 2000 -------- -------- -------- -------- (in thousands) <S> <C> <C> <C> <C> Service charges on deposit accounts $ 2,265 $ 1,710 $ 4,083 $ 3,211 Net gains on asset sales Real estate mortgage loans 2,052 534 3,047 914 Securities 123 158 (16) Manufactured home loan origination fees and commissions 676 514 1,029 1,022 Title insurance fees 562 242 848 402 Real estate mortgage loan servicing fees 165 372 556 748 Mutual fund and annuity commissions 218 337 390 742 Other 1,277 1,115 2,233 1,945 -------- -------- -------- -------- Total non-interest income $ 7,338 $ 4,824 $ 12,344 $ 8,968 ======== ======== ======== ======== </TABLE> The volume of loans sold is dependent upon the Banks' ability to originate real estate mortgage loans as well as the demand for fixed-rate obligations and other loans that the Banks cannot profitably fund within established interest-rate risk parameters. See "Portfolio loans and asset quality." Net gains on real estate mortgage loans are also dependent upon economic and competitive factors as well as the Banks' ability to effectively manage exposure to changes in interest rates. The Banks capitalized approximately $0.2 million and $0.5 million of related servicing rights during the six-month periods ended June 30, 2001 and 2000, respectively. Amortization of capitalized servicing rights for those periods were $0.7 million and $0.5 million, respectively. The book value of capitalized mortgage servicing rights was $4.1 million at June 30, 2000. The fair value of capitalized servicing rights, which relate to approximately $713 million of real estate mortgage loans sold and serviced, approximated $6.0 million at that same date. 20
22 <TABLE> <CAPTION> Three months ended Six months ended June 30, June 30, 2001 2000 2001 2000 -------- -------- -------- -------- (in thousands) <S> <C> <C> <C> <C> Real estate mortgage loans originated $192,081 $ 96,618 $308,052 $163,572 Real estate mortgage loan sales 128,073 41,115 194,587 68,890 Real estate mortgage loan servicing rights sold 112,481 8,351 170,400 10,993 Net gains on the sale of real estate mortgage loans 2,052 534 3,047 914 Net gains as a percent of real estate mortgage loans sold 1.60% 1.30% 1.57% 1.33% </TABLE> NON-INTEREST EXPENSE Non-interest expense increased by $2.3 million to $17.0 million and by $2.7 million to $32.2 million during the three- and six-month periods ended June 30, 2001, respectively, compared to the like periods in 2000. Increased costs for health care insurance as well as salary increases and staff additions related to the growth of the Company, contributed to the increase in non-interest expense. NON-INTEREST EXPENSE <TABLE> <CAPTION> Three months ended Six months ended June 30, June 30, 2001 2000 2001 2000 -------- -------- -------- -------- (in thousands) <S> <C> <C> <C> <C> Salaries $ 6,519 $ 5,717 $ 12,699 $ 11,541 Performance-based compensation and benefits 1,857 1,310 2,942 2,511 Other benefits 1,415 1,270 2,772 2,637 -------- -------- -------- -------- Salaries and benefits 9,791 8,297 18,413 16,689 Occupancy, net 1,183 1,119 2,473 2,297 Furniture and fixtures 1,109 1,092 2,167 2,233 Communications 577 529 1,165 1,094 Data processing 583 664 1,137 1,357 Advertising 633 587 1,134 1,044 Loan and collection 608 336 1,073 643 Amortization of intangible assets 425 432 852 864 Supplies 460 368 883 763 Other 1,678 1,337 2,873 2,488 -------- -------- -------- -------- Total non-interest expense $ 17,047 $ 14,761 $ 32,170 $ 29,472 ======== ======== ======== ======== </TABLE> 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, 2000. 21
23 Part II Item 4. Submission of Matters to a Vote of Security-Holders The Registrant's Annual Meeting of Shareholders was held on April 17, 2001. As described in the Registrant's proxy statement, dated March 16, 2001, matters considered at that meeting were: (1) Election of three nominees to the board of directors Jeffrey A. Bratsburg, Charles A. Palmer, and Charles C. Van Loan were elected to serve three-year terms expiring in 2004. Directors whose term of office as a director continued after the meeting were Robert L. Hetzler, Robert J. Leppink, Arch V. Wright, Jr., Keith E. Bazaire, Terry L. Haske, and Thomas F. Kohn. Item 6. Exhibits & Reports on Form 8-K (a) Exhibit Number & Description 11. Computation of Earnings Per Share (b) Reports on Form 8-K During the quarter ended June 30, 2001, there were no reports filed on Form 8-K. 22
24 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Date August 10, 2001 By /s/ Robert N. Shuster ---------------------- -------------------------------------------- Robert N. Shuster, Principal Financial Officer Date August 10, 2001 By /s/ James J. Twarozynski ---------------------- -------------------------------------------- James J. Twarozynski, Principal Accounting Officer 23