-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KOlt5Zn7lChKHjxRAJ1rpTzppLkSU8Dj4sa4sXpbRCcr4PYKBTosF8JLa0QwC/we 12NAa50AgG8McIXylDBrnA== 0000950124-97-001883.txt : 19970329 0000950124-97-001883.hdr.sgml : 19970329 ACCESSION NUMBER: 0000950124-97-001883 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970328 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: INDEPENDENT BANK CORP /MI/ CENTRAL INDEX KEY: 0000039311 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 382032782 STATE OF INCORPORATION: MI FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-07818 FILM NUMBER: 97567047 BUSINESS ADDRESS: STREET 1: 230 W MAIN ST STREET 2: PO BOX 491 CITY: IONIA STATE: MI ZIP: 48846 BUSINESS PHONE: 6165279450 MAIL ADDRESS: STREET 1: 230 W MAIN ST CITY: IONIA STATE: MI ZIP: 48846 10-K 1 10-K 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K /X/ Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 1996 or / / Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from __________________ to________________ Commission file Number 0-7818 INDEPENDENT BANK CORPORATION ================================================================================ (Exact name of Registrant as specified in its charter)
MICHIGAN 38-2032782 - ---------------------------------------------- ------------------------------------ (State or other jurisdiction of incorporation) (I.R.S. employer identification no.)
230 W. Main St., P.O. Box 491, Ionia, Michigan 48846 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (616) 527-9450 --------------------- Securities registered pursuant to Section 12(g) of the Act: Common Stock, $1.00 Par Value - -------------------------------------------------------------------------------- (Title of class) 9.25% Cumulative Trust Preferred Securities, $25.00 Liquidation Amount - -------------------------------------------------------------------------------- (Title of class) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. . State the aggregate market value of the voting stock held by non-affiliates of the Registrant. (For this purpose only, the affiliates of the Registrant have been assumed to be the executive officers and directors of the Registrant and their associates.) Common Stock, $1.00 Par Value - $94,226,210 - -------------------------------------------------------------------------------- (Based on $36.50 per common share, the last reported sales price on the National Market Tier of the Nasdaq Stock Market on March 18, 1997. Reference is made to Part II, Item 5 for further information). Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date. Common stock, $1.00 par value - 2,889,209 shares at March 18, 1997 Documents incorporated by reference Portions of the Registrant's definitive proxy statement, and appendix thereto dated March 14, 1997, relating to its April 15, 1997 Annual Meeting of Shareholders are incorporated by reference into Part II and Part III of this form. The Exhibit Index appears on Page 22 2 Included or incorporated by reference in this Form 10-K are certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such forward-looking statements are based upon the beliefs of the Registrant's management as well as on assumptions made by and information currently available to the Registrant at the time such statements were made. Actual results could differ materially from those included in such forward-looking statements as a result of, among other things, the factors included in or incorporated by reference in this Report generally and certain economic and business factors, some of which may be beyond the control of the Registrant. Investors are cautioned that all forward-looking statements involve risks and uncertainty. PART I ITEM 1. BUSINESS Independent Bank Corporation (the "Registrant") was incorporated under the laws of the State of Michigan on September 17, 1973, for the purpose of becoming a bank holding company. The Registrant is registered under the Bank Holding Company Act of 1956, as amended, and owns the outstanding stock of four banks (the "Banks") which are all organized under the laws of the State of Michigan. Aside from the stock of the Banks, the Registrant has no other substantial assets. The Registrant conducts no business except for the provision of certain management and operational services to the Banks, the collection of fees and dividends from the Banks and the payment of dividends to the Registrant's shareholders. Certain employee retirement plans (including an employee stock ownership plan and a deferred compensation plan) as well as health and other insurance programs have been established by the Registrant. The proportional costs of these plans are borne by each of the Banks. The Registrant and the Banks have no material patents, trademarks, licenses or franchises except the corporate franchises of the Banks which permit them to engage in commercial banking pursuant to Michigan law. The following table shows each of the Banks and their total loans and deposits as of December 31, 1996: Main Office Total Total Bank Location Deposits Loans - ---- -------- ------------ ------------ Independent Bank Ionia $247,909,000 $223,058,000 Independent Bank West Michigan Rockford 120,671,000 168,414,000 Independent Bank South Michigan Leslie 98,554,000 103,554,000 Independent Bank East Michigan Caro 208,262,000 126,261,000 Independent Bank (formerly First Security Bank) affiliated with the Registrant on June 1, 1974. Independent Bank consolidated with North Bank, the sole banking subsidiary of North Bank Corporation ("NBC") acquired by the Registrant effective May 31, 1996. On that date NBC had total assets of $152,000,000. Independent Bank West Michigan is the result of a merger in 1985 of the First State Bank of Newaygo (acquired December 16, 1974), the Western State Bank, Howard City (acquired February 7, 1977), and the Bank of Rockford (organized by the Registrant as a new bank on August 18, 1975). Independent Bank South Michigan is the result of a merger in 1985 of the Peoples Bank of Leslie (acquired February 16, 1981) and the Olivet State Bank (acquired on October 16, 1979). 1 3 ITEM 1. BUSINESS (Continued) Independent Bank East Michigan is the result of the consolidation of the former American Home Bank (acquired October 8, 1993), Pioneer Bank (acquired October 15, 1993) and The Kingston State Bank (acquired March 7, 1994). On December 13, 1996 Independent Bank East Michigan purchased eight offices from First of America Bank--Michigan N.A. with deposits and loans of $121,900,000 and $22,100,000, respectively. Effective November 7, 1996, the Registrant formed IBC Capital Finance, a Delaware statutory business trust ("IBC Capital"). IBC Capital's business and affairs are conducted by its property trustee, a Delaware trustee, and three individual administrative trustees who are employees or officers of or affiliated with the Registrant. IBC Capital exists for the sole purposes of issuing and selling its preferred securities and common securities, using the proceeds from the sale of those securities to acquire subordinated debentures issued by the Registrant and certain related services. As a result, the sole assets of IBC Capital are the subordinated debentures of the Registrant. The Banks transact business in the single industry segment of commercial banking. Most of the Banks' offices provide full service lobby and drive-in services in the communities which they serve. Automatic teller machines are also provided at most locations. The Banks' activities cover all phases of commercial banking, including checking and savings accounts, commercial and agricultural lending, direct and indirect consumer financing, mortgage lending and deposit box services. The Banks do not offer trust services. The principal markets are the rural and suburban communities across lower Michigan that are served by the banks' branch networks. The local economies of the communities served by the Banks are relatively stable and reasonably diversified. The Banks serve their markets through their four main offices and a total of 55 branch and 7 loan production offices. Banking is highly competitive. The Banks compete with other commercial banks, savings and loan associations, credit unions, mortgage banking companies, securities brokerage companies, insurance companies, and money market mutual funds. Many of these competitors have substantially greater resources than the Registrant and the Banks and offer certain services that the Registrant and Banks do not currently provide. Such competitors may also have greater lending limits than the Banks. The number of competitors may increase as a result of the easing of restrictions on interstate banking effected under the Riegle-Neal Interstate Banking and Efficiency Act of 1994. In addition, non-bank competitors are generally not subject to the extensive regulations applicable to the Registrant and the Banks. Price (the interest charged on loans and/or paid on deposits) remains a principal means of competition within the financial services industry. The Banks also compete on the basis of service and convenience, utilizing the strengths and benefits of the Registrant's decentralized structure to providing financial services. The principal sources of revenue, on a consolidated basis, are interest and fees on loans, other interest income and non-interest income. The sources of income for the three most recent years are as follows:
1996 1995 1994 ---- ---- ---- Interest and fees on loans 76.5% 76.1% 71.1% Other interest income 15.0 16.3 21.3 Non-interest income 8.5 7.6 7.6 ------ ------ ------ 100.0% 100.0% 100.0% ====== ====== ======
As of December 31, 1996, the Registrant and the Banks had 459 full-time employees and 152 part-time employees. Supervision and Regulation The following is a summary of certain statutes and regulations affecting the Registrant and the Banks. This summary is qualified in its entirety by reference to the particular statutes and regulations. A change in applicable laws or regulations may have a material effect on the Registrant, the Banks and the businesses of the Registrant and the Banks. 2 4 ITEM 1. BUSINESS (Continued) General Financial institutions and their holding companies are extensively regulated under federal and state law. Consequently, the growth and earnings performance of the Registrant and the Banks can be affected not only by management decisions and general and local economic conditions, but also by the statutes administered by, and the regulations and policies of, various governmental regulatory authorities. The effect of such statutes, regulations and policies and any changes thereto can be significant and cannot be predicted. The system of supervision and regulation applicable to the Registrant and the Banks establishes a comprehensive framework for their respective operations and is intended primarily for the protection of the Federal Deposit Insurance Corporation's (the "FDIC") deposit insurance funds, the depositors of the Banks, and the public, rather than the shareholders of the Registrant. Federal law and regulations, including provisions added by the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") and regulations promulgated thereunder, establish supervisory standards applicable to the lending activities of the Banks, including internal controls, credit underwriting, loan documentation, and loan-to value ratios for loans secured by real property. The Registrant General. The Registrant is a bank holding company and, as such, is registered with, and subject to regulation by, the Board of Governors of the Federal Reserve System (the "Federal Reserve") under the Bank Holding Company Act, as amended (the "BHCA"). Under the BHCA, the Registrant is subject to periodic examination by the Federal Reserve, and is required to file periodic reports of its operations and such additional information as the Federal Reserve may require. In accordance with Federal Reserve policy, the Registrant is expected to act as a source of financial strength to the Banks and to commit resources to support the Banks in circumstances where the Registrant might not do so absent such policy. In addition, in certain circumstances a Michigan state bank having impaired capital may be required by the Commissioner of the Michigan Financial Institution's Bureau (the "Commissioner") either to restore the bank's capital by a special assessment upon its shareholders, or to initiate the liquidation of the bank. Any capital loans by a bank holding company to a subsidiary bank are subordinate in right of payment to deposits and to certain other indebtedness of such subsidiary bank. In the event of a bank holding company's bankruptcy, any commitment by the bank holding company to a federal bank regulatory agency to maintain the capital of a subsidiary bank will be assumed by the bankruptcy trustee and entitled to a priority of payment. Investments and Activities. Under the BHCA, bank holding companies are prohibited, with certain limited exceptions, from engaging in activities other than those of banking or of managing or controlling banks and from acquiring or retaining direct or indirect ownership or control of voting shares or assets of any company which is not a bank or bank holding company, other than subsidiary companies furnishing services to or performing services for its subsidiaries, and other subsidiaries engaged in activities which, by the Federal Reserve's determination, are closely related to banking or managing or controlling banks. In general, any direct or indirect acquisition by the Registrant of any voting shares of any bank which would result in the Registrant's direct or indirect ownership or control of more than 5% of any class of voting shares of such bank, and any merger or consolidation of the Registrant with another bank holding company, will require the prior written approval of the Federal Reserve under the BHCA. In acting on such applications, the Federal Reserve must consider various statutory factors. Among others, such statutory factors include the effect of the proposed transaction on competition in relevant geographic and product markets, and each party's financial condition, managerial resources, and record of performance under the Community Reinvestment Act. In addition and subject to certain exceptions, the Change in the Bank Control Act ("Control Act") and regulations promulgated thereunder by the Federal Reserve, require any person acting directly or indirectly, or through or in concert with one or more persons, to give the Federal Reserve 60 days' written notice before acquiring control of a bank holding company. Transactions which are presumed to constitute the acquisition of control include the acquisition of any voting securities of a bank holding company having securities registered under Section 12 of the Securities Exchange Act of 1934, as amended, if, after the transaction, the acquiring person (or persons acting in 3 5 ITEM 1. BUSINESS (Continued) concert) owns, controls or holds with power to vote 25% or more of any class of voting securities of the institution. The acquisition may not be consummated subsequent to such notice if the Federal Reserve issues a notice within 60 days, or within certain extensions of such period, disapproving the same. The merger or consolidation of an existing bank subsidiary of the Registrant with another bank, or the acquisition by such a subsidiary of the assets of another bank, or the assumption of the deposit and other liabilities by such a subsidiary requires the prior written approval of the responsible Federal depository institution regulatory agency under the Bank Merger Act, based upon a consideration of statutory factors similar to those outlined above with respect to the BHCA. In addition, in certain cases an application to, and the prior approval of, the Commissioner under Michigan banking laws, may be required. With certain limited exceptions, the BHCA prohibits bank holding companies from acquiring direct or indirect ownership or control of voting shares or assets of any company other than a bank, unless the company involved is engaged solely in one or more activities which the Federal Reserve has determined to be closely related to banking or managing or controlling banks. The recent enactment of the Economic Growth and Regulatory Paperwork Reduction Act of 1996 ("EGRPRA") streamlines the nonbanking activities application process for well capitalized and well managed bank holding companies. Capital Requirements. The Federal Reserve uses capital adequacy guidelines in its examination and regulation of bank holding companies. If capital falls below minimum guidelines, a bank holding company may, among other things, be denied approval to acquire or establish additional banks or non-bank businesses. The Federal Reserve's capital guidelines establish the following minimum regulatory capital requirements for bank holding companies: (i) a capital leverage requirement expressed as a percentage of total assets, (ii) a risk-based requirement expressed as a percentage of total risk-weighted assets, and (iii) a Tier 1 leverage requirement expressed as a percentage of total assets. The capital leverage requirement consists of a minimum ratio of total capital to total assets of 6%, with an expressed expectation that banking organizations generally should operate above such minimum level. The risk-based requirement consists of a minimum ratio of total capital to total risk-weighted assets of 8%, of which at least one-half must be Tier 1 capital (which consists principally of shareholders' equity). The Tier 1 leverage requirement consists of a minimum ratio of Tier 1 capital to total assets, less goodwill, of 3% for the most highly rated companies, with minimum requirements of 4% to 5% for all others. The risk-based and leverage standards presently used by the Federal Reserve are minimum requirements, and higher capital levels will be required if warranted by the particular circumstances or risk profiles of individual banking organizations. FDICIA requires the federal bank regulatory agencies biennially to review risk-based capital standards to ensure that they adequately address interest rate risk, concentration of credit risk and risks from non-traditional activities. In 1995, the Federal bank regulatory agencies have also adopted regulations requiring as part of the assessment of an institution's capital adequacy the consideration of identified concentrations of credit risks and the exposure of the institution to a decline in the value of its capital due to changes in interest rates. Dividends. The Banks are subject to statutory restrictions on their ability to pay dividends to the Registrant. In its policy statement, the Federal Reserve expressed its view that a bank holding company experiencing earnings weaknesses should not pay cash dividends exceeding its net income or which could only be funded in ways that weakened the bank holding company's financial health. Additionally, the Federal Reserve possesses enforcement powers over bank holding companies and their non-bank subsidiaries to prevent or remedy actions that represent unsafe or unsound practices or violations of applicable statutes and regulations. Among these powers is the ability to proscribe the payment of dividends by banks and bank holding companies. Similar enforcement powers over the Banks are possessed by the FDIC. The "prompt corrective action" provisions of FDICIA impose further restrictions on the payment of dividends by insured banks which fail to meeting specified capital levels and, in some cases, impose similar restrictions on their parent bank holding companies. 4 6 ITEM 1. BUSINESS (Continued) In addition to the restrictions on dividends imposed by the Federal Reserve, the Michigan Business Corporation Act provides that dividends may be legally declared or paid only if after the distribution a corporation, such as the Registrant, can pay its debts as they come due in the usual course of business and its total assets equal or exceed the sum of its liabilities plus the amount that would be needed to satisfy the preferential rights upon dissolution of any holders of preferred stock whose preferential rights are superior to those receiving the distribution. The Banks General. The Banks are Michigan banking corporations and their deposit accounts are principally insured by the Bank Insurance Fund ("BIF") of the FDIC. As BIF-insured Michigan chartered banks, the Banks are subject to the examination, supervision, reporting and enforcement requirements of the Commissioner, as the chartering authority for Michigan banks, and the FDIC, as administrator of the BIF. Deposit Insurance. As FDIC-insured institutions, the Banks are required to pay deposit insurance premium assessments to the FDIC. Pursuant to FDICIA, the FDIC adopted a risk-based assessment system under which all insured depository institutions are placed into one of nine categories and assessed insurance premiums, based upon their level of capital and supervisory evaluation. Institutions classified as well-capitalized and considered healthy pay the lowest premium while institutions that are less than adequately capitalized and considered of substantial supervisory concern pay the highest premium. The FDIC has established the schedule of BIF-insurance assessments, ranging from 0% of deposits for institutions in the highest category to .27% of deposits for institutions in the lowest category. Capital Requirements. FDICIA establishes five capital categories, and the federal depository institution regulators, as directed by FDICIA, have adopted, subject to certain exceptions, the following minimum requirements for each of such categories:
TOTAL TIER 1 RISK-BASED RISK-BASED CAPITAL RATIO CAPITAL RATIO LEVERAGE RATIO ------------- ------------- -------------- Well capitalized 10% or above 6% or above 5% or above Adequately capitalized 8% or above 4% or above 4% or above Undercapitalized Less than 8% Less than 4% Less than 4% Significantly undercapitalized Less than 6% Less than 3% Less than 3% Critically undercapitalized -- -- A ratio of tangible equity to total assets of 2% or less
At December 31, 1996 each of the Banks' ratios exceeded minimum requirements for the well-capitalized category. FDICIA requires the federal depository institution regulators to take prompt corrective action in respect of depository institutions that do not meet minimum capital requirements. The scope and degree of regulatory intervention is linked to the capital category to which a depository institution is assigned. A depository institution may be reclassified to a lower category than is indicted by its capital position if the appropriate federal depository institution regulatory agency determines the institution to be otherwise in an unsafe or unsound condition or to be engaged in an unsafe or unsound practice. Dividends. Under Michigan law, the Banks are restricted as to the maximum amount of dividends they may pay on their common stock. A Michigan state bank may not declare or pay a dividend unless the bank will have a surplus amounting to at least 20% of its capital after the payment of the dividend. 5 7 ITEM 1. BUSINESS (Continued) FDICIA generally prohibits a depository institution from making any capital distribution or paying any management fee to its holding company if the depository institution would thereafter be undercapitalized. The FDIC may also prevent an insured bank from paying dividends if the bank is in default of payment of any assessment due to the FDIC. Payment of dividends by a bank may be prevented by the applicable federal regulatory authority if such payment is determined, by reason of the financial condition of such bank, to be an unsafe and unsound banking practice. Insider Transactions. The Banks are subject to certain restrictions imposed by the Federal Reserve Act on "covered transactions" with the Registrant or its subsidiaries. Certain limitations and reporting requirements are also placed on extensions of credit by the Banks to their directors and officers, to directors and officers of the Registrant and its subsidiaries, to principal shareholders of the Registrant, and to "related interests" of such directors, officers and principal shareholders. Safety and Soundness Standards. On July 10, 1995, the FDIC published final guidelines implementing the FDICIA requirement that the federal banking agencies establish operational and managerial standards to promote the safety and soundness of federally insured depository institutions. The guidelines establish standards for internal controls, information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, and compensation, fees and benefits. The guidelines prescribe the goals to be achieved in each area, and each institution is responsible for establishing its own procedures to achieve those goals. If an institution fails to comply with any of the standards set forth in the guidelines, the institution's primary federal regulator may require the institution to submit a plan for achieving and maintaining compliance. State Bank Activities. Under FDICIA, as implemented by final regulations adopted by the FDIC, FDIC-insured state banks are prohibited, subject to certain exceptions, from making or retaining equity investments of a type, or in an amount, that are not permissible for a national bank. FDICIA, as implemented by FDIC regulations, also prohibits FDIC-insured state banks and their subsidiaries, subject to certain exceptions, from engaging as a principal in any activity that is not permitted for a national bank or its subsidiary, respectively, unless the bank meets, and continues to meet, its minimum regulatory capital requirements and the FDIC determines the activity would not pose a significant risk to the deposit insurance fund of which the bank is a member. Impermissible investments and activities must be otherwise divested or discontinued within certain time frames set by the FDIC in accordance with FDICIA. Consumer Banking. The Banks' business includes making a variety of types of loans to individuals. In making these loans, the Banks are subject to State usury and regulatory laws and to various Federal statutes, such as the Equal Credit Opportunity Act, Fair Credit Reporting Act, Truth in Lending Act, Real Estate Settlement Procedures Act, and Home Mortgage Disclosure Act, and the regulations promulgated thereunder. In receiving deposits, the Banks are subject to extensive regulation under state and federal law and regulations, including the Truth in Savings Act, the Expedited Funds Availability Act, the Bank Secrecy Act, the Electronic Funds Transfer Act, and the Federal Deposit Insurance Act. Violation of these laws could result in the imposition of significant damages and fines upon the Banks and their respective directors and officers. Other. In 1994, the Congress enacted two major pieces of banking legislation, the Riegle Act and the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the "Riegle-Neal Act"). The Riegle-Neal Act substantially changed the geographic constraints applicable to the banking industry. Effective September 29, 1995, the Riegle-Neal Act allows bank holding companies to acquire banks located in any state in the United States without regard to geographic restrictions or reciprocity requirements imposed by state law, but subject to certain conditions, including limitations on the aggregate amount of deposits that may be held by the acquiring holding company and all of its insured depository institution affiliates. Effective June 1, 1997 (or earlier if expressly authorized by applicable state law), the Riegle-Neal Act allows banks to establish interstate branch networks through acquisitions of other banks, subject to certain conditions that include limitations on the aggregate amount of deposits that may be held by the surviving bank and all of its insured depository institution affiliates. The establishment of de novo interstate branches or the acquisition of individual branches of a bank in another state (rather than the acquisition of an out-of-state bank in its entirety) is allowed by the Riegle-Neal Act only if specifically authorized by state law. The legislation allows individual states to "opt-out" of certain provisions of the Riegle-Neal Act by enacting appropriate legislation prior to June 1, 1997. 6 8 ITEM 1. BUSINESS (Continued) In November, 1995, Michigan exercised its right to opt-in early to the Riegle-Neal Act, and permitted non-U.S. banks to establish branch offices in Michigan. Effective November 29, 1995, the Michigan Banking Code was amended to permit, in appropriate circumstances and with the approval of the Commissioner, (i) the acquisition of Michigan-chartered banks by FDIC-insured banks, savings banks, or savings and loan associations located in other states, (ii) the sale by a Michigan-chartered bank of one or more of its branches (not comprising all or substantially all of its assets) to an FDIC insured bank, savings bank or savings and loan association located in a state in which a Michigan-chartered bank could purchase one or more branches of the purchasing entity, (iii) the acquisition by a Michigan-chartered bank of an FDIC-insured bank, savings bank or savings and loan association located in another state, (iv) the acquisition by a Michigan-chartered bank of one or more branches (not comprising of all or substantially all of the assets) of an FDIC-insured bank, savings bank or savings and loan association located in another state, (v) the consolidation of one or more Michigan-chartered banks and FDIC-insured banks, savings banks or savings and loan associations located in other states having laws permitting such consolidation, with the resulting organization chartered either by Michigan or one of such other states, (vi) the establishment by Michigan-chartered banks of branches located in other states, the District of Columbia, or U.S. territories or protectorates with the consent of the appropriate state or territorial regulatory authority, and (vii) the establishment by foreign banks of branches located in Michigan. The amending legislation also expanded the regulatory authority of the Commissioner and made certain other changes. In addition to the authorization of interstate banking discussed above, Michigan law permits Banks to consolidate on a state-wide basis and to operate the offices of merged banks as branches of a surviving bank. Also, with the written approval of the Commissioner, the Banks may relocate their main office to any location in the state, establish and operate branch banks anywhere in the state and contract with other banks to act as branches thereof. To better serve their customers, the Banks have entered into an interbank branching agreements, whereby each of the Banks may act as a branch of the other three banks. 7 9 ITEM 1. BUSINESS -- STATISTICAL DISCLOSURE I. (A) DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY; (B) INTEREST RATES AND INTEREST DIFFERENTIAL The following table sets forth average balances for major categories of interest earning assets and interest bearing liabilities, the interest earned (on a tax equivalent basis) or paid on such amounts, and the average interest rates earned or paid thereon.
1996 1995 1994 -------------------------- -------------------------- --------------------------- Average Yield/ Average Yield/ Average Yield/ Balance Interest Rate Balance Interest Rate Balance Interest Rate -------- -------- ------ -------- -------- ------ -------- -------- ------ (dollars in thousands) ASSETS - ------ Loans--all domestic (1,2) $510,434 $49,478 9.69% $382,644 $37,654 9.84% $294,968 $28,936 9.81% Taxable securities 100,945 6,710 6.65 93,064 5,919 6.36 108,905 6,537 6.00 Tax-exempt securities (2) 39,393 3,433 8.72 31,516 2,914 9.25 29,763 2,857 9.60 Other investments 13,946 971 6.96 6,153 421 6.84 12,335 460 3.73 -------- -------- -------- -------- -------- -------- Interest earning assets 664,718 60,592 9.12 513,377 46,908 9.14 445,971 38,790 8.70 -------- -------- -------- Cash and due from banks 21,573 16,091 14,359 Other assets, net 21,038 14,115 21,491 -------- -------- -------- Total assets $707,329 $543,583 $481,821 ======== ======== ======== LIABILITIES - ----------- Savings and NOW $250,977 6,116 2.44 $217,721 5,515 2.53 $213,590 4,819 2.26 Time deposits 187,117 10,022 5.36 141,292 6,955 4.92 150,036 6,273 4.18 Long-term debt 4,875 335 6.87 2,195 120 5.47 Other borrowings 144,703 8,340 5.76 89,048 5,430 6.10 28,481 1,373 4.82 -------- -------- -------- -------- -------- -------- Interest bearing liabilities 587,672 24,813 4.22 448,061 17,900 4.00 394,302 12,585 3.19 -------- -------- -------- Demand deposits 61,161 46,539 41,910 Other liabilities 8,597 5,296 5,989 Shareholders' equity 49,899 43,687 39,620 -------- -------- -------- Total liabilities and shareholders' equity $707,329 $543,583 $481,821 ======== ======== ======== Net interest income $35,779 $29,008 $26,205 ======== ======== ======== Net interest income as a percent of earning assets 5.38% 5.65% 5.88% ====== ===== =====
(1) Average loans outstanding includes the daily average balance of non-performing loans. Interest on loans does not include additional interest of approximately $183,000, $199,000 and $157,000 for 1996, 1995 and 1994, respectively, which would have been accrued based on the original terms of such non-performing loans compared with the interest that was actually recorded. Interest income on loans includes net origination fees of $3,331,000 in 1996, $2,702,000 in 1995 and $2,590,000 in 1994. (2) Interest on tax-exempt securities has been adjusted to reflect preferential taxation. The adjustment assumes a marginal tax rate of 34%. For purposes of this analysis, tax-exempt loans are included in tax-exempt securities. 8 10 ITEM 1. BUSINESS -- STATISTICAL DISCLOSURE (Continued) I. (C) INTEREST RATES AND DIFFERENTIAL The following table summarizes the changes in interest income (on a tax equivalent basis) and interest expense resulting from changes in volume and changes in rates:
1996 Compared to 1995 1995 Compared to 1994 ----------------------------------- ------------------------------------ Volume Rate Net Volume Rate Net ------ ---- --- ------ ---- --- (in thousands) Increase (decrease) in interest income (1) - ------------------------------------------ Loans--all domestic $12,395 $(571) $11,824 $8,627 $ 91 $8,718 Taxable securities 516 275 791 (991) 373 (618) Tax-exempt securities (2) 695 (176) 519 165 (108) 57 Other investments 542 8 550 (303) 264 (39) ------- ----- ------- ------- ------- ------ Total interest income 14,148 (464) 13,684 7,498 620 8,118 ------- ----- ------- ------ ------- ------ Increase (decrease) in interest expense (1) - ------------------------------------------- Savings and NOW 817 (216) 601 95 601 696 Time deposits 2,412 655 3,067 (382) 1,064 682 Long-term debt 335 335 (120) (120) Other borrowings 3,223 (313) 2,910 3,594 463 4,057 ------- ----- ------- ------ ------- ------ Total interest expense 6,787 126 6,913 3,187 2,128 5,315 ------- ----- ------- ------ ------- ------ Net interest income $ 7,361 $(590) $ 6,771 $4,311 $(1,508) $2,803 ======= ===== ======= ====== ======= ======
(1) The change in interest due to both volume and rate has been allocated to volume or rate changes in proportion to the relationship of the absolute dollar amounts of the change in each. (2) Interest on tax-exempt securities has been adjusted to reflect preferential taxation. The adjustment assumes a marginal tax rate of 34%. II. INVESTMENT PORTFOLIO (A) The following table sets forth the book value of securities at December 31:
1996 1995 1994 ---- ---- ---- (in thousands) Held to maturity - ---------------- U.S. Treasury $ 5,738 U.S. Government agencies $ 1,484 $ 2,559 11,004 States and political subdivisions 21,192 20,142 27,240 Mortgage-backed securities 3,688 4,487 26,545 Other securities 390 718 7,194 --------- -------- -------- Total $ 26,754 $27,906 $77,721 ========= ======== ======== Available for sale - ------------------ U.S. Treasury $ 27,722 $23,272 $34,724 U.S. Government agencies 21,159 6,623 States and political subdivisions 21,854 9,290 Mortgage-backed securities 57,528 37,722 11,684 Other securities 8,589 10,646 6,348 --------- -------- -------- Total $136,852 $87,553 $52,756 ========= ======== ========
9 11 ITEM 1. BUSINESS -- STATISTICAL DISCLOSURE (Continued) II. INVESTMENT PORTFOLIO (Continued) (B) The following table sets forth contractual maturities of securities at December 31, 1996 and the weighted average yield of such securities:
Maturing Maturing Maturing After One After Five Maturing Within But Within But Within After One Year Five Years Ten Years Ten Years --------------- --------------------- -------------------- ------------------ Amount Yield Amount Yield Amount Yield Amount Yield ------- ----- ------ ----- ------ ----- ------ ----- (dollars in thousands) Held to maturity - ----------------- U.S. Government agencies $ 1,484 7.85% States and political subdivisions $ 1,772 7.05% $12,238 9.26% $ 5,945 9.56% 1,237 8.83 Mortgage-backed securities Guaranteed or issued by U.S. Government agencies 195 9.29 3,248 7.43 245 8.96 Other securities 200 5.45 190 6.50 -------- ------- ------- ------- Total $ 2,167 7.11% $15,676 8.84% $ 6,190 9.53% $ 2,721 8.30% ======== ======= ======= ======= Tax equivalent adjustment for calculations of yield $ 22 $ 385 $ 193 $ 37 ======== ======= ======= ======= Available for sale - ------------------ U.S. Treasury $ 6,565 6.46% $20,517 6.07% $ 640 6.45% U.S. Government agencies 509 5.01 5,889 5.93 14,761 6.61 States and political subdivisions 951 8.30 5,173 8.94 8,780 9.21 $ 6,950 8.14% Mortgage backed securities: Guaranteed or issued by U.S. Government agencies 1,680 6.86 39,563 7.19 6,483 6.49 7,881 6.70 Other mortgage-backed securities 1,921 7.29 Other securities 501 6.00 7,586 6.14 502 3.58 -------- ------- ------- ------- Total $10,206 6.61% $80,649 6.83% $30,664 7.33% $15,333 7.24% ======== ======= ======= ======= Tax equivalent adjustment for calculations of yield $ 27 $ 157 $ 275 $ 192 ======== ======= ======= =======
The rates set forth in the tables above for obligations of state and political subdivisions have been restated on a fully tax equivalent basis assuming a 34% marginal tax rate. The amount of the adjustment is as follows:
Tax-Exempt Rate on Tax Held to maturity Rate Adjustment Equivalent Basis - ---------------- ---------- ---------- ---------------- Under 1 year 5.82% 1.23% 7.05% 1-5 years 6.11 3.15 9.26 5-10 years 6.31 3.25 9.56 After 10 years 5.83 3.00 8.83 Available for sale - ------------------ Under 1 year 5.48 2.82 8.30 1-5 years 5.90 3.04 8.94 5-10 years 6.08 3.13 9.21 After 10 years 5.37 2.77 8.14
10 12 ITEM 1. BUSINESS -- STATISTICAL DISCLOSURE (Continued) III. LOAN PORTFOLIO (A) The following table sets forth loans outstanding at December 31:
1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- (in thousands) Loans held for sale $ 11,583 $ 16,047 $ 5,933 $ 6,376 $ 6,400 Real estate mortgage 331,150 225,900 166,794 136,579 133,486 Commercial and agricultural 164,304 108,879 103,984 91,655 70,360 Installment 114,250 83,265 65,947 54,033 51,388 --------- --------- ---------- ---------- ---------- Total Loans $621,287 $434,091 $342,658 $288,643 $261,634 ========= ========= ========== ========== ========== Agricultural loans included in commercial and agricultural and in real estate mortgage loans above $ 21,804 $ 12,394 $ 15,855 $ 17,096 $ 8,179 ========= ========= ========== ========== ==========
The loan portfolio is periodically and systematically reviewed and the results of these reviews are reported to the Boards of Directors of the Registrant and the Banks. The purpose of these reviews is to assist in assuring proper loan documentation, to provide for the early identification of potential problem loans (which enhances collection prospects) and to evaluate the adequacy of the allowance for loan losses. (B) The following table sets forth scheduled loan repayments (excluding 1-4 family residential mortgages and installment loans) at December 31, 1996:
Due Due After One Due Within But Within After One Year Five Years Five Years Total --------- ---------- ---------- ----- (in thousands) Real estate mortgage $ 12,970 $15,986 $26,857 $55,813 Commercial and agricultural 85,266 70,050 8,988 164,304 --------- ------- ------- ------------ Total $101,436 $86,036 $35,845 $223,317 ========= ======= ======= ============
The following table sets forth loans due after one year which have predetermined (fixed) interest rates and/or adjustable (variable) interest rates at December 31, 1996:
Fixed Variable Rate Rate Total --------- -------- --------- (in thousands) Due after one but within five years $ 74,765 $11,271 $ 86,036 Due after five years 29,208 6,637 35,845 --------- -------- --------- Total $103,973 $17,908 $121,881 ========= ======== =========
11 13 ITEM 1. BUSINESS -- STATISTICAL DISCLOSURE (Continued) III. LOAN PORTFOLIO (Continued) (C) The following table sets forth non-performing loans at December 31:
1996 1995 1994 1993 1992 ------ ------ ------ ------ ------ (in thousands) (a) Loans accounted for on a non-accrual basis (1, 2) $1,711 $1,886 $2,052 $1,707 $1,581 (b) Aggregate amount of loans ninety days or more past due (excludes loans in (a) above) 1,994 427 254 408 380 (c) Loans not included above which are "troubled debt restruc- turings" as defined in State- ment of Financial Accounting Standards No. 15 (2) 197 247 528 1,098 1,213 ------ ------ ------ ------ ------ Total non-performing loans $3,902 $2,560 $2,834 $3,213 $3,174 ====== ====== ====== ====== ======
(1) The accrual of interest income is discontinued when a loan becomes 90 days past due and/or the borrower's capacity to repay the loan and collateral values appear insufficient. Non-accrual loans may be restored to accrual status when interest and principal payments are current and the loan appears otherwise collectible. (2) Interest in the amount of $288,000 would have been earned in 1996 had loans in categories (a) and (c) remained at their original terms, however, only $105,000 was included in interest income for the year with respect to these loans. Other loans of concern identified by the loan review department which are not included as non-performing totaled approximately $2,100,000 at December 31, 1996. These loans involve circumstances which have caused management to place increased scrutiny on the credits and may, in some instances, represent an increased risk of loss to the Banks. At December 31, 1996, there was no concentration of loans exceeding 10% of total loans which is not already disclosed as a category of loans in this section "Loan Portfolio" (Item III(A)). There were no other interest bearing assets at December 31, 1996, that would be required to be disclosed above (Item III(C)), if such assets were loans. There were no foreign loans outstanding at December 31, 1996. 12 14 ITEM 1. BUSINESS -- STATISTICAL DISCLOSURE (Continued) IV. SUMMARY OF LOAN LOSS EXPERIENCE (A) The following table sets forth loan balances and summarizes the changes in the allowance for loan losses for each of the years ended December 31:
1996 1995 1994 1993 1992 --------- --------- --------- --------- --------- (dollars in thousands) Loans outstanding at the end of the year (net of unearned fees) $621,287 $434,091 $342,658 $288,643 $261,634 ======== ======== ======== ======== ======== Average loans outstanding for the year (net of unearned fees) $510,434 $382,644 $294,968 $259,334 $267,801 ======== ======== ======== ======== ======== Balance of allowances for loan losses at beginning of year $ 5,243 $ 5,054 $ 5,053 $ 4,023 $ 3,784 -------- -------- -------- -------- -------- Loans charged-off Real estate 24 24 14 38 69 Commercial and agricultural 66 113 311 306 566 Installment 1,046 575 546 370 581 -------- -------- -------- -------- -------- Total loans charged-off 1,136 712 871 714 1,216 -------- -------- -------- -------- -------- Recoveries of loans previously charged-off Real estate 8 28 6 11 26 Commercial and agricultural 138 115 151 156 91 Installment 294 122 242 164 113 -------- -------- -------- -------- -------- Total recoveries 440 265 399 331 230 -------- -------- -------- -------- -------- Net loans charged-off 696 447 472 383 986 Additions to allowance charged to operating expense 1,233 636 473 657 1,225 Allowance on loans acquired 1,180 756 -------- -------- -------- -------- -------- Balance at end of year $ 6,960 $ 5,243 $ 5,054 $ 5,053 $ 4,023 ======== ======== ======== ======== ======== Net loans charged-off as a percent of average loans outstanding for the year 0.14% 0.12% 0.16% 0.15% 0.37% Allowance for loan losses as a percent of loans outstanding at the end of the year 1.12 1.21 1.48 1.75 1.54
The allowance for loan losses reflected above is a valuation allowance in its entirety and the only allowance available to absorb future loan losses. Further discussion of the provision and allowance for loan losses as well as non-performing loans is presented in Management's Discussion and Analysis of Financial Condition and Results of Operations, incorporated herein by reference in Item 7, Part II of this report. 13 15 ITEM 1. BUSINESS -- STATISTICAL DISCLOSURE (Continued) IV. SUMMARY OF LOAN LOSS EXPERIENCE (Continued) (B) The Banks have allocated the allowance for loan losses to provide for the possibility of losses being incurred within the categories of loans set forth in the table below. The amount of the allowance that is allocated and the ratio of loans within each category to total loans at December 31, follows:
1996 1995 1994 ---------------------- ------------------------------- ---------------------- Percent Percent Percent Allowance of Loans to Allowance of Loans to Allowance of Loans to Amount Total Loans Amount Total Loans Amount Total Loans --------- ----------- ----------- ----------- --------- ----------- (dollars in thousands) Commercial and agricultural $2,176 26.4% $1,612 25.8% $1,655 30.3% Real estate mortgage 257 55.2 162 55.0 177 50.4 Installment 834 18.4 597 19.2 474 19.3 Unallocated 3,693 2,872 2,748 ------ ----- ------ ----- ----- ----- Total $6,960 100.0% $5,243 100.0% $5,054 100.0% ====== ===== ====== ===== ====== =====
1993 1992 ---------------------- ------------------------------ Percent Percent Allowance of Loans to Allowance of Loans to Amount Total Loans Amount Total Loans --------- ----------- --------- ----------- (dollars in thousands) Commercial and agricultural $2,222 31.8% $1,971 26.9% Real estate mortgage 270 49.5 255 53.5 Installment 464 18.7 434 19.6 Unallocated 2,097 1,363 ------ ----- ------ ----- Total $5,053 100.0% $4,023 100.0% ====== ===== ====== =====
V. DEPOSITS The following table sets forth average deposit balances and the weighted-average rates paid thereon for the years ended December 31:
1996 1995 1994 ---------------- ---------------- ---------------- Average Average Average Balance Rate Balance Rate Balance Rate --------- ----- --------- ----- --------- ----- (dollars in thousands) Non-interest bearing demand $ 61,161 $ 46,539 $ 41,910 Savings and NOW 250,977 2.44% 217,721 2.53% 213,590 2.26% Time deposits 187,117 5.36 141,292 4.92 150,036 4.18 -------- -------- -------- Total $499,255 3.23% $405,552 3.08% $405,536 2.74% ======== ======== ========
The following table summarizes time deposits in amounts of $100,000 or more by time remaining until maturity as of December 31, 1996:
(in thousands) Three month or less $14,467 Over three through six months 4,003 Over six months through one year 3,061 Over one year 9,522 ------- Total $31,053 =======
14 16 ITEM 1. BUSINESS -- STATISTICAL DISCLOSURE (Continued) VI. RETURN ON EQUITY AND ASSETS The ratio of net income to average shareholders' equity and to average total assets, and certain other ratios, for the years ended December 31, follow:
1996 1995 1994 1993 1992 ------ ------ ------ ------ ------ Net income as a percent of Average common equity 15.74% 15.59% 15.22% 15.21% 15.88% Average total assets 1.11 1.25 1.25 1.33 1.26 Dividends declared per common share as a percent of net income per share 36.76 37.20 34.78 25.58 24.37 Average shareholders' equity as a percent of average total assets 7.06 8.04 8.22 8.72 7.94
Additional performance ratios are set forth in Selected Consolidated Financial Data, incorporated herein by reference in Item 6, Part II of this report. Any significant changes in the current trend of the above ratios are reviewed in Management's Discussion and Analysis of Financial Condition and Results of Operations, incorporated herein by reference in Item 7, Part II of this report. VII. SHORT-TERM BORROWINGS Short-term borrowings are discussed in note 8 to the consolidated financial statements incorporated herein by reference in Item 8, Part II of this report. 15 17 ITEM 2. PROPERTIES The Registrant and the Banks operate a total of 64 facilities in Michigan. The individual properties are not materially significant to the Registrants' or the Banks' business or to the consolidated financial statements. With the exception of the potential remodeling of certain facilities to provide for the efficient use of work space or to maintain an appropriate appearance, each property is considered reasonably adequate for current and anticipated needs. ITEM 3. LEGAL PROCEEDINGS Due to the nature of their business, the Banks are often subject to numerous legal actions. These legal actions, whether pending or threatened, arise through the normal course of business and are not considered unusual or material. Currently, no material legal procedures are pending which involve the Registrant or the Banks. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. 16 18 ADDITIONAL ITEM - EXECUTIVE OFFICERS Executive officers of the Registrant are appointed annually by the Board of Directors at the meeting of Directors following the Annual Meeting of Shareholders. There are no family relationships among these officers and/or the Directors of the Registrant nor any arrangement or understanding between any officer and any other person pursuant to which the officer was elected. The following sets forth certain information with respect to the Registrant's executive officers and certain key officers of its subsidiaries (included for information purposes only) as of December 31, 1996. First elected as an officer of Name (Age) Position with Registrant the registrant - ---------- ------------------------ ---------------- Charles C. Van Loan (49) President, Chief Executive December, 1984 Officer and Director William R. Kohls (39) Executive Vice President and Chief Financial Officer May, 1985 Jeffrey A. Bratsburg (53) President and Chief Executive Officer - Independent Bank West Michigan Edward B. Swanson (43) President and Chief Executive Officer - Independent Bank South Michigan Michael M. Magee, Jr. (41) President and Chief Executive Officer - Independent Bank Ronald L. Long (37) President and Chief Executive Officer - Independent Bank East Michigan Prior to being named President and Chief Executive Officer in 1993, Mr. Magee was Executive Vice President of Independent Bank. Prior to being named President and Chief Executive Officer in 1993, Mr. Long was Vice President and Controller of the Registrant. The President and Chief Executive Officers of the Registrant's subsidiary banks serve as members of various committees of the Registrant. 17 19 PART II. ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The information set forth under the caption "Quarterly Summary " on Page A-31 of the Appendix to the Registrant's definitive proxy statement, dated March 14, 1997, relating to the April 15, 1997 Annual Meeting of Shareholders (as filed with the commission and as filed as exhibit 13 to this report on Form 10-K) is incorporated herein by reference. ITEM 6. SELECTED FINANCIAL DATA The information set forth under the caption "Selected Consolidated Financial Data" on Page A-11 of the Appendix to the Registrant's definitive proxy statement, dated March 14, 1997, relating to the April 15, 1997 Annual Meeting of Shareholders (as filed with the commission and as filed as exhibit 13 to this report on Form 10-K) is incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information set forth under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" on pages A-2 through A-10 of the Appendix to the Registrant's definitive proxy statement, dated March 14, 1997, relating to the April 15, 1997 Annual Meeting of Shareholders (as filed with the commission and as filed as exhibit 13 to this report on Form 10-K) is incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The following consolidated financial statements of the Registrant and the auditors' report are set forth on pages A-12 through A-30 of the Appendix to the Registrant's definitive proxy statement, dated March 14, 1997, relating to the April 15, 1997 Annual Meeting of Shareholders (as filed with the commission and as filed as exhibit 13 to this report on Form 10-K) is incorporated herein by reference. Consolidated Statements of Financial Condition at December 31, 1996 and 1995 Consolidated Statements of Operations for the years ended December 31, 1996, 1995 and 1994 Consolidated Statements of Cash Flows for the years ended December 31, 1996, 1995 and 1994 Consolidated Statements of Shareholders' Equity for the years ended December 31, 1996, 1995 and 1994 Notes to Consolidated Financial Statements Independent Auditors Report The supplementary data required by this item set forth under the caption "Quarterly Financial Data" on page A-31 of the Appendix to the Registrant's definitive proxy statement, dated March 14, 1997, relating to the April 15, 1997 Annual Meeting of Shareholders (as filed with the commission and as filed as exhibit 13 to this report on Form 10-K) is incorporated herein by reference. 18 20 PART II. ITEM 8. (Continued) The portions of the Appendix to the Registrant's definitive proxy statement, dated March 14, 1997, relating to the April 15, 1997 Annual Meeting of Shareholders (as filed with the commission and as filed as exhibit 13 to this report on Form 10-K) which are not specifically incorporated by reference as part of this Form 10-K are not deemed to be a part of this report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None PART III. ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT DIRECTORS - The information with respect to Directors of the Registrant, set forth under the caption "Election of Directors" on pages 2 through 4 of the Registrant's definitive proxy statement, dated March 14, 1997, relating to the April 15, 1997 Annual Meeting of Shareholders, (as filed with the commission) is incorporated herein by reference. EXECUTIVE OFFICERS - Reference is made to additional item under Part I of this report on Form 10-K. ITEM 11. EXECUTIVE COMPENSATION The information set forth under the captions "Summary Compensation Table", "Option Grants in 1996" and "Aggregated Stock Option Exercises in 1996 and Year End Option Values" on pages 11 through 12 of the Registrant's definitive proxy statement, dated March 14, 1997, relating to the April 15, 1997 Annual Meeting of Shareholders, (as filed with the commission) is incorporated herein by reference. Information under the caption "Committee Report on Executive Compensation" on pages 9 through 10 of the definitive proxy statement is not incorporated by reference herein and is not deemed to be filed with the Securities and Exchange Commission. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information set forth under the captions "Voting Securities and Record Date", "Election of Directors" and "Securities Ownership of Management" on pages 1, 2 and 11, respectively, of the Registrant's definitive proxy statement, dated March 14, 1997, relating to the April 15, 1997 Annual Meeting of Shareholders, (as filed with the commission) is incorporated herein by reference. Information under the captions "Shareholder Return Performance Graph" and "Committee Report on Executive Compensation" on pages 8 through 10 of the definitive proxy statement is not incorporated by reference herein and is not deemed to be filed with the Securities and Exchange Commission. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information set forth under the caption "Transactions Involving Management" on page 13 of the Registrant's definitive proxy statement, dated March 14, 1997, relating to the April 15, 1997 Annual Meeting of Shareholders, (as filed with the commission) is incorporated herein by reference. 19 21 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) 1. Financial Statements All financial statements of the Registrant are incorporated herein by reference as set forth in the Appendix to the Registrant's definitive proxy statement, dated March 14, 1997, relating to the April 15, 1997 Annual Meeting of Shareholders (filed as exhibit 13 to this report on Form 10-K.) 2. Financial Statement Schedules Not applicable 3. Exhibits (Numbered in accordance with Item 601 of Regulation S-K) The Exhibit Index is located on the final page of this report on Form 10-K. (b) Reports on Form 8-K A report on Form 8-K was filed on December 24, 1996, to report the acquisition of eight branch banking facilities from First of America Bank--Michigan, N.A. 20 22 SIGNATURES Pursuant to the requirements of Section 13 or 15 (d) 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, dated March 18, 1997. INDEPENDENT BANK CORPORATION /s/Charles C. Van Loan Charles C. Van Loan, President and Chief - ------------------------------- Executive Officer (Principal Executive Officer) /s/William R. Kohls William R. Kohls, Executive Vice President and - ------------------------------- Chief Financial Officer (Principal Financial Officer) /s/James J. Twarozynski James J. Twarozynski, Vice President and - ------------------------------- Controller (Principal Accounting Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Each director of the Registrant, who's signature appears below hereby appoints Charles C. Van Loan and William R. Kohls and each of them severally, as his attorney-in-fact, to sign in his name and on his behalf, as a director of the Registrant, and to file with the Commission any and all Amendments to this Report on Form 10-K. Keith E. Bazaire, Director /s/Keith E. Bazaire ---------------------- Terry L. Haske, Director /s/Terry L. Haske ---------------------- Thomas F. Kohn, Director /s/Thomas F. Kohn ---------------------- Robert J. Leppink, Director /s/Robert J. Leppink ---------------------- Charles A. Palmer, Director /s/Charles A. Palmer ---------------------- Charles C. Van Loan, Director /s/Charles C. Van Loan ---------------------- Arch V. Wright, Jr., Director /s/Arch V. Wright, Jr. ---------------------- 21 23 EXHIBIT INDEX Exhibit number and description EXHIBITS FILED HEREWITH 13 Appendix to the Registrant's definitive proxy statement, dated March 14, 1997, relating to the April 15, 1997 Annual Meeting of Shareholders. This appendix was filed with the Commission as part of the Company's proxy statement and was delivered to the Company's shareholders in compliance with Rule 14(a)-3 of the Securities Exchange Act of 1934, as amended. 21 List of Subsidiaries 23 Consent of Independent Accountants 24 Power of Attorney (Included on page 21). 27 Financial Data Schedule EXHIBITS INCORPORATED BY REFERENCE 3(A) Restated Articles of Incorporation (incorporated herein by reference to Exhibit 3(i) to the Registrant's report on Form 10-Q for the quarter ended June 30, 1994). 3(B) Amended and Restated Bylaws (incorporated herein by reference to Exhibit 3(ii) to the Registrant's report on Form 10-Q for the quarter ended June 30, 1994). 4 Automatic Dividend Reinvestment and Stock Purchase Plan, as amended (incorporated herein by reference to the Registrant's Form S-3 Registration Statement dated June 13, 1994, filed under Registration No. 33-80088). 4.1 Form of Indenture, dated as of December 17, 1996 (incorporated herein by reference to the Registrant's Form S-2 Registration Statement dated December 6, 1996, filed under Registration No. 33-14507). 4.2 Form of Subordinated Debenture (included as an exhibit to Exhibit 4.1), (incorporated herein by reference to the Registrant's Form S-2 Registration Statement dated December 6, 1996, filed under Registration No. 33-14507). 4.3 Certificate of Trust of IBC Capital Finance (incorporated herein by reference to the Registrant's Form S-2 Registration Statement dated December 6, 1996, filed under Registration No. 33-14507). 4.4 Trust Agreement of IBC Capital Finance dated as of November 7, 1996 (incorporated herein by reference to the Registrant's Form S-2 Registration Statement dated December 6, 1996, filed under Registration No. 33-14507). 4.5 Form of Amended and Restated Trust Agreement of IBC Capital Finance dated as of December 17, 1996 (incorporated herein by reference to the Registrant's Form S-2 Registration Statement dated December 6, 1996, filed under Registration No. 33-14507). 4.6 Form of Preferred Security Certificate of IBC Capital Finance (included as an exhibit to Exhibit 4.5), (incorporated herein by reference to the Registrant's Form S-2 Registration Statement dated December 6, 1996, filed under Registration No. 33-14507). 4.7 Form of Preferred Securities Guarantee Agreement for IBC Capital Finance (incorporated herein by reference to the Registrant's Form S-2 Registration Statement dated December 6, 1996, filed under Registration No. 33-14507). 4.8 Form of Agreement as to Expenses and Liabilities (included as an exhibit to Exhibit 4.5), (incorporated herein by reference to the Registrant's Form S-2 Registration Statement dated December 6, 1996, filed under Registration No. 33-14507). 22 24 EXHIBIT INDEX (Continued) 10(A) Deferred Benefit Plan for Directors (incorporated herein by reference to Exhibit 10(C) to the Registrant's report on Form 10-K for the year ended December 31, 1984). 10(B) The form of Indemnity Agreement approved by the Registrant's shareholders at its April 19, 1988 Annual Meeting, as executed with all of the Directors of the Registrant (incorporated herein by reference to Exhibit 10(F) to the Registrant's report on Form 10-K for the year ended December 31, 1988). 10(C) Incentive Share Grant Plan, as amended, approved by the Registrant's shareholders at its April 21, 1992 Annual Meeting (incorporated herein by reference to Exhibit 10 to the Registrant's report on Form 10-K for the year ended December 31, 1992). 10(D) Non-Employee Director Stock Option Plan, approved by the Registrant's shareholders at its April 21, 1992 Annual Meeting (incorporated herein by reference to Exhibit 28 to the Registrant's Form S-8 Registration Statement dated April 23, 1993, filed under registration No. 33-62086). 10(E) Employee Stock Option Plan, approved by the Registrant's shareholders at its April 21, 1992 Annual Meeting (incorporated herein by reference to Exhibit 28 to the Registrant's Form S-8 Registration Statement dated April 30, 1993, filed under registration No. 33-62090). 10(F) Agreement and Plan of Reorganization among the Registrant, IBC Interim Co., and North Bank Corporation, dated February 2, 1996 (incorporated by reference to Exhibit 2.1 to the Company's Current Report on 8-K filed June 16, 1996). 10(G) Agreement to Purchase Assets and Assume Liabilities By and Between the Registrant and First of America Bank -- Michigan, National Association, dated September 18, 1996 (incorporated herein by reference to the Registrant's Form S-2 Registration Statement dated December 6, 1996, filed under Registration No. 33-14507). 23 EX-13 2 EX 13 1 EXHIBIT 13 A-1 APPENDIX Independent Bank Corporation is a bank holding company with total assets of $889 million and a market capitalization of approximately $116 million. Its four subsidiary banks principally serve rural and suburban communities located across Michigan's lower peninsula. The Banks emphasize service and convenience as the principal means of competing in the delivery of financial services. Accordingly, the Company's community banking philosophy vests discretion and authority in the Banks' management while providing financial incentives to align the interests of such managers with those of its shareholders. To support the Banks' service and sales efforts, while providing the internal controls that are consistent with its decentralized structure, the Company has centralized common operations and provides administrative and operational services to the Banks. CONTENTS Management's Discussion and Analysis........................... A-2 Selected Consolidated Financial Data........................... A-11 Independent Auditor's Report................................... A-12 Consolidated Financial Statements.............................. A-13 Notes to Consolidated Financial Statements..................... A-18 Quarterly Data................................................. A-31 Shareholder Information........................................ A-32 Executive Officers & Directors................................. A-32 2 A-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 to assess the financial condition and results of operations of the Company and the Banks. This section should be read in conjunction with the consolidated financial statements and supplemental financial data contained in this appendix. ACQUISITIONS AND FINANCING. Consistent with Management's goal to maintain profitable financial leverage, the Company acquired North Bank Corporation ("NBC") effective May 31, 1996, and on December 13, 1996, one of the Banks purchased eight offices from First of America Bank - Michigan N.A. (the "FoA Branches"). These acquisitions (the "1996 Acquisitions") were financed with an unsecured credit facility (the "Credit Facility") and the issuance of cumulative trust preferred securities. The 1996 Acquisitions and related financing will continue to have a material impact on the Company's financial condition and results of operation. NBC was acquired in exchange for cash consideration totaling $15.8 million. On the effective date of the transaction (the "NBC Acquisition"), NBC's assets and shareholders' equity totaled $152.0 million and $9.5 million, respectively, and the Company recorded goodwill totaling $7.5 million. NBC's sole banking subsidiary, North Bank, was subsequently consolidated with one of the Banks. The FoA Branches are located in communities that are contiguous to markets served by the acquiring Bank. On the date of the transaction (the "FoA Purchase"), the FoA Branches had deposits and loans totaling $121.9 million and $22.1 million, respectively, and the Bank recorded intangible assets of approximately $8.8 million. Real and personal property associated with the FoA Branches was purchased at net book value totaling $1.3 million. The Credit Facility consisted of a $10 million term loan that requires quarterly principal payments of $500,000 and a $7 million revolving credit agreement. Unpaid principal balances at December 31, 1996, totaled $9.0 million and $5.0 million, respectively. On December 18, 1996, IBC Capital Finance, a trust subsidiary of the Company, issued $17.25 million of 9.25% Cumulative Trust Preferred Securities ("Preferred Securities"). Net proceeds have been used by the Company to fund a capital contribution to one of the Banks in conjunction with the FoA Purchase and for other corporate purposes. In addition, the transaction will assist the Company in maintaining a Tier 1 capital ratio in excess of 5%. (See "Capital resources.") RESULTS OF OPERATIONS SUMMARY OF RESULTS. Net income totaled $7,852,000 in 1996. The 15.3% increase from $6,810,000 in 1995 represents the thirteenth consecutive increase in the Company's annual earnings. A year earlier, net income increased by 12.9% from $6,031,000 in 1994. These increases in net income principally reflect increases in net interest income that have accompanied the growth in average earning assets. In addition to the NBC Acquisition, the Banks' balance sheet management strategies that combine effective loan origination efforts with disciplined funding strategies have provided an opportunity to profitably deploy capital (See "Deposits and borrowings" and "Asset/liability management.") Net gains on the sale of real estate mortgage loans have also contributed to the increases in net income. Increases in net interest income and net gains on the sale of real estate mortgage loans were, however, partially offset by increases in non-interest expense, the provision for loan losses and federal income taxes. KEY PERFORMANCE RATIOS YEAR ENDED DECEMBER 31, 1996 1995 1994 - -------------------------------------------------------------------------------- Net income to Average equity...................................... 15.74% 15.59% 15.22% Average assets...................................... 1.11 1.25 1.25 Income per common share............................... $2.72 $2.38 $2.09 The increase in the Company's return on average equity, relative to its return on average assets, reflects Management's efforts to maintain or enhance financial leverage. As a result of the NBC Acquisition and the Banks' balance sheet management strategies, the Company's leverage ratio (average assets divided by average shareholders' equity) increased to 14.18 during 1996, compared to 12.44 and 12.16 during 1995 and 1994, respectively. The leverage ratio further increased to 17.14 at December 31, 1996, as a result of the FoA Purchase. 3 A-3 NET INTEREST INCOME. Increases in tax equivalent net interest income are the result of increases in average earning assets. Tax equivalent net interest income increased by 23.3% to $35,779,000 during 1996 and by 10.7% to $29,008,000 in 1995 from $26,205,000 in 1994. Average earning assets increased by 29.5% to $664,718,000 in 1996 and by 15.1% to $513,377,000 in 1995 from $445,971,000 in 1994. The Banks' balance sheet management strategies and the NBC Acquisition each account for approximately 50% of the $151,341,000 increase in average earning assets in 1996. (See "Deposits and borrowings.") The FoA Purchase did not, however, have a material impact on average earning assets. Approximately 90% of the $67,406,000 increase in average earning assets in 1995 can be attributed to the Banks' balance sheet management strategies.
1996 1995 1994 AVERAGE ----------------------------------------------------------------------------------------------- BALANCES AND TAX AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/ EQUIVALENT RATES BALANCE INTEREST COST BALANCE INTEREST COST BALANCE INTEREST COST - ---------------------------------------------------------------------------------------------------------------------------------- (dollars in thousands) ASSETS Loans-all domestic(1,2)..... $510,434 $49,478 9.69% $382,644 $37,654 9.84% $294,968 $28,936 9.81% Taxable securities.......... 100,945 6,710 6.65 93,064 5,919 6.36 108,905 6,537 6.00 Tax-exempt securities(2).... 39,393 3,433 8.72 31,516 2,914 9.25 29,763 2,857 9.60 Other investments........... 13,946 971 6.96 6,153 421 6.84 12,335 460 3.73 -------- ------- -------- -------- -------- -------- Interest earning assets... 664,718 60,592 9.12 513,377 46,908 9.14 445,971 38,790 8.70 ------- -------- -------- Cash and due from banks..... 21,573 16,091 14,359 Other assets, net........... 21,038 14,115 21,491 -------- -------- -------- Total assets............ $707,329 $543,583 $481,821 ======== ======== ======== LIABILITIES Savings and NOW............. $250,977 6,116 2.44 $217,721 5,515 2.53 $213,590 4,819 2.26 Time deposits............... 187,117 10,022 5.36 141,292 6,955 4.92 150,036 6,273 4.18 Long-term debt.............. 4,875 335 6.87 2,195 120 5.47 Other borrowings............ 144,703 8,340 5.76 89,048 5,430 6.10 28,481 1,373 4.82 -------- ------- -------- -------- -------- -------- Interest bearing liabilities............. 587,672 24,813 4.22 448,061 17,900 4.00 394,302 12,585 3.19 ------- -------- -------- Demand deposits............. 61,161 46,539 41,910 Other liabilities........... 8,597 5,296 5,989 Shareholders' equity........ 49,899 43,687 39,620 -------- -------- -------- Total liabilities and shareholders' equity $707,329 $543,583 $481,821 ======== ======== ======== Net interest income..... $35,779 $29,008 $ 26,205 ======= ======= ======== Net interest income as a percent of earning assets........ 5.38% 5.65% 5.88% ==== ==== ====
(1) Interest on loans includes net origination fees totaling $3,331,000, $2,702,000 and $2,590,000 in 1996, 1995 and 1994, respectively. (2) Interest on tax-exempt securities has been adjusted to reflect preferential taxation. The adjustment assumes a marginal tax rate of 34%. For purposes of analysis, tax-exempt loans are included in tax-exempt securities. Tax equivalent net interest income declined to 5.38% of average earning assets during 1996 from 5.65% and 5.88% in 1995 and 1994, respectively. In addition to the cost of other borrowings utilized to implement the Banks' balance sheet management strategies, the decrease in tax equivalent net interest income as a percent of average earning assets during 1996 reflects the NBC Acquisition and the cost of the Credit Facility. 4 A-4
CHANGE IN TAX EQUIVLENT 1996 COMPARED TO 1995 1995 COMPARED TO 1994 NET INTEREST INCOME VOLUME RATE NET VOLUME RATE NET - --------------------------------------------------------------------------------------------------------------------------- (in thousands) Increase (decrease) in interest income(1) Loans-all domestic................................ $12,395 $(571) $11,824 $ 8,627 $ 91 $ 8,718 Taxable securities................................ 516 275 791 (991) 373 (618) Tax-exempt securities(2).......................... 695 (176) 519 165 (108) 57 Other investments................................. 542 8 550 (303) 264 (39) ------------------------------------------------------------------- Total interest income........................... 14,148 (464) 13,684 7,498 620 8,118 ------------------------------------------------------------------- Increase (decrease) in interest expense(1) Savings and NOW................................... 817 (216) 601 95 601 696 Time deposits..................................... 2,412 655 3,067 (382) 1,064 682 Long-term debt.................................... 335 335 (120) (120) Other borrowings.................................. 3,223 (313) 2,910 3,594 463 4,057 ------------------------------------------------------------------- Total interest expense.......................... 6,787 126 6,913 3,187 2,128 5,315 ------------------------------------------------------------------- Net interest income.......................... $ 7,361 $(590) $ 6,771 $ 4,311 $(1,508) $ 2,803 ===================================================================
(1) The change in interest due to changes in both balance and rate has been allocated to change due to balance and change due to rate in proportion to the relationship of the absolute dollar amounts of change in each. (2) Interest on tax exempt securities has been adjusted to reflect preferential taxation. The adjustment assumes a marginal tax rate of 34%. Increases in loans as a percent of average earning assets partially offset the decline in tax equivalent net interest income as a percent of average earning assets. Loans were equal to 76.8% of average earning assets in 1996 compared to 74.5% and 66.1% in 1995 and 1994. Management anticipates that cash proceeds from the FoA Purchase, pending complete deployment into higher yielding loans, as well as distributions paid on the Preferred Securities will depress tax equivalent net interest income as a percent of average earning assets in future accounting periods.
COMPOSITION OF AVERAGE EARNING ASSETS YEAR ENDED DECEMBER 31, AND INTEREST PAYING LIABILITIES 1996 1995 1994 - ----------------------------------------------------------------------------------------------------------------------- As a percent of average earning assets Loans-all domestic...................................................................... 76.79% 74.53% 66.14% Other earning assets.................................................................... 23.21 25.47 33.86 -------------------------- Average earning assets.............................................................. 100.00% 100.00% 100.00% ========================== Savings and NOW......................................................................... 37.76% 42.41% 47.89% Time deposits........................................................................... 28.15 27.52 33.64 Other borrowings and long-term debt..................................................... 22.50 17.35 6.88 -------------------------- Average interest bearing liabilities................................................ 88.41% 87.28% 88.41% ========================== Earning asset ratio....................................................................... 93.98% 94.44% 92.56% Free-funds ratio.......................................................................... 11.59 12.72 11.59
PROVISION FOR LOAN LOSSES. In addition to a subjective analysis of general and local economic conditions, Management's assessment of the allowance for loan losses is based upon the aggregate amount and composition of the Banks' loan portfolios, a systematic review of specific credits, historical loss experience as well as the absolute level of non-performing and impaired loans. (See "Loan portfolios.") The provision for loan losses totaled $1,233,000 in 1996 compared to $636,000 in 1995 and $473,000 in 1994. Increases in the provision for loan losses during both years partially reflect increases in the Banks' loan portfolios. The application of Management's allocation methodology to NBC's loan portfolio further contributed to the increase in the provision for loan losses during 1996. NON-INTEREST INCOME. Non-interest income totaled $5,552,000 in 1996. The 47% increase from $3,766,000 in 1995 reflects a $1,143,000 increase in net gains on the sale of real estate mortgage loans. Increases in service charges on deposit accounts and other non-interest income that principally relate to the NBC Acquisition also contributed to the increase in non-interest income. A year earlier, an increase in net gains on the sale of real estate mortgage loans accounted for approximately 72% of the $665,000 increase in non-interest income. Management anticipates that the 1996 Acquisitions will contribute to increases in service charges on deposit accounts and other non-interest income during the coming year. 5 A-5
NON-INTEREST INCOME YEAR ENDED DECEMBER 31, 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------ Service charges on deposit accounts................................. $2,267,000 $1,919,000 $1,892,000 Net gains (losses) on asset sales Real estate mortgage loans........................................ 1,871,000 728,000 249,000 Securities........................................................ (162,000) (120,000) (174,000) Real estate mortgage loan servicing................................. 412,000 371,000 335,000 PrimeVest commissions............................................... 103,000 73,000 120,000 Other............................................................... 1,061,000 795,000 679,000 ------------------------------------- Total non-interest income...................................... $5,552,000 $3,766,000 $3,101,000 =====================================
Net gains on the sale of real estate mortgage loans totaled $1,871,000 in 1996 compared to $728,000 and $249,000 in 1995 and 1994, respectively. Management attributes a substantial portion of the increase in such net gains to favorable economic and competitive conditions as well as increases in aggregate loans sold. Management estimates, however, that approximately 45% of the $1,143,000 increase during 1996 reflects the implementation of Statement of Financial Accounting Standards No. 122, "Accounting for Mortgage Servicing Rights" ("SFAS #122"), as well as an increase in the sale of servicing rights and an increase in the origination and sale of loans underwritten pursuant to government guarantees.
NET GAINS ON THE SALE OF REAL ESTATE YEAR ENDED DECEMBER 31, MORTGAGE LOANS 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------ Real estate mortgage loans originated............................. $227,600,000 $163,500,000 $97,800,000 Real estate mortgage loan sales................................... 108,700,000 52,000,000 38,100,000 Real estate mortgage loan servicing rights sold................... 37,900,000 19,700,000 1,500,000 Net gains on the sale of real estate mortgage loans............... 1,871,000 728,000 249,000 Net gains as a percent of real estate mortgage loan sales......... 1.72% 1.40% 0.65%
The Banks' balance sheet management strategies are largely dependent upon the ability to fund rate-sensitive loans with non-deposit sources of funds. (See "Asset/liability management.") Accordingly, the Banks continue to retain the majority of such rate-sensitive real estate mortgage loans and sell the majority of fixed-rate obligations. Consequently, the volume of loans sold is dependent upon consumer demand for fixed-rate loans as well as the Banks' ability to sustain or increase the origination of real estate mortgage loans. Net gains are further subject to economic and competitive factors as well as the ability to effectively manage the Banks' exposure to changes in interest rates. The Banks have historically retained servicing rights on real estate mortgage loans sold to maintain customer relationships. During 1996, however, the Banks sold the related servicing rights on loans totaling $37,900,000 compared to $19,700,000 and $1,500,000 in 1995 and 1994, respectively. The majority of these loans represent loans underwritten pursuant to government guarantees and loans that have been originated in markets that are not served by the Banks' branch networks. Accordingly, the sale of such servicing rights will depend on the ability of the Banks to generate such loans. Net losses on the sale of securities available for sale equaled $162,000 in 1996 compared to $120,000 and $174,000 in 1995 and 1994, respectively. Future gains and losses will be dependent upon the Banks' asset/liability management needs as well as the slope of the yield curve, the level of interest rates and other pertinent factors. (See "Asset/liability management.") NON-INTEREST EXPENSE. Non-interest expense totaled $27,861,000 in 1996 compared to $21,702,000 in 1995 and $19,503,000 in 1994. The $6,159,000 increase during 1996 principally reflects the impact of the NBC Acquisition as well as an increase in salaries and benefits, including performance-based compensation. A year earlier, an increase in salaries and benefits accounted for the majority of the $2,199,000 increase in total non-interest expense. Reductions in deposit insurance assessments, however, partially offset the increase in non-interest expense during both 1996 and 1995. 6 A-6
NON-INTEREST EXPENSE YEAR ENDED DECEMBER 31, 1996 1995 1994 - ---------------------------------------------------------------------------------------------------------------------- Salaries............................................................. $10,280,000 $ 8,005,000 $ 7,817,000 Performance-based compensation and benefits.......................... 3,106,000 2,351,000 1,052,000 Other benefits....................................................... 2,299,000 1,807,000 1,693,000 ------------------------------------------- Salaries and benefits............................................. 15,685,000 12,163,000 10,562,000 Occupancy, net....................................................... 2,042,000 1,548,000 1,392,000 Furniture and fixtures............................................... 1,864,000 1,345,000 1,248,000 Loan and collection.................................................. 663,000 1,030,000 626,000 Deposit insurance.................................................... 92,000 499,000 966,000 Other................................................................ 7,515,000 5,117,000 4,709,000 ------------------------------------------- Total non-interest expense....................................... $27,861,000 $21,702,000 $19,503,000 ===========================================
The Company and the Banks maintain compensation policies and practices that provide incentives for superior performance and align the interests of its officers and employees with those of the Company's shareholders. In addition to annual cash performance awards and commissions related to the origination of real estate mortgage loans, such incentive compensation plans include equity-based plans such as the Employee Stock Ownership Plan, the Employee Stock Option Plan and the Incentive Share Grant Plan. Increases in performance-based compensation accounted for 21.4% of the $3,522,000 increase in salaries and benefits during 1996. A year earlier, performance-based compensation accounted for 81% of the $1,601,000 increase in total compensation. The NBC Acquisition also had a substantial impact on salaries and benefits as well as total non-interest expense. Management estimates that the NBC Acquisition accounts for approximately 35% of the increase in salaries and benefits and approximately 45% of the increase in total non-interest expense. Further, Management anticipates that the 1996 Acquisitions, including the amortization of intangible assets, will contribute to increases in salaries and benefits as well as total non-interest expense during future accounting periods. Costs associated with new branch facilities, a write down of other real estate as well as the introduction of the "EZ Money" check card and related ATM conversion have also contributed to the increase in non-interest expense during 1996. Costs associated with new loan production offices contributed to increases in occupancy, furniture and fixtures and other non-interest expense during 1995. A provision for environmental remediation costs, as estimated by environmental engineers, associated with foreclosed properties contributed approximately $200,000 to the increase in non-interest expense during 1995. FINANCIAL CONDITION SUMMARY. Total assets increased by 51% to $888.6 million at December 31, 1996, from $590.1 million a year earlier. While the 1996 Acquisitions account for more than 85% of the $298.5 million increase, the Banks' balance sheet management efforts continue to make an important contribution to the Company's growth. In addition to proceeds from the sale or maturity of securities, the Banks have relied on other borrowings to fund the increase in Portfolio Loans. The use of such non-deposit funds, principally advances from the Federal Home Loan Bank (the "FHLB"), complements the Banks' relatively stable base of core deposits and may further Management's efforts to limit the Banks' exposure to changes in interest rates. (See "Deposits and borrowings.") FHLB advances totaled $111.0 million and $103.0 million at December 31, 1996 and 1995, respectively. SECURITIES. The Banks maintain diversified securities portfolios that include obligations of the U.S. Treasury and government-sponsored agencies as well as securities issued by states and political subdivisions, corporate notes and mortgage-backed securities. Management continually evaluates the Banks' asset/liability management needs and attempts to maintain a portfolio structure that provides sufficient liquidity and cash flow. Securities available for sale are carried at fair value and unrealized gains and losses, after consideration of applicable taxes, are recognized as a separate component of shareholders' equity. Management has the intent and the Banks have the ability to hold other securities to maturity. These securities are carried at amortized cost without adjustment for unrealized gains and losses. 7 A-7
SECURITIES AMORTIZED UNREALIZED FAIR COST GAINS LOSSES VALUE - ---------------------------------------------------------------------------------------------------------- Securities Available for Sale December 31, 1996......................... $135,290,000 $1,870,000 $308,000 $136,852,000 December 31, 1995......................... 86,471,000 1,538,000 456,000 87,553,000 Securities Held to Maturity December 31, 1996......................... $26,754,000 $929,000 $38,000 $27,645,000 December 31, 1995......................... 27,906,000 1,157,000 32,000 29,031,000
The Banks sold securities available for sale with an aggregate market value of $18,145,000, in 1996 compared to $14,054,000 and $28,384,000 in 1995 and 1994, respectively. The Banks realized net losses of $162,000 in 1996 compared to $120,000 and $174,000 in 1995 and 1994, respectively, on such sales. LOAN PORTFOLIOS. Management believes that the stable and diversified economies of the Banks' principal lending markets provide attractive lending opportunities. In addition to the communities served by the Banks' branch networks and loan production offices, the 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 purchase real estate mortgage loans from third-party originators.
LOAN PORTFOLIO COMPOSITION DECEMBER 31, 1996 1995 - ---------------------------------------------------------------------------------------------------------------- Real estate Residential first mortgages.......................................... $275,660,000 $211,690,000 Residential home equity and other junior mortgages................... 35,673,000 19,733,000 Construction and land development.................................... 49,017,000 29,328,000 Other................................................................ 92,253,000 56,675,000 Consumer............................................................... 90,284,000 64,821,000 Commercial............................................................. 45,013,000 23,403,000 Agricultural........................................................... 21,804,000 12,394,000 ------------------------------- Total loans..................................................... $609,704,000 $418,044,000 ===============================
Loans, excluding loans held for sale ("Portfolio Loans"), increased to $609.7 million at December 31, 1996, from $418.0 million a year earlier. Management attributes approximately 55% of the $191.7 million increase in Portfolio Loans to the impact of the 1996 Acquisitions. Management believes that the Company's decentralized structure provides the Banks with important advantages in serving the credit needs of its principal lending markets. Although the Management and Board of Directors of each Bank retain authority and responsibility for all credit decisions, each of the Banks has adopted uniform underwriting standards. The Company's loan committee and the centralization of credit services promote compliance with established underwriting standards. The Company's centralized credit services, which include credit analysis and commercial loan review, provide additional internal controls that are consistent with the needs of a decentralized organization. The centralization of retail loan services further provides for consistent service quality and facilitates compliance with applicable consumer protection laws and regulations.
NON-PERFORMING ASSETS DECEMBER 31, 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------------------ Non-accrual loans................................................................ $1,711,000 $1,886,000 $2,052,000 Loans 90 days or more past due and still accruing interest....................... 1,994,000 427,000 254,000 Restructured loans............................................................... 197,000 247,000 528,000 ------------------------------------ Total non-performing loans..................................................... 3,902,000 2,560,000 2,834,000 Other real estate................................................................ 730,000 760,000 1,381,000 ------------------------------------ Total non-performing assets.............................................. $4,632,000 $3,320,000 $4,215,000 ==================================== As a percent of total loans Non-performing loans........................................................... 0.64% 0.61% 0.84% Non-performing assets.......................................................... 0.76 0.79 1.25
8 A-8 The 1996 Acquisitions account for the $1,342,000 increase in non-performing loans to $3,902,000 at December 31, 1996. Non-performing loans associated with these transactions totaled approximately $1,485,000 at December 31, 1996. The decline in non-performing assets during 1995, to $3,320,000 at December 31, 1995, from $4,215,000 a year earlier, principally reflects a decrease in substandard assets that had been acquired in connection with the acquisition of a bank in 1994 and two banks in 1993.
ALLOWANCE FOR LOAN LOSSES YEAR ENDED DECEMBER 31, 1996 1995 1994 - ----------------------------------------------------------------------------------------------------------------------- Balance at beginning of period ............................................. $5,243,000 $5,054,000 $5,053,000 Allowance on loans acquired............................................... 1,180,000 Provision charged to operating expense.................................... 1,233,000 636,000 473,000 Recoveries credited to allowance.......................................... 440,000 265,000 399,000 Loans charged against allowance........................................... (1,136,000) (712,000) (871,000) ---------------------------------- Balance at end of period.................................................... $6,960,000 $5,243,000 $5,054,000 ================================== Allowance for loan losses as a percent of non-performing loans.............. 178% 205% 178%
Loans charged against the allowance, net of recoveries ("Net Losses"), were $696,000 during 1996, compared to $447,000 and $472,000 in 1995 and 1994, respectively. Net Losses on loans that were acquired as a result of the NBC Acquisition totaled approximately $153,000.
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES DECEMBER 31, 1996 1995 1994 - ----------------------------------------------------------------------------------------------------------------------- Commercial and agricultural........................................... $2,176,000 $1,612,000 $1,655,000 Real estate mortgage.................................................. 257,000 162,000 177,000 Installment........................................................... 834,000 597,000 474,000 Unallocated........................................................... 3,693,000 2,872,000 2,748,000 ------------------------------------ Total.......................................................... $6,960,000 $5,243,000 $5,054,000 ==================================== Allocated allowance as a percent of total allowance................... 46.9% 45.2% 45.6%
The allowance for loan losses is maintained at a level that Management considers appropriate based upon its assessment of relevant circumstances. (See "Provision for loan losses.") In performing its assessment, Management allocates portions of the allowance for loan losses to specific loans and loan portfolios. The allowance for loan losses declined to 1.14% of Portfolio Loans at December 31, 1996, from 1.25% and 1.50% at December 31, 1995 and 1994, respectively. At those same dates, the unallocated portion of the allowance was equal to 53.1% of the total allowance for loan losses compared to 54.8% and 54.4%, respectively. DEPOSITS AND BORROWINGS. Deposits totaled $672.5 million at December 31, 1996, compared to $411.6 million at December 31, 1995. The 1996 Acquisitions account for substantially all of the $260.9 million increase in total deposits. Other borrowed funds totaled $135.3 million at December 31, 1996, compared to $110.9 million a year earlier. In addition to FHLB advances, other borrowed funds include the Credit Facility and securities sold under repurchase agreements. The Banks' competitive position within many of the markets served by the branch networks limit the ability to materially increase deposits without adversely impacting the weighted-average cost of core deposits. Accordingly, the use of other borrowed funds, principally advances from the FHLB, is an integral component of the Banks' balance sheet management strategies. Such non-deposit sources of funds are structured to complement the Banks' existing interest rate risk profile and may further reduce the Banks' exposure to depositors' options to withdraw funds prior to maturity. (See "Asset/liability management.") CAPITAL RESOURCES. The ability to maintain or enhance financial leverage is critical to Management's mission to create value for the Company's shareholders. Accordingly, the Banks have implemented balance sheet management strategies that combine effective loan origination efforts with disciplined funding strategies to profitably deploy capital within existing markets. Implementation of such strategies have made important contributions to the Company's net income and return on average equity. Management believes that its disciplined acquisition strategy is consistent with its goal to create shareholder value. Although the Banks' balance sheet management strategies continue to provide important opportunities to grow, Management believes that the franchise value associated with core deposits and other customer relationships may provide greater value to the Company's shareholders. 9 A-9 Dividend policies have been an important element of the Company's capital management efforts. Cash dividends declared totaled $2,868,000, equal to 36.5% of net income during 1996. Cash dividends totaled $2,506,000 in 1995 and $2,088,000 in 1994, equal to 36.8% and 34.6% of net income, respectively. The Company's cost of capital is also a critical factor in creating shareholder value. On October 21, 1996, the Board of Governors of the Federal Reserve approved the use of certain cumulative preferred stock instruments as Tier 1 capital for bank holding companies. Distributions paid to holders of such preferred stock instruments are a tax deductible expense of the issuer. In view of the low cost of such capital, Management elected to fund the FoA Branch Purchase by issuing non-convertible preferred securities. IBC Capital Finance invested the proceeds from the sale of the Preferred Securities into subordinated debentures issued by the Company. The Preferred Securities are presented within the liability section of the consolidated balance sheets as Guaranteed Preferred Beneficial Interests in Company's Subordinated Debentures and are not considered equity under generally accepted accounting principles. The quarterly distributions paid on the Preferred Securities are included in interest expense. In addition to annual tax benefits totaling more than $500,000, the non-convertible structure of the Preferred Securities eliminates potential dilution of the common shareholders' proportionate interest in the Company.
CAPITAL RATIOS DECEMBER 31, 1996 1995 - ------------------------------------------------------------------------------- Equity capital............................................... 5.83% 7.97% Average shareholders equity to average assets................ 7.05 8.04 Tier 1 leverage (tangible equity capital).................... 5.72 7.47 Tier 1 risk-based capital.................................... 9.01 11.49 Total risk-based capital..................................... 10.26 12.75
Shareholders' equity totaled $51.8 million at December 31, 1996. The $4.8 million increase from $47.0 million at December 31, 1995, reflects earnings retention as well as the issuance of common stock pursuant to the Incentive Share Grant Plan and the Company's various stock option plans. Principally as a result of the 1996 Acquisitions, shareholders' equity declined to 5.83% of total assets at December 31, 1996, from 7.97% a year earlier. In the absence of those transactions, Management estimates that shareholders' equity would have increased to approximately 8.17% of total assets. The Company's Tier 1 leverage ratio was equal to 5.72% at December 31, 1996, compared to 7.47% a year earlier. ASSET/LIABILITY MANAGEMENT. The asset/liability management efforts of the Company and the Banks are intended to identify and evaluate opportunities to structure the balance sheet in a manner that is consistent with Management's mission to maintain profitable financial leverage within established risk parameters. Accordingly, Management's evaluation of business opportunities and alternate strategies carefully consider the likely impact on the Banks' risk profile as well as the anticipated contribution to earnings. Management employs simulation analyses to evaluate the potential changes in the Banks' net interest income and market value of portfolio equity that result from changes in interest rates. Such analyses further anticipate the potential change in the slope of the U.S. Treasury yield curve as well as changes in prepayment rates on certain assets and premature withdrawals of certificates of deposits that will accompany changes in interest rates. Consistent with Management's intent to maintain profitable leverage, the marginal cost of non-deposit funds is a principal consideration in the implementation of the Banks' balance sheet management strategies. Management's ongoing evaluations have determined that the retention of 15- and 30-year fixed-rate real estate mortgage loans is not consistent with its goal to profitably deploy capital or the Banks' asset/liability management needs. Accordingly, the majority of such loans are sold to mitigate exposure to changes in interest rates. Adjustable-rate and balloon real estate mortgage loans may, however, be profitably funded within established risk parameters and the retention of such loans is a principal focus of the Banks' balance sheet management strategies. 10 A-10
INTEREST RATE SENSITIVITY DECEMBER 31, 1996 DAYS YEARS ------------------------------------------ ------------------- 0 - 30 31 - 90 91 - 180 181 - 365 1 - 5 5+ TOTAL - ---------------------------------------------------------------------------------------------------------------------------- (dollars in thousands) ASSETS Loans and loans held for sale............. $117,030 $39,979 $ 53,062 $ 86,583 $189,020 $135,613 $621,287 Federal funds sold........................ 10,000 10,000 Taxable securities........................ 11,938 2,717 4,730 13,331 75,264 24,656 132,636 Tax-exempt securities..................... 274 1,089 1,840 19,347 19,496 42,046 ----------------------------------------------------------------------- Interest earning assets................. 138,968 42,970 58,881 101,754 283,631 179,765 805,969 ------------------------------------------------------------- Non-interest earning assets............... 82,628 -------- Total Assets....................... $888,597 ======== LIABILITIES AND SHAREHOLDERS' EQUITY Demand, savings and NOW................... 54,879 15,452 22,703 38,000 126,612 154,652 $412,298 Time deposits............................. 23,754 36,062 41,380 54,508 97,833 6,699 260,236 Other borrowings.......................... 30,994 25,000 15,000 22,000 44,000 17,250 154,244 ----------------------------------------------------------------------- Total deposits and other borrowings..... 109,627 76,514 79,083 114,508 268,445 178,601 826,778 ------------------------------------------------------------- Shareholders' equity and other liabilities 61,819 -------- Total liabilities and shareholders' equity.............. $888,597 ======== RATE SENSITIVITY GAP AND RATIOS Gap for period............................ $ 29,341 $(33,544) $(20,202) $(12,754) $ 15,186 $ 1,164 ============================================================== Cumulative gap............................ $ 29,341 $ (4,203) $(24,405) $(37,159) $(21,973) $(20,809) ============================================================== Ratio of rate-sensitive assets to rate-sensitive liabilities for period... 126.8% 56.2% 74.5% 88.9% 105.7% 100.7% Cumulative ratio of rate-sensitive assets to rate-sensitive liabilities............. 126.8 97.7 90.8 90.2 96.6 97.5
11 A-11
SELECTED CONSOLIDATED FINANCIAL DATA YEAR ENDED DECEMBER 31, 1996 1995 1994 1993(1) 1992(1) - ------------------------------------------------------------------------------------------------------------------------------------ (dollars in thousands, except per share amounts) SUMMARY OF OPERATIONS Interest income.................................... $ 59,485 $ 45,982 $ 37,820 $ 34,370 $ 36,465 Interest expense................................... 24,813 17,900 12,585 12,305 15,150 ---------------------------------------------------------------------------- Net interest income.............................. 34,672 28,082 25,235 22,065 21,315 Provision for loan losses.......................... 1,233 636 473 657 1,225 Non-interest income................................ 5,552 3,766 3,101 3,898 2,742 Non-interest expense............................... 27,861 21,702 19,503 17,535 15,703 ---------------------------------------------------------------------------- Income before federal income tax expense......... 11,130 9,510 8,360 7,771 7,129 Federal income tax expense......................... 3,278 2,700 2,329 2,165 2,020 ---------------------------------------------------------------------------- Net income.................................. $ 7,852 $ 6,810 $ 6,031 $ 5,606 $ 5,109 ============================================================================ PER COMMON SHARE DATA(2) Net income......................................... $ 2.72 $ 2.38 $ 2.09 $ 1.95 $ 1.78 Cash dividends declared............................ 1.00 0.89 0.72 0.50 0.44 Book value......................................... 18.11 16.56 14.12 13.57 12.08 SELECTED BALANCES Assets............................................ $888,597 $590,147 $516,211 $482,027 $403,125 Loans and loans held for sale..................... 621,287 434,091 342,658 288,643 261,634 Allowance for loan losses......................... 6,960 5,243 5,054 5,053 4,023 Deposits.......................................... 672,534 411,624 409,471 423,620 358,874 Shareholders' equity.............................. 51,836 47,025 40,311 39,049 34,467 Long-term debt.................................... 7,000 2,750 SELECTED RATIOS Tax equivalent net interest income to average earning assets....................... 5.38% 5.65% 5.88% 5.85% 5.88% Net income to Average common equity........................... 15.74 15.59 15.22 15.21 15.88 Average assets.................................. 1.11 1.25 1.25 1.33 1.26 Dividend payment ratio............................ 36.53 36.80 34.62 25.54 24.13 Average shareholders'equity to average assets..... 7.05 8.04 8.22 8.72 7.94 Tier 1 leverage (tangible equity capital) ratio... 5.72 7.47 7.76 7.61 8.05 Non-performing loans to total loans............... 0.64 0.61 0.84 1.14 1.24
(1) Restated to reflect an acquisition accounted for as a pooling of interests. (See note 2 to consolidated financial statements.) (2) Per share data has been adjusted to give retroactive effect to 5% stock dividends in 1996 and 1995. 12 A-12 INDEPENDENT AUDITOR'S REPORT - -------------------------------------------------------------------------------- BOARD OF DIRECTORS AND SHAREHOLDERS INDEPENDENT BANK CORPORATION IONIA, MICHIGAN We have audited the accompanying consolidated statements of financial condition of Independent Bank Corporation and subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1996. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express our opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Independent Bank Corporation and subsidiaries as of December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1996, in conformity with generally accepted accounting principles. As discussed in note 1 to the consolidated financial statements, the Company changed its method of accounting for mortgage servicing rights to adopt the provisions of Financial Accounting Standards Board's Statement of Financial Accounting Standards (SFAS) No. 122, "Accounting for Mortgage Servicing Rights." As discussed in note 1, the Company changed its method of accounting for investments to adopt the provisions of Financial Accounting Standards Board's SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities" at January 1, 1994. As discussed in note 1, the Company changed its method of accounting for impaired loans in 1995 to adopt the provisions of Financial Accounting Standards Board's SFAS No. 114, "Accounting by Creditors for Impairment of a Loan", as amended by SFAS No. 118, "Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures." /s/ KPMG Peat Marwick LLP KPMG Peat Marwick LLP Lansing, Michigan February 3, 1997 13 A-13 CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 1996 1995 - ---------------------------------------------------------------------------------------------------------------- ASSETS Cash and Cash Equivalents Cash and due from banks.......................................................... $ 40,631,000 $ 17,208,000 Federal funds sold............................................................... 10,000,000 -------------------------- Total Cash and Cash Equivalents................................................ 50,631,000 17,208,000 -------------------------- Securities available for sale...................................................... 136,852,000 87,553,000 Securities held to maturity (fair value of $27,645,000 at December 31, 1996; $29,031,000 at December 31, 1995)................................................ 26,754,000 27,906,000 Federal Home Loan Bank stock, at cost.............................................. 11,076,000 7,710,000 Loans held for sale................................................................ 11,583,000 16,047,000 Loans Commercial and agricultural...................................................... 164,304,000 108,879,000 Real estate mortgage............................................................. 331,150,000 225,900,000 Installment...................................................................... 114,250,000 83,265,000 -------------------------- Total Loans................................................................... 609,704,000 418,044,000 Allowance for loan losses........................................................ (6,960,000) (5,243,000) -------------------------- Net Loans..................................................................... 602,744,000 412,801,000 Property and equipment, net........................................................ 18,462,000 9,931,000 Accrued income and other assets.................................................... 30,495,000 10,991,000 -------------------------- Total Assets............................................................... $888,597,000 $590,147,000 ========================== LIABILITIES AND SHAREHOLDERS' EQUITY Deposits Non-interest bearing............................................................. $ 84,671,000 $ 46,168,000 Savings and NOW.................................................................. 327,627,000 215,336,000 Time............................................................................. 260,236,000 150,120,000 -------------------------- Total Deposits................................................................. 672,534,000 411,624,000 Federal funds purchased............................................................ 1,700,000 13,400,000 Other borrowings................................................................... 135,294,000 110,894,000 Guaranteed preferred beneficial interests in Company's subordinated debentures..... 17,250,000 Accrued expenses and other liabilities............................................. 9,983,000 7,204,000 -------------------------- Total Liabilities................................................................ 836,761,000 543,122,000 -------------------------- Commitments and contingent liabilities Shareholders' Equity Preferred stock, no par value--200,000 shares authorized; none outstanding Common stock, $1.00 par value--14,000,000 shares authorized; issued and outstanding: 2,861,535 shares at December 31, 1996 and 2,704,038 shares at December 31, 1995.......................................................... 2,862,000 2,704,000 Capital surplus.................................................................. 23,230,000 19,924,000 Retained earnings................................................................ 24,713,000 23,683,000 Net unrealized gain on securities available for sale, net of related tax effect.. 1,031,000 714,000 -------------------------- Total Shareholders' Equity..................................................... 51,836,000 47,025,000 -------------------------- Total Liabilities and Shareholders' Equity................................ $888,597,000 $590,147,000 ==========================
See notes to consolidated financial statements. 14 A-14 CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996 1995 1994 - ----------------------------------------------------------------------------------------------------------------- INTEREST INCOME Interest and fees on loans ........................... $ 49,768,000 $ 37,861,000 $29,107,000 Securities available for sale ......................... 6,337,000 2,692,000 2,853,000 Securities held to maturity Taxable ........................................... 1,209,000 3,227,000 3,684,000 Tax-exempt ......................................... 1,200,000 1,781,000 1,716,000 Other investments ..................................... 971,000 421,000 460,000 -------------------------------------------------- Total Interest Income .............................. 59,485,000 45,982,000 37,820,000 -------------------------------------------------- INTEREST EXPENSE Deposits ............................................. 16,138,000 12,470,000 11,092,000 Other borrowings ...................................... 8,675,000 5,430,000 1,493,000 -------------------------------------------------- Total Interest Expense ............................. 24,813,000 17,900,000 12,585,000 -------------------------------------------------- Net Interest Income ................................ 34,672,000 28,082,000 25,235,000 Provision for loan losses ................................. 1,233,000 636,000 473,000 -------------------------------------------------- Net Interest Income After Provision for Loan Losses ........................................... 33,439,000 27,446,000 24,762,000 -------------------------------------------------- NON-INTEREST INCOME Service charges on deposit accounts ................... 2,267,000 1,919,000 1,892,000 Net gains (losses) on asset sales Real estate mortgage loans ......................... 1,871,000 728,000 249,000 Securities ......................................... (162,000) (120,000) (174,000) Other income ......................................... 1,576,000 1,239,000 1,134,000 -------------------------------------------------- Total Non-interest Income ......................... 5,552,000 3,766,000 3,101,000 -------------------------------------------------- NON-INTEREST EXPENSE Salaries and employee benefits ....................... 15,685,000 12,163,000 10,562,000 Occupancy, net ....................................... 2,042,000 1,548,000 1,392,000 Furniture and fixtures ................................ 1,864,000 1,345,000 1,248,000 Other expenses ....................................... 8,270,000 6,646,000 6,301,000 -------------------------------------------------- Total Non-interest Expense ......................... 27,861,000 21,702,000 19,503,000 -------------------------------------------------- Income Before Federal Income Tax ................... 11,130,000 9,510,000 8,360,000 Federal income tax expense ............................. 3,278,000 2,700,000 2,329,000 -------------------------------------------------- Net Income ...................................... $ 7,852,000 $ 6,810,000 $ 6,031,000 ================================================== Income per common share ................................... $ 2.72 $ 2.38 $ 2.09 ================================================== Cash dividends declared per common share ................. $ 1.00 $ 0.89 $ 0.72 ==================================================
See notes to consolidated financial statements. 15 A-15 CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1996 1995 1994 - -------------------------------------------------------------------------------------------------------------------- Net Income .................................................... $ 7,852,000 $ 6,810,000 $ 6,031,000 ------------------------------------------------ ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH FROM OPERATING ACTIVITIES Proceeds from sales of loans held for sale ............... 110,593,000 51,976,000 38,103,000 Disbursements for loans held for sale .................... (101,786,000) (54,262,000) (37,411,000) Provision for loan losses ................................ 1,233,000 636,000 473,000 Deferred federal income tax expense (credit) ............. (230,000) (1,208,000) 474,000 Deferred loan fees ....................................... 334,000 109,000 (179,000) Depreciation, amortization of intangible assets and premiums and accretion of discounts on securities and loans ................................. 2,759,000 2,247,000 2,494,000 Net gains on sales of real estate mortgage loans ......... (1,871,000) (728,000) (249,000) Net losses on sales of securities ....................... 162,000 120,000 174,000 (Increase) decrease in accrued income and other assets ... (7,906,000) 286,000 1,891,000 Increase in accrued expenses and other liabilities ....... 356,000 2,587,000 373,000 ------------------------------------------------ Total Adjustments .................................... 3,644,000 1,763,000 6,143,000 ------------------------------------------------ Net Cash from Operating Activities ................... 11,496,000 8,573,000 12,174,000 ------------------------------------------------ CASH FLOW FROM INVESTING ACTIVITIES Proceeds from the sale of securities available for sale ..... 18,145,000 14,054,000 28,384,000 Proceeds from the maturity of securities available for sale .................................................. 16,385,000 Proceeds from the maturity of securities held to maturity ... 3,015,000 13,920,000 25,094,000 Principal payments received on securities available for sale .................................................. 9,601,000 1,347,000 285,000 Principal payments received on securities held to maturity .. 694,000 5,116,000 8,866,000 Purchases of securities available for sale .................. (60,396,000) (732,000) (34,658,000) Purchases of securities held to maturity .................... (295,000) (19,423,000) (28,299,000) Portfolio loans made to customers, net of principal payments received ......................................... (85,566,000) (88,906,000) (54,751,000) Acquisition of bank, less cash received ..................... 9,478,000 Acquisition of branch offices, less cash received ........... 89,864,000 13,949,000 Capital expenditures ........................................ (3,709,000) (1,642,000) (1,283,000) ------------------------------------------------ Net Cash from Investing Activities ................... (2,784,000) (62,317,000) (56,362,000) ------------------------------------------------ CASH FLOW FROM FINANCING ACTIVITIES Net increase (decrease) in total deposits ................... 7,468,000 (12,273,000) (14,149,000) Net increase (decrease) in short-term borrowings ............ (13,300,000) (347,000) 16,252,000 Proceeds from Federal Home Loan Bank advances ............... 63,000,000 104,000,000 44,000,000 Payments of Federal Home Loan Bank advances ................. (55,000,000) (41,000,000) (10,000,000) Proceeds from long-term debt ................................ 10,000,000 Retirement of long-term debt ................................ (1,000,000) (2,750,000) Proceeds from issuance of guaranteed preferred beneficial interests in Company's subordinated debentures ............ 16,220,000 Dividends paid .............................................. (2,736,000) (2,392,000) (1,926,000) Proceeds from issuance of common stock ...................... 59,000 138,000 16,000 Repurchase of common stock .................................. (893,000) (924,000) ------------------------------------------------ Net Cash from Financing Activities ................... 24,711,000 47,233,000 30,519,000 ------------------------------------------------ Net Increase (Decrease) in Cash and Cash Equivalents ........................................ 33,423,000 (6,511,000) (13,669,000) Cash and Cash Equivalents at Beginning of Period .............. 17,208,000 23,719,000 37,388,000 ------------------------------------------------ Cash and Cash Equivalents at End of Period ...... $ 50,631,000 $ 17,208,000 $ 23,719,000 ================================================ Cash paid during the period for Interest .................................................... $ 23,736,000 $ 17,604,000 $ 12,696,000 Income taxes ................................................ 3,890,000 3,110,000 2,366,000 Transfer of loans to other real estate ........................ 996,000 555,000 254,000 Transfer of portfolio loans to held for sale .................. 7,100,000 Transfer of securities held to maturity to available for sale ........................................................ 52,601,000 19,283,000
See notes to consolidated financial statements. 16 A-16 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
NET UNREALIZED GAIN (LOSS) ON SECURITIES TOTAL COMMON CAPITAL RETAINED AVAILABLE SHAREHOLDERS' STOCK SURPLUS EARNINGS FOR SALE EQUITY - ------------------------------------------------------------------------------------------------------------------------------------ Balances at January 1, 1994 .................... $2,611,000 $17,471,000 $18,967,000 $ 0 $39,049,000 Impact of change in accounting for securities, net of $46,000 of related tax effect ......... 90,000 90,000 Net Income for 1994 ............................ 6,031,000 6,031,000 Cash dividends declared, $.72 per share ........ (2,088,000) (2,088,000) Issuance of 18,356 shares of common stock ...... 18,000 345,000 363,000 Repurchase of 40,000 shares of common stock ................................. (40,000) (884,000) (924,000) Net change in unrealized gain (loss) on securities available for sale, net of $1,138,000 of related tax effect ............. (2,210,000) (2,210,000) ----------------------------------------------------------------------------- Balances at December 31, 1994 ................ 2,589,000 16,932,000 22,910,000 (2,120,000) 40,311,000 Net income for 1995 ............................ 6,810,000 6,810,000 Cash dividends declared, $.89 per share (2,506,000) (2,506,000) 5% stock dividend .............................. 129,000 3,386,000 (3,531,000) (16,000) Issuance of 22,430 shares of common stock ...... 22,000 463,000 485,000 Repurchase of 35,900 shares of common stock ................................. (36,000) (857,000) (893,000) Transfer of securities held to maturity to available for sale, net of $443,000 of related tax effect ........................... 859,000 859,000 Net change in unrealized gain (loss) on securities available for sale, net of $1,017,000 of related tax effect ............. 1,975,000 1,975,000 ----------------------------------------------------------------------------- Balances at December 31, 1995 ................ 2,704,000 19,924,000 23,683,000 714,000 47,025,000 Net income for 1996 ............................ 7,852,000 7,852,000 Cash dividends declared, $1.00 per share (2,868,000) (2,868,000) 5% stock dividend .............................. 136,000 3,799,000 (3,954,000) (19,000) Issuance of 21,834 shares of common stock....... 22,000 537,000 559,000 Net issuance costs ............................. (1,030,000) (1,030,000) Net change in unrealized gain (loss) on securities available for sale, net of $163,000 of related tax effect ............... 317,000 317,000 ----------------------------------------------------------------------------- Balances at December 31, 1996............... $2,862,000 $23,230,000 $24,713,000 $ 1,031,000 $51,836,000 =============================================================================
See notes to consolidated financial statements. 17 (This page intentionally left blank) 18 A-18 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 -- SIGNIFICANT ACCOUNTING POLICIES The accounting and reporting policies and practices of Independent Bank Corporation and subsidiaries conform with generally accepted accounting principles and prevailing practices within the banking industry. The following summaries describe the significant accounting and reporting policies that are employed in the preparation of the consolidated financial statements. The Banks transact business in the single industry segment of commercial banking. The Banks' activities cover traditional phases of commercial banking, including checking and savings accounts, commercial and agricultural lending, direct and indirect consumer financing, mortgage lending and deposit box services. The principal markets are the rural and suburban communities across lower Michigan that are served by the Banks' branch networks. Subject to established underwriting criteria, the Banks may also participate in commercial lending transactions with certain non-affiliated banks and purchase real estate mortgage loans from third-party originators. The local economies of the communities served by the Banks are relatively stable and reasonably diversified. Management is required to make estimates and assumptions in the preparation of the financial statements which affect the amounts reported. Material estimates that are particularly susceptible to changes in the near-term relate to the determination of the allowance for loan losses. While Management uses relevant information to recognize losses on loans, additional provisions for related losses may be necessary in the future based on changes in economic conditions and customer circumstances. PRINCIPLES OF CONSOLIDATION -- The consolidated financial statements include the accounts of Independent Bank Corporation and its subsidiaries. The income, expenses, assets and liabilities of the subsidiaries are included in the respective accounts of the consolidated financial statements, after elimination of all material intercompany accounts and transactions. STATEMENTS OF CASH FLOWS -- For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks, and federal funds sold. Generally, federal funds are sold for one-day periods. The Company reports net cash flows for customer loan and deposit transactions. LOANS HELD FOR SALE -- Loans held for sale are carried at the lower of aggregate amortized cost or market value. Lower of cost or market value adjustments, as well as realized gains and losses, are recorded in current earnings. The Company adopted Statement of Financial Accounting Standards No. 122, "Accounting for Mortgage Servicing Rights," ("SFAS #122") on January 1, 1996. SFAS #122 requires the Banks to recognize as separate assets the rights to service mortgage loans for others that have been acquired by purchase or the origination and subsequent sale of a loan. The fair value of capitalized originated mortgage servicing rights has been determined based upon market value quotes for similar servicing. These mortgage servicing rights are amortized in proportion to and over the period of estimated net loan servicing income. SFAS #122 also requires the Banks to assess mortgage servicing rights for impairment based on the fair value of those rights. For purposes of measuring impairment, the risk characteristics used by the Banks include the underlying loans' interest rates, term of loan and loan types. SECURITIES -- The Company adopted Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities," ("SFAS #115") effective January 1, 1994. Under SFAS #115, the Company is required to classify its securities as trading, held to maturity or available for sale. Trading securities are bought and held principally for the purpose of selling them in the near-term and are reported at fair value with realized and unrealized gains and losses included in earnings. The Company does not have any trading securities. Securities held to maturity represent those securities for which the Banks have the positive intent and ability to hold until maturity and are reported at cost, adjusted for amortization of premiums and accretion of discounts computed on the level yield method. Securities available for sale represent those securities not classified as trading or held to maturity and are reported at fair value with unrealized gains and losses, net of applicable income taxes reported as a separate component of shareholders' equity. Gains and losses realized on the sale of securities available for sale are determined using the specific identification method and are recognized on a trade-date basis. Premiums and discounts are recognized in interest income computed on the level yield method. LOAN REVENUE RECOGNITION -- Interest on loans is accrued based on the principal amounts outstanding. The accrual of interest income is discontinued when a loan becomes 90 days past due and the borrower's capacity to repay the loan and collateral values appear insufficient. A non-accrual loan may be restored to accrual status when interest and principal payments are current and the loan appears otherwise collectible. 19 A-19 Certain loan fees, net of direct loan origination costs, are deferred and recognized as an adjustment of yield over the life of the related loan. Fees received in connection with loan commitments are deferred until the loan is advanced and are then recognized over the life of the loan as an adjustment of yield. Fees on commitments that expire unused are recognized at expiration. Fees received for a letter of credit are recognized as fee revenue over its life. ALLOWANCE FOR LOAN LOSSES -- Some loans may not be repaid in full. Therefore, an allowance for loan losses is maintained at a level which management has determined to be adequate to absorb inherent losses. Management's assessment of the allowance is based on historical loss experience, general economic conditions and trends, as well as the review of specific loans. Increases in the allowance are recorded by a provision for loan losses charged to expense and, although Management periodically allocates portions of the allowance to specific loans and loan portfolios, the entire allowance is available for any charge-offs which occur. Collection efforts may continue and future recoveries may occur after a loan is charged-off. The Company has adopted Statement of Financial Accounting Standards No. 114, "Accounting by Creditors for Impairment of a Loan," ("SFAS #114"). SFAS #114, which has been subsequently amended by SFAS #118, requires the Company to measure its investment in certain impaired loans based on one of three methods: the loan's observable market price, the fair value of the collateral or the present value of expected future cash flows discounted at the loan's effective interest rate. This statement does not apply to homogenous residential mortgage and installment loans. The adoption of this Statement in 1995 did not have a significant effect on the allowance for loan losses. PROPERTY AND EQUIPMENT -- Property and equipment is stated at cost less accumulated depreciation and amortization. Depreciation and amortization is computed using both straight-line and accelerated methods over the estimated useful lives of the related assets. OTHER REAL ESTATE -- Other real estate represents properties acquired through foreclosure or by acceptance of a deed in lieu of foreclosure. The carrying values of these properties are periodically evaluated and are adjusted to the lower of cost or fair value minus estimated costs to sell. Other real estate and repossessed assets totaling $730,000 and $760,000 at December 31, 1996 and 1995, respectively, are included in other assets. INTANGIBLE ASSETS -- Goodwill, which represents the excess of the purchase price over the fair value of net tangible assets acquired, is amortized on a straight-line basis over the period of expected benefit, generally 12 to 20 years. Goodwill totaled $8,289,000 and $1,099,000 as of December 31, 1996 and 1995, respectively. Other intangible assets are amortized using both straight-line and accelerated methods over 12 to 15 years. Other intangibles amounted to $10,056,000 and $1,407,000 as of December 31, 1996 and 1995, respectively. INCOME TAXES -- The Company employs the asset and liability method of accounting for income taxes. The objective of this method is to establish deferred tax assets and liabilities for the temporary differences between the financial reporting basis and the tax basis of the Company's assets and liabilities at enacted tax rates expected to be in effect when such amounts are realized or settled. Under the asset and liability method, the effect of a change in tax rates is recognized in income in the period that includes the enactment date. The deferred tax asset is subject to a valuation allowance for that portion of the asset for which it is more likely than not that it will not be realized. The Company and its subsidiaries file a consolidated federal income tax return. Intercompany tax liabilities are settled as if each subsidiary filed a separate return. COMMON STOCK -- At December 31, 1996, 26,769 shares of common stock were reserved for issuance under the Incentive Share Grant Plan, 26,089 shares of common stock were reserved for issuance under the dividend reinvestment plan and 124,967 shares of common stock were reserved for issuance under stock option plans. EARNINGS PER SHARE -- Earnings per share is based on 2,883,995 average shares and equivalents outstanding in 1996, 2,861,898 in 1995 and 2,890,368 in 1994. RETIREMENT PLANS -- The Company maintains an employee stock ownership plan as well as a 401(k) plan for substantially all full-time employees. RECLASSIFICATION -- Certain amounts in the 1995 and 1994 financial statements have been reclassified to conform with the 1996 presentation. 20 A-20 NOTE 2 -- ACQUISITIONS In June 1996, the Company acquired North Bank Corporation ("NBC") for cash consideration totaling approximately $15,800,000. At the effective date of the acquisition, NBC's assets totaled $152,000,000 and its loans and deposits totaled $84,000,000 and $131,600,000, respectively. The transaction was accounted for as a purchase and the assets acquired and the liabilities assumed have been recorded at fair value. The Company's results of operations include revenues and expenses relating to NBC since May 31, 1996. Goodwill totaled $7,500,000 and is being amortized over 15 years. NBC's sole banking subsidiary consolidated with an existing subsidiary of the Company during the third quarter of 1996. The pro-forma information presented in the following table is based on historical results of the Company and NBC. The information has been combined to present the results of operations as if the acquisition had occurred at the beginning of the periods presented. The following pro-forma results for the years ended December 31 are not necessarily indicative of the results which would have actually been attained if the acquisition had been consummated in the past or what may be attained in the future.
1996 1995 - --------------------------------------------------------------------------------------------------------------------- (unaudited) Total revenue.................................................................. $ 70,200,000 $62,300,000 Net income..................................................................... 7,600,000 5,800,000 Earnings per share............................................................. 2.64 2.03
On December 13, 1996, one of the Banks purchased certain loans as well as real and personal property and assumed deposit liabilities associated with eight branch offices from First of America Bank - Michigan, NA ("FoA Purchase"). On that date, loans purchased and deposit liabilities assumed totaled $22,100,000 and $121,900,000, respectively. The transaction was accounted for as a purchase and the assets purchased and the liabilities assumed have been recorded at fair value. The Company's results of operations include revenues and expenses relating to the FoA Purchase since December 13, 1996. An intangible asset of $8,800,000 is being amortized over 12 years. On March 7, 1994, KSB Financial, Inc., ("KSB") merged with the Company. As a result, The Kingston State Bank became a subsidiary of the Company. The Company issued 225,649 shares of common stock in exchange for all of the outstanding common stock of KSB. The merger was accounted for as a pooling of interests and, accordingly, the accompanying financial statements were restated to include the accounts and operations of KSB for the two months prior to the merger. NOTE 3 -- RESTRICTIONS ON CASH AND DUE FROM BANKS The Banks' legal reserve requirements were satisfied by maintaining average non-interest earning vault cash balances of $4,316,000 in 1996 and $2,661,000 in 1995. The Banks do not maintain compensating balances with correspondent banks. NOTE 4 -- SECURITIES Securities available for sale consist of the following at December 31:
AMORTIZED UNREALIZED FAIR COST GAINS LOSSES VALUE - --------------------------------------------------------------------------------------------------------------------- 1996 U.S. Treasury.............................. $ 27,561,000 $ 174,000 $ 13,000 $ 27,722,000 U.S. Government agencies................... 20,839,000 337,000 17,000 21,159,000 Mortgage-backed securities................. 57,113,000 671,000 256,000 57,528,000 Obligations of states and political subdivisions............................ 21,183,000 688,000 17,000 21,854,000 Other securities........................... 8,594,000 5,000 8,589,000 ------------------------------------------------------------- Total.................................... $ 135,290,000 $ 1,870,000 $ 308,000 $136,852,000 ============================================================= 1995 U.S. Treasury.............................. $ 23,189,000 $ 188,000 $ 105,000 $ 23,272,000 U.S. Government agencies................... 6,557,000 79,000 13,000 6,623,000 Mortgage-backed securities................. 37,238,000 661,000 177,000 37,722,000 Obligations of states and political subdivisions............................ 8,682,000 608,000 9,290,000 Other securities........................... 10,805,000 2,000 161,000 10,646,000 ------------------------------------------------------------- Total.................................... $ 86,471,000 $ 1,538,000 $ 456,000 $ 87,553,000 =============================================================
21 A-21 Securities held to maturity consist of the following at December 31:
AMORTIZED UNREALIZED FAIR COST GAINS LOSSES VALUE - ---------------------------------------------------------------------------------------------------------------------- 1996 U.S. Government agencies........................... $ 1,484,000 $ 13,000 $ 4,000 $ 1,493,000 Mortgage-backed securities......................... 3,688,000 17,000 11,000 3,694,000 Obligations of states and political subdivisions... 21,192,000 899,000 23,000 22,068,000 Other securities................................... 390,000 390,000 --------------------------------------------------------- Total............................................ $ 26,754,000 $ 929,000 $ 38,000 $ 27,645,000 ========================================================= 1995 U.S. Government agencies........................... $ 2,559,000 $ 70,000 $ 2,629,000 Mortgage-backed securities......................... 4,487,000 13,000 $ 18,000 4,482,000 Obligations of states and political subdivisions... 20,142,000 1,074,000 12,000 21,204,000 Other securities................................... 718,000 2,000 716,000 --------------------------------------------------------- Total............................................ $ 27,906,000 $1,157,000 $ 32,000 $ 29,031,000 =========================================================
The amortized cost and approximate fair value of securities at December 31, 1996, by contractual maturity, follow. Actual maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.
AVAILABLE FOR SALE HELD TO MATURITY AMORTIZED FAIR AMORTIZED FAIR COST VALUE COST VALUE - ------------------------------------------------------------------------------------------------------------------ Maturing within one year........................... $ 8,453,000 $ 8,526,000 $ 1,972,000 $ 1,977,000 Maturing after one year but within five years...... 38,338,000 39,165,000 12,428,000 12,900,000 Maturing after five years but within ten years..... 24,042,000 24,181,000 5,945,000 6,290,000 Maturing after ten years........................... 6,842,000 6,950,000 2,721,000 2,784,000 ---------------------------------------------------------- 77,675,000 78,822,000 23,066,000 23,951,000 Mortgage-backed securities......................... 57,113,000 57,528,000 3,688,000 3,694,000 Other securities................................... 502,000 502,000 ---------------------------------------------------------- Total.......................................... $135,290,000 $136,852,000 $26,754,000 $27,645,000 ==========================================================
A summary of proceeds from the sale of securities available for sale and realized gains and losses follows:
REALIZED REALIZED PROCEEDS GAINS LOSSES - ------------------------------------------------------------------------------------------------------------------ 1996............................................................. $ 18,145,000 $ 42,000 $ 204,000 1995............................................................. 14,054,000 8,000 128,000 1994............................................................. 28,384,000 228,000 402,000
Securities with a book value of $14,882,000 and $20,816,000 at December 31, 1996 and 1995, respectively, were pledged to secure public deposits and for other purposes as required by law. There were no investment obligations of state and political subdivisions that were payable from or secured by the same source of revenue or taxing authority that exceeded 10% of consolidated shareholders' equity at December 31, 1996 or 1995. During November 1995, the Financial Accounting Standards Board issued a "Guide to Implementation of Statement #115 on Accounting for Certain Investment in Debt and Equity Securities." This guide allowed for a one-time change in the classification of securities pursuant to SFAS #115 as of the date of the implementation guide, but no later than December 31, 1995. As a result, the Banks made a transfer of $52,601,000 to securities available for sale. 22 A-22 NOTE 5 -- LOANS An analysis of the allowance for loan losses for the years ended December 31 follows:
1996 1995 1994 - ------------------------------------------------------------------------------------------------------------------- Balance at beginning of period..................................... $5,243,000 $5,054,000 $5,053,000 Allowance on loans acquired...................................... 1,180,000 Provision charged to operating expense........................... 1,233,000 636,000 473,000 Recoveries credited to allowance................................. 440,000 265,000 399,000 Loans charged against allowance.................................. (1,136,000) (712,000) (871,000) ---------------------------------------- Balance at end of period........................................... $6,960,000 $5,243,000 $5,054,000 ========================================
Loans are presented net of deferred income of $1,768,000 at December 31, 1996, and $1,434,000 at December 31, 1995. Loans on non-accrual status, 90 days or more past due and still accruing interest, or restructured amounted to $3,902,000, $2,560,000 and $2,834,000 at December 31, 1996, 1995 and 1994, respectively. If these loans had continued to accrue interest in accordance with their original terms, approximately $288,000, $263,000, and $259,000 of interest income would have been realized in 1996, 1995 and 1994, respectively. Interest income realized on these loans was approximately $105,000, $64,000 and $102,000 in 1996, 1995 and 1994, respectively. Impaired loans totaled approximately $3,800,000 and $3,200,000 at December 31, 1996 and 1995, respectively. The Banks' average investment in impaired loans approximated $2,500,000 and $2,300,000 in 1996 and 1995, respectively. Cash receipts on impaired loans on non-accrual status are generally applied to the principal balance. Interest income recognized on impaired loans in 1996 and 1995 was approximately $130,000 and $70,000, respectively. Certain impaired loans with a balance of approximately $2,300,000 and $700,000 had specific allocations of the allowance for loan losses calculated in accordance with SFAS #114 totaling approximately $500,000 and $250,000 at December 31, 1996 and 1995, respectively. The Banks capitalized approximately $370,000 of servicing rights relating to originated loans that were subsequently sold during the year ended December 31, 1996, of which approximately $56,000 has been amortized. The fair value of capitalized servicing rights approximated book value at December 31, 1996, therefore no valuation allowance relating to impairment was considered necessary at that date. At December 31, 1996, 1995 and 1994, the Banks serviced loans totaling approximately $181,000,000, $124,000,000 and $103,500,000, respectively, for the benefit of third parties. NOTE 6 -- PROPERTY AND EQUIPMENT A summary of property and equipment at December 31 follows:
1996 1995 - ------------------------------------------------------------------------------------------------------------------- Land....................................................................... $ 2,969,000 $ 1,662,000 Buildings.................................................................. 15,109,000 9,554,000 Equipment.................................................................. 11,511,000 7,988,000 --------------------------- 29,589,000 19,204,000 Accumulated depreciation and amortization.................................. (11,127,000) (9,273,000) --------------------------- Property and equipment, net.............................................. $18,462,000 $ 9,931,000 ===========================
NOTE 7 -- DEPOSITS - -------------------------------------------------------------------------------- A summary of interest expense on deposits for the years ended December 31 follows:
1996 1995 1994 - ------------------------------------------------------------------------------------------------------------------- Savings and NOW.................................................... $ 6,116,000 $ 5,515,000 $ 4,819,000 Time deposits under $100,000....................................... 8,718,000 6,072,000 5,705,000 Time deposits of $100,000 or more.................................. 1,304,000 883,000 568,000 ------------------------------------------ Total............................................................ $ 16,138,000 $12,470,000 $ 11,092,000 ==========================================
Aggregate time certificates of deposit and other time deposits in denominations of $100,000 or more amounted to $31,053,000, $19,497,000, and $11,231,000 at December 31, 1996, 1995 and 1994, respectively. 23 A-23 NOTE 8 -- OTHER BORROWINGS A summary of other borrowings at December 31 follows:
1996 1995 - ------------------------------------------------------------------------------------------------------------------ Advances from Federal Home Loan Bank........................................... $ 111,000,000 $ 103,000,000 Notes payable.................................................................. 14,000,000 U.S. Treasury demand notes..................................................... 1,858,000 1,223,000 Repurchase agreements.......................................................... 8,424,000 6,666,000 Other.......................................................................... 12,000 5,000 ----------------------------- Total........................................................................ $ 135,294,000 $ 110,894,000 =============================
Advances from the Federal Home Loan Bank ("FHLB") at December 31, 1996 and 1995, are secured by the Banks' unencumbered qualifying mortgage loans as well as U.S. Treasury and government agency securities equal to at least 160% of outstanding advances. Maturities and weighted average interest rates are as follows:
1996 1995 AMOUNT RATE AMOUNT RATE - ------------------------------------------------------------------------------------------------------------------- Fixed rate advances 1996............................................. $ 27,000,000 5.61% 1997............................................. $ 46,000,000 5.92% 34,000,000 6.01 1998............................................. 36,000,000 5.98 16,000,000 5.94 1999............................................. 8,000,000 6.07 ------------------------------------------------------- Total fixed rate advances........................ 90,000,000 5.96 77,000,000 5.86 ------------------------------------------------------- Variable rate advances 1996............................................. 15,000,000 5.76 1997............................................. 12,000,000 5.47 4,000,000 5.86 1998............................................. 9,000,000 5.52 2000............................................. 7,000,000 6.66 ------------------------------------------------------- Total variable rate advances .................... 21,000,000 5.49 26,000,000 6.02 ------------------------------------------------------- Total advances................................ $ 111,000,000 5.87% $ 103,000,000 5.90% =======================================================
Interest expense on advances amounted to $6,757,000, $3,836,000 and $761,000 for the years ending December 31, 1996, 1995 and 1994, respectively. As members of the FHLB system, the Banks must own FHLB stock equal to the greater of 1.0% of the unpaid principal balances of residential mortgage loans, 0.3% of its total assets, or 5.0% of its outstanding advances. At December 31, 1996, the Banks were in compliance with the FHLB stock ownership requirements. The Company has established a $17,000,000 unsecured credit facility comprised of a $10,000,000 five-year term loan, payable in equal quarterly installments and a $7,000,000 revolving credit agreement. At December 31, 1996, the term note had an unpaid principal balance of $9,000,000 and the revolving credit facility had an unpaid principal balance of $5,000,000. The term note and the revolving credit facility accrue interest at LIBOR, plus 1.00% and federal funds, plus .75%, respectively. Maturities of the notes payable follow:
1997............................................................................................. $ 7,000,000 1998............................................................................................. 2,000,000 1999............................................................................................. 2,000,000 2000............................................................................................. 2,000,000 2001............................................................................................. 1,000,000 ------------- Total................................................................................. $ 14,000,000 =============
NOTE 9 -- GUARANTEED PREFERRED BENEFICIAL INTERESTS IN COMPANY'S SUBORDINATED DEBENTURES In connection with the FoA Purchase described in Note 2, IBC Capital Finance, a trust subsidiary of the Company, completed the public offering of 690,000 shares of cumulative trust preferred securities ("Preferred Securities") with a liquidation preference of $25 per security. The proceeds of the offering were loaned to the Company in exchange for subordinated debentures with terms that are similar to the Preferred Securities. Distributions on the securities are payable quarterly at the annual rate of 9.25% of the liquidation preference and are included in interest expense in the consolidated financial statements. 24 A-24 The Preferred Securities are subject to mandatory redemption, in whole or in part, upon repayment of the subordinated debentures at maturity or their earlier redemption at the liquidation preference. The subordinated debentures are redeemable prior to the maturity date of December 31, 2026, at the option of the Company on or after December 31, 2001, in whole at any time or in part from time to time, or at any time, in whole, but not in part, upon the occurrence of specific events defined within the trust indenture. The Company has the option to defer distributions on the subordinated debentures from time to time for a period not to exceed 20 consecutive quarters. NOTE 10 -- FEDERAL INCOME TAX The composition of federal income tax expense for the years ended December 31 follows:
1996 1995 1994 - ----------------------------------------------------------------------------------------------------------------- Current ............................................................. $ 3,508,000 $ 3,908,000 $ 1,855,000 Deferred ............................................................ (230,000) (1,208,000) 474,000 ----------------------------------------- Federal income tax expense ........................................ $ 3,278,000 $ 2,700,000 $ 2,329,000 =========================================
A reconciliation of federal income tax expense to the amount computed by applying the statutory federal income tax rate of 34% to income before federal income tax for the years ended December 31 follows:
1996 1995 1994 - ----------------------------------------------------------------------------------------------------------------- Statutory rate applied to income before federal income tax .......... $ 3,784,000 $ 3,233,000 $ 2,842,000 Tax-exempt interest income .......................................... (698,000) (587,000) (586,000) Amortization of goodwill ............................................ 150,000 54,000 58,000 Other, net .......................................................... 42,000 15,000 ----------------------------------------- Federal income tax expense ........................................ $ 3,278,000 $ 2,700,000 $ 2,329,000 =========================================
The deferred federal income tax benefit of $230,000 in 1996, $1,208,000 in 1995 and expense of $474,000 in 1994, resulted from the tax effect of temporary differences. There was no impact for changes in tax laws and rates or changes in the valuation allowance for deferred tax assets. The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31 follow:
1996 1995 - ----------------------------------------------------------------------------------------------------------------- Deferred tax assets Allowance for loan losses ....................................................... $1,534,000 $ 961,000 Deferred compensation ........................................................... 691,000 598,000 Purchase discounts .............................................................. 427,000 Deferred loan fees .............................................................. 316,000 486,000 Deferred credit life premiums ................................................... 145,000 145,000 Other ........................................................................... 836,000 555,000 ------------------------- Gross deferred tax assets ..................................................... 3,949,000 2,745,000 ------------------------- Deferred tax liabilities Unrealized gain on securities available for sale ................................ 531,000 368,000 Fixed assets .................................................................... 483,000 Purchase premiums ............................................................... 134,000 ------------------------- Gross deferred tax liabilities ................................................ 1,014,000 502,000 ------------------------- Net deferred tax assets .................................................... $2,935,000 $ 2,243,000 =========================
The Company's aggregate income subject to federal income tax for the three years ended December 31, 1996, totaled approximately $26,500,000. Consequently, Management believes that at December 31, 1996, it is more likely than not that the benefit of the gross deferred tax assets of $3,949,000 will be realized and no valuation allowance is deemed necessary as of December 31, 1996. NOTE 11 -- EMPLOYEE BENEFIT PLANS The Company maintains stock option plans for certain employees of the Company and the Banks and for non-employee directors of the Company. An aggregate of 137,813 shares of common stock has been authorized for issuance under the plans. Options granted under these plans are exercisable not earlier than one year after the date of grant, at a price equal to the fair market value of the common stock on the date of grant, and expire five years after the date of grant. 25 A-25 On January 1, 1996, the Company adopted Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," ("SFAS #123"). SFAS #123 encourages companies to adopt a fair value method of accounting for stock compensation plans. Companies that do not adopt a fair value method are required to make pro-forma disclosures of net income and earnings per share as if they had adopted the fair value accounting method. The Company has elected the pro-forma disclosure method. The per share weighted average fair value of stock options granted in 1996 and 1995 was obtained using the Black Scholes options pricing model. A summary of the assumptions used and values obtained follows:
1996 1995 - ---------------------------------------------------------------------------------------------------------------- Expected dividend yield ............................................................. 3.64% 3.84% Risk free interest rate ............................................................. 6.53 6.78 Expected life ....................................................................... 5 YEARS 5 years Expected volatility ................................................................. .16262 .15593 Per share weighted average fair value ............................................... $4.65 $3.85
The Company applies APB Opinion No. 25 in accounting for its plans and, accordingly, no compensation cost has been recognized for its stock options in the financial statements. The following table summarizes the impact on the Company's net income had compensation cost included the fair value of options at the grant date:
1996 1995 - ----------------------------------------------------------------------------------------------------------------- Net income As reported ..................................................................... $7,852,000 $6,810,000 Pro-forma ....................................................................... 7,762,000 6,743,000 Net income per share As reported ..................................................................... 2.72 2.38 Pro-forma ....................................................................... 2.69 2.36
A summary of outstanding stock option grants and transactions follows:
NUMBER AVERAGE OF EXERCISE SHARES PRICE - --------------------------------------------------------------------------------------------------------------- Outstanding at December 31, 1993 ...................................................... 42,997 $16.18 Granted .............................................................................. 23,153 18.14 Exercised ............................................................................ (1,103) 14.29 -------------------- Outstanding at December 31, 1994 ....................................................... 65,047 16.91 Granted .............................................................................. 26,460 22.57 Exercised ............................................................................ (8,435) 16.23 Forfeited ............................................................................ (1,103) 22.22 -------------------- Outstanding at December 31, 1995 ....................................................... 81,969 18.73 Granted .............................................................................. 29,348 27.21 Exercised ............................................................................ (3,308) 17.99 Forfeited ............................................................................ (1,102) 27.14 -------------------- Outstanding at December 31, 1996 ....................................................... 106,907 $21.00 ====================
At December 31, 1996, the range of exercise prices of outstanding options was $13.15 to $27.38. The Company has a 401(k) and an employee stock ownership plan covering substantially all full-time employees of the Company and the Banks. The Company matches employee contributions to the 401(k) up to a maximum of 3% of participating employees' eligible wages. Contributions to the employee stock ownership plan are determined annually and require approval of the Company's Board of Directors. For the years ended December 31, 1996, 1995 and 1994, $850,000, $704,000 and $365,000 respectively, was expensed for these retirement plans. Officers of the Company and the Banks participate in various performance-based compensation plans. The Incentive Share Grant Plan provides that the Board of Directors, at its sole discretion, may award restricted shares of common stock to the participants in the Management Incentive Compensation Plan in lieu of cash bonuses. The market value of such incentive shares at the date of grant must equal twice the amount of the cash incentive otherwise payable. Shares of common stock issued pursuant to the Incentive Share Grant Plan vest over four years. For the years ended December 31, 1996, 1995 and 1994, amounts expensed for all incentive plans totaled $1,026,000, $876,000, and $633,000, respectively. 26 A-26 The Company also provides certain health care and life insurance programs to substantially all full-time employees. These insurance programs are available to retired employees at their expense. NOTE 12 -- FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK In the normal course of business, the Banks enter into financial instruments with off-balance sheet risk to meet the financing needs of customers or to reduce exposure to fluctuations in interest rates. These financial instruments may include commitments to extend credit, standby letters of credit and interest rate swaps. There were no interest rate swaps in 1996, 1995 and 1994. Financial instruments involve varying degrees of credit and interest rate risk in excess of amounts reflected in the consolidated balance sheets. Exposure to credit risk in the event of non-performance by the counterparties to the financial instruments for loan commitments to extend credit and letters of credit is represented by the contractual amounts of those instruments. Management does not, however, anticipate material losses as a result of these financial instruments. A summary of financial instruments with off-balance sheet risk at December 31 follows:
1996 1995 - ----------------------------------------------------------------------------------------------------------------- Financial instruments whose risk is represented by contract amounts Commitments to extend credit ...................................................... $58,827,000 $50,821,000 Standby letters of credit ......................................................... 2,182,000 2,427,000
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and generally require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the commitment amounts do not represent future cash requirements. Commitments are issued subject to similar underwriting standards, including collateral requirements, as are generally involved in the extension of credit facilities. Standby letters of credit are written conditional commitments issued to guarantee the performance of a customer to a third party, primarily public and private borrowing arrangements. Standby letters of credit generally extend for periods of less than one year. The credit risk involved in such transactions is essentially the same as that involved in extending loan facilities and, accordingly, standby letters of credit are issued subject to similar underwriting standards, including collateral requirements, as are generally involved in the extension of credit facilities. NOTE 13 -- RELATED PARTY TRANSACTIONS Certain directors and executive officers of the Company and the Banks, including companies in which they are officers or have significant ownership, were loan customers of the Banks during 1996 and 1995. A summary of loans to directors and executive officers whose borrowing relationship exceeds $60,000, and to entities in which they own a 10% or more voting interest for the years ended December 31 follows:
1996 1995 - ------------------------------------------------------------------------------------------------------------------- Balance at beginning of period .................................................... $ 4,687,000 $ 5,322,000 New loans and advances ........................................................... 3,413,000 3,265,000 Repayments ....................................................................... (4,156,000) (3,900,000) --------------------------- Balance at end of period ........................................................... $ 3,944,000 $ 4,687,000 ===========================
NOTE 14 -- OTHER OPERATING EXPENSES Other operating expenses for the years ended December 31 follow:
1996 1995 1994 - ----------------------------------------------------------------------------------------------------------------- Computer processing ............................................... $1,063,000 $ 818,000 $ 786,000 Communications .................................................... 1,007,000 791,000 728,000 Advertising ....................................................... 827,000 344,000 286,000 Supplies .......................................................... 804,000 561,000 498,000 Loan and collection ............................................... 663,000 1,030,000 626,000 State taxes ....................................................... 638,000 537,000 496,000 Intangible amortization ........................................... 583,000 273,000 278,000 Legal and professional ............................................ 339,000 307,000 406,000 Deposit insurance ................................................. 92,000 499,000 966,000 Other ............................................................. 2,254,000 1,486,000 1,231,000 ----------------------------------------- Total ........................................................... $ 8,270,000 $ 6,646,000 $ 6,301,000 =========================================
27 A-27 NOTE 15 -- REGULATORY MATTERS Capital guidelines adopted by Federal and State regulatory agencies and restrictions imposed by law limit the amount of cash dividends the Banks can pay to the Company. At December 31, 1996, using the most restrictive of these conditions for each Bank, the aggregate cash dividends that the Banks can pay the Company without prior approval is approximately $27,910,000. It is not the intent of Management to have dividends paid in amounts which would reduce the capital of the Banks to levels below those which are considered prudent by management and in accordance with guidelines of regulatory authorities. The Company and the Banks are also subject to various regulatory capital requirements. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly discretionary, actions by regulators that could have a material effect on the Company's financial statements. Under capital adequacy guidelines the Company and the Banks must meet specific capital requirements that involve quantitative measures as well as qualitative judgments by the regulators. Quantitative measures established by regulation to ensure capital adequacy require minimum amounts and ratios of total and Tier 1 capital to risk-weighted assets and Tier 1 capital to average assets. Actual capital amounts and ratios for the Company and the Banks at December 31 follow:
MINIMUM RATIOS MINIMUM RATIOS FOR FOR ADEQUATELY WELL-CAPITALIZED ACTUAL CAPITALIZED INSTITUTIONS INSTITUTIONS - ---------------------------------------------------------------------------------------------------------------------------- AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO - ---------------------------------------------------------------------------------------------------------------------------- 1996 Total capital (to risk-weighted assets) Consolidated ........................... $ 57,094,000 10.26% $ 44,502,000 8.00% $ 55,628,000 10.00% Independent Bank ....................... 24,935,000 11.84 16,847,000 8.00 21,059,000 10.00 Independent Bank West Michigan ......... 15,492,000 11.68 10,607,000 8.00 13,259,000 10.00 Independent Bank South Michigan ........ 10,431,000 11.73 7,115,000 8.00 8,894,000 10.00 Independent Bank East Michigan ........ 15,567,000 12.38 10,058,000 8.00 12,573,000 10.00 Tier 1 capital (to risk-weighted assets) Consolidated ........................... $ 50,140,000 9.01% $ 22,251,000 4.00% $ 33,377,000 6.00% Independent Bank ....................... 22,310,000 10.59 8,424,000 4.00 12,635,000 6.00 Independent Bank West Michigan ......... 13,833,000 10.43 5,303,000 4.00 7,955,000 6.00 Independent Bank South Michigan ........ 9,318,000 10.48 3,563,000 4.00 5,336,000 6.00 Independent Bank East Michigan ......... 14,248,000 11.33 5,029,000 4.00 7,544,000 6.00 Tier 1 capital (to average assets) Consolidated ........................... $ 50,140,000 6.31% $ 31,774,000 4.00% $ 39,718,000 5.00% Independent Bank ....................... 22,310,000 6.71 13,294,000 4.00 16,617,000 5.00 Independent Bank West Michigan ......... 13,833,000 6.83 8,098,000 4.00 10,122,000 5.00 Independent Bank South Michigan ........ 9,318,000 7.07 5,274,000 4.00 6,593,000 5.00 Independent Bank East Michigan ......... 14,248,000 10.42 5,472,000 4.00 6,840,000 5.00 1995 Total capital (to risk-weighted assets) Consolidated ........................... $ 49,227,000 12.75% $ 31,124,000 8.00% $ 38,906,000 10.00% Independent Bank ....................... 13,296,000 10.58 10,061,000 8.00 12,577,000 10.00 Independent Bank West Michigan ......... 13,228,000 11.81 9,032,000 8.00 11,289,000 10.00 Independent Bank South Michigan ........ 9,466,000 12.25 6,203,000 8.00 7,753,000 10.00 Independent Bank East Michigan ......... 8,539,000 12.51 5,551,000 8.00 6,939,000 10.00 Tier 1 capital (to risk-weighted assets) Consolidated ........................... $ 44,364,000 11.49% $ 15,562,000 4.00% $ 23,343,000 6.00% Independent Bank ....................... 11,976,000 9.53 5,031,000 4.00 7,546,000 6.00 Independent Bank West Michigan ......... 11,817,000 10.55 4,516,000 4.00 6,774,000 6.00 Independent Bank South Michigan ........ 8,497,000 11.00 3,101,000 4.00 4,652,000 6.00 Independent Bank East Michigan ......... 7,672,000 11.24 2,776,000 4.00 4,163,000 6.00 Tier 1 capital (to average assets) Consolidated ........................... $ 44,364,000 7.52% $ 23,598,000 4.00% $ 29,497,000 5.00% Independent Bank ....................... 11,976,000 6.86 6,983,000 4.00 8,729,000 5.00 Independent Bank West Michigan ......... 11,817,000 6.52 7,250,000 4.00 9,062,000 5.00 Independent Bank South Michigan ........ 8,497,000 6.68 5,088,000 4.00 6,360,000 5.00 Independent Bank East Michigan ......... 7,672,000 7.37 4,164,000 4.00 5,205,000 5.00
28 A-28 NOTE 16 -- FAIR VALUES OF FINANCIAL INSTRUMENTS Statement of Financial Accounting Standards No. 107, "Disclosures About Fair Value of Financial Instruments" requires that the Company disclose estimated fair values for its financial instruments. Many of the Company's financial instruments lack an available trading market. Further, it is the Company's general practice and intent to hold the majority of its financial instruments to maturity. Significant estimates and assumptions were used to determine the fair value of financial instruments. These estimates are subjective in nature, involving uncertainties and matters of judgment, and therefore, fair values cannot be determined with precision. Changes in assumptions could significantly affect the estimates. Estimated fair values have been determined using available data and an estimation methodology that is considered suitable for each category of financial instrument. For assets and liabilities with floating interest rates which reprice frequently and without significant credit risk, it is presumed that estimated fair values approximate the recorded book balances. Financial instrument assets actively traded in a secondary market, such as securities, have been valued using quoted market prices while recorded book balances have been used for cash and due from banks and federal funds sold. The fair value of loans is calculated by discounting estimated future cash flows using estimated market discount rates that reflect credit and interest rate risk inherent in the loans. Financial instruments with a stated maturity, such as certificates of deposit, have been valued based on the discounted value of contractual cash flows using a discount rate approximating current market rates for liabilities with a similar maturity. Financial instrument liabilities without a stated maturity, such as demand deposits, savings, NOW and money market accounts, have a fair value equal to the amount payable on demand. The estimated fair values and recorded book balances at December 31 follow:
1996 1995 ESTIMATED RECORDED ESTIMATED RECORDED FAIR BOOK FAIR BOOK VALUE BALANCE VALUE BALANCE - ------------------------------------------------------------------------------------------------------------------- (in thousands) ASSETS Cash and due from banks ....................... $ 40,600 $ 40,600 $ 17,200 $ 17,200 Federal funds sold ........................... 10,000 10,000 Securities available for sale ................. 136,900 136,900 87,600 87,600 Securities held to maturity ................... 27,600 26,800 29,000 27,900 Net loans and loans held for sale ............. 618,000 614,300 432,000 428,800 LIABILITIES Deposits with no stated maturity .............. $ 412,300 $ 412,300 $ 261,500 $ 261,500 Deposits with stated maturity ................. 262,000 260,200 150,300 150,100 Other borrowings .............................. 136,600 137,000 124,400 124,300
The fair values for commitments to extend credit and standby letters of credit are estimated to approximate their aggregate book balance. Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale the entire holdings of a particular financial instrument. Fair value estimates are based on existing on and off-balance sheet financial instruments without attempting to estimate the value of anticipated future business, the value of future earnings attributable to off-balance sheet activities and the value of assets and liabilities that are not considered financial instruments. Fair value estimates for deposit accounts do not include the value of the substantial core deposit intangible asset resulting from the low-cost funding provided by the deposit liabilities compared to the cost of borrowing funds in the market. 29 A-29 NOTE 17 -- INDEPENDENT BANK CORPORATION (PARENT COMPANY ONLY) FINANCIAL INFORMATION Presented below are condensed financial statements for the parent company. CONDENSED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 1996 1995 - ----------------------------------------------------------------------------------------------------------------- ASSETS Cash and due from banks ................................................... $ 2,974,000 $ 2,761,000 Investment in subsidiaries ................................................ 81,057,000 44,212,000 Other assets .............................................................. 2,116,000 1,713,000 --------------------------- Total Assets .......................................................... $ 86,147,000 $ 48,686,000 =========================== LIABILITIES AND SHAREHOLDERS' EQUITY Notes payable ............................................................. $ 14,000,000 Subordinated debentures ................................................... 17,783,000 Other liabilities ......................................................... 2,528,000 $ 1,661,000 Shareholders' equity ...................................................... 51,836,000 47,025,000 --------------------------- Total Liabilities and Shareholders' Equity ............................ $ 86,147,000 $ 48,686,000 ===========================
CONDENSED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996 1995 1994 - ----------------------------------------------------------------------------------------------------------------- OPERATING INCOME Dividends from subsidiaries ................................... $4,425,000 $4,500,000 $5,560,000 Management fees from subsidiaries and other income ............ 5,073,000 4,248,000 4,028,000 ---------------------------------------- Total Operating Income ...................................... 9,498,000 8,748,000 9,588,000 ---------------------------------------- OPERATING EXPENSES Interest expense .............................................. 546,000 120,000 Administrative and other expenses ............................. 6,348,000 5,226,000 4,849,000 ---------------------------------------- Total Operating Expenses .................................... 6,894,000 5,226,000 4,969,000 ---------------------------------------- Income Before Federal Income Tax and Undistributed Net Income of Subsidiaries .......................................... 2,604,000 3,522,000 4,619,000 Federal income tax credit ....................................... 568,000 320,000 310,000 ---------------------------------------- Income Before Equity in Undistributed Net Income of Subsidiaries .............................................. 3,172,000 3,842,000 4,929,000 Equity in undistributed net income of subsidiaries .............. 4,680,000 2,968,000 1,102,000 ---------------------------------------- Net Income ................................................ $7,852,000 $6,810,000 $6,031,000 ========================================
30 A-30 CONDENSED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1996 1995 1994 - ----------------------------------------------------------------------------------------------------------------------- Net Income ........................................................ $ 7,852,000 $ 6,810,000 $ 6,031,000 ----------------------------------------------- ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH FROM OPERATING ACTIVITIES Depreciation, amortization of intangible assets and premiums, and accretion of discounts on securities and loans ............ 336,000 297,000 286,000 (Increase) decrease in other assets ............................. 426,000 (604,000) 547,000 Increase in other liabilities ................................... 688,000 599,000 298,000 Equity in undistributed net income of subsidiaries .............. (4,680,000) (2,968,000) (1,102,000) ----------------------------------------------- Total Adjustments ............................................. (3,230,000) (2,676,000) 29,000 ----------------------------------------------- Net Cash from Operating Activities ............................ 4,622,000 4,134,000 6,060,000 ----------------------------------------------- CASH FLOW FROM INVESTING ACTIVITIES Purchase of securities available for sale ....................... (23,000) (241,000) Capital expenditures ............................................ (1,110,000) (127,000) (142,000) Investment in subsidiaries ...................................... (31,352,000) Proceeds from sale of property and equipment .................... 36,000 ----------------------------------------------- Net Cash from Investing Activities ............................ (32,485,000) (91,000) (383,000) ----------------------------------------------- CASH FLOW FROM FINANCING ACTIVITIES Proceeds from issuance of short-term borrowings ................. 5,000,000 Proceeds from issuance of long-term debt ........................ 10,000,000 Proceeds from issuance of subordinated debentures ............... 16,753,000 Repayment of long-term debt ..................................... (1,000,000) (2,750,000) Dividends paid .................................................. (2,736,000) (2,392,000) (1,926,000) Proceeds from issuance of common stock .......................... 59,000 138,000 16,000 Repurchase of common stock ...................................... (893,000) (924,000) ----------------------------------------------- Net Cash from Financing Activities ............................ 28,076,000 (3,147,000) (5,584,000) ----------------------------------------------- Net Increase in Cash and Cash Equivalents ..................... 213,000 896,000 93,000 Cash and Cash Equivalents at Beginning of Period .................. 2,761,000 1,865,000 1,772,000 ----------------------------------------------- Cash and Cash Equivalents at End of Period .................. $ 2,974,000 $ 2,761,000 $ 1,865,000 ===============================================
31 A-31 QUARTERLY SUMMARY
REPORTED SALE PRICES OF COMMON SHARES CASH DIVIDENDS 1996 1995 DECLARED --------------------------------------------------------------------------- HIGH LOW CLOSE HIGH LOW CLOSE 1996 1995 - ---------------------------------------------------------------------------------------------------------------- First quarter ................... $27.00 $24.75 $26.75 $22.50 $21.50 $22.50 $.25 $.22 Second quarter .................. 28.00 26.00 27.00 24.00 21.75 23.75 .25 .22 Third quarter ................... 29.00 27.00 27.75 27.50 23.00 26.25 .25 .22 Fourth quarter .................. 35.25 28.00 34.00 27.00 25.25 25.50 .26 .23
The Company has approximately 1,900 holders of record of its common stock. The common stock trades on the Nasdaq stock market under the symbol "IBCP". The prices shown above are supplied by Nasdaq and reflect the inter-dealer prices and may not include retail markups, markdowns or commissions. There may have been transactions or quotations at higher or lower prices of which the Company is not aware. In addition to the provisions of the Michigan Business Corporations Act, the Company's ability to pay dividends is limited by its ability to obtain funds from the Banks and by regulatory capital guidelines applicable to the Company. (See note 15 to the Consolidated Financial Statements.) QUARTERLY FINANCIAL DATA A summary of selected quarterly results of operations for the years ended December 31 follows:
THREE MONTHS ENDED MARCH JUNE SEPTEMBER DECEMBER 31, 30, 30, 31, - ----------------------------------------------------------------------------------------------------------------- 1996 Interest income ................................. $ 12,388,000 $13,909,000 $ 16,301,000 $ 16,887,000 Net interest income ............................. 7,371,000 8,401,000 9,278,000 9,622,000 Provision for loan losses ....................... 207,000 482,000 253,000 291,000 Net income before income tax expense ............ 2,681,000 2,801,000 2,803,000 2,845,000 Net income ...................................... 1,890,000 1,952,000 1,977,000 2,033,000 Net income per common share ..................... .66 .67 .69 .70 1995 Interest income ................................. $ 10,412,000 $11,181,000 $ 11,941,000 $ 12,448,000 Net interest income ............................. 6,523,000 6,942,000 7,188,000 7,429,000 Provision for loan losses ....................... 159,000 159,000 159,000 159,000 Net income before income tax expense ............ 2,161,000 2,266,000 2,508,000 2,575,000 Net income ...................................... 1,556,000 1,636,000 1,795,000 1,823,000 Net income per common share ..................... .54 .57 .63 .64
32 A-32 SHAREHOLDER INFORMATION HOW TO ORDER FORM 10-K Shareholders may obtain, without charge, a copy of Form 10-K, the 1996 Annual Report to the Securities and Exchange Commission, by writing to William R. Kohls, Chief Financial Officer, Independent Bank Corporation, P.O. Box 491, Ionia, Michigan 48846. PRESS RELEASES The Company's press releases, including earnings and dividend announcements, are available via facsimile by calling #800/758-5804 and entering 436425. Press releases are also available on the World Wide Web via PR Newswire's Company News On Call (http://www.prnewswire.com). NOTICE OF ANNUAL MEETING The Company's Annual Meeting of Shareholders will be held at 3:00 p.m. on April 15, 1997, in the Ionia Theater located at 205 West Main Street, Ionia, Michigan, 48846. TRANSFER AGENT AND REGISTRAR State Street Bank & Trust Company, (P.O. Box 8200, Boston, Massachusetts 02266-8200, 800/426-5523) serves as transfer agent and registrar of the Company's common stock. DIVIDEND REINVESTMENT The Company maintains an Automatic Dividend Reinvestment and Stock Purchase Plan which provides an opportunity for shareholders of record to reinvest cash dividends into the Company's common stock. Optional cash purchases are also permitted. A prospectus is available by writing to the Company's Chief Financial Officer. MARKET MAKERS Registered market makers at December 31, 1996 follow: Chicago Capital, Inc. Howe, Barnes Investments, Inc. The Chicago Corporation Robert W. Baird & Co., Inc. First of Michigan Corporation Roney & Company Herzog, Heine, Geduld, Inc. Stifel Nicolaus & Co. EXECUTIVE OFFICERS AND DIRECTORS EXECUTIVE OFFICERS Charles C. Van Loan, President and Chief Executive Officer, Independent Bank Corporation Jeffrey A. Bratsburg, President and Chief Executive Officer, Independent Bank West Michigan Ronald L. Long, President and Chief Executive Officer, Independent Bank East Michigan Michael M. Magee, Jr., President and Chief Executive Officer, Independent Bank Edward B. Swanson, President and Chief Executive Officer, Independent Bank South Michigan William R. Kohls, Executive Vice President and Chief Financial Officer DIRECTORS Keith E. Bazaire, President, Carter's Food Center, Inc., Retail Grocer, Charlotte Terry L. Haske, Partner, Ricker & Haske, C.P.A.s, P.C., Marlette Thomas F. Kohn, Chief Executive Officer, Belco Industries, Inc., Manufacturer, Belding Robert J. Leppink, President, Leppink's Inc., Retail Grocer, Belding Charles A. Palmer, Professor of Law, Cooley Law School, Lansing Charles C. Van Loan, President and Chief Executive Officer, Independent Bank Corporation, Ionia Arch V. Wright, Jr., President, Charlevoix Development Company, Real Estate Development, Charlevoix EX-21 3 EX 21 1 EXHIBIT 21 INDEPENDENT BANK CORPORATION Subsidiaries of the Registrant State of Incorporation ---------------------- IBC Capital Finance Ionia, Michigan Delaware Independent Bank Ionia, Michigan Michigan Independent Bank West Michigan Rockford, Michigan Michigan Independent Bank South Michigan Leslie, Michigan Michigan Independent Bank East Michigan Caro, Michigan Michigan IBC Financial Services, Inc. (a subsidiary of Independent Bank) Ionia, Michigan Michigan Independent Title Services, Inc. (a subsidiary of Independent Bank, Independent Bank West Michigan, Independent Bank South Michigan and Independent Bank East Michigan) Rockford, Michigan Michigan EX-23 4 EX 23 1 EXHIBIT 23 [KPMG LETTERHEAD] The Board of Directors Independent Bank Corporation We consent to incorporation by reference in the registration statements (No. 33-80088) on Form S-3 and (Nos. 33-62086 and 33-62090) on Forms S-8 of Independent Bank Corporation of our report dated February 3, 1997, relating to the consolidated statements of financial condition of Independent Bank Corporation and subsidiaries as of December 31, 1996, and 1995, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1996, which report is incorporated by reference in the December 31, 1996, annual report on Form 10-K of Independent Bank Corporation. Lansing, Michigan March 18, 1997 EX-27 5 EX 27
9 1,000 12-MOS DEC-31-1996 DEC-31-1996 40,631 0 10,000 0 136,852 26,754 27,645 609,704 6,960 888,597 672,534 136,994 9,983 17,250 0 0 2,862 48,974 888,597 49,768 8,746 971 59,485 16,138 24,813 34,672 1,233 (162) 27,861 11,130 11,130 0 0 7852 2.72 2.72 5.38 1,711 1,994 197 3,800 5,243 1,136 440 6,960 3,267 0 3,693
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