SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996 Commission File Number 0-7638
FIRST MICHIGAN BANK CORPORATION
(Exact name of registrant as specified in its charter)
Michigan 38-2024376
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Financial Plaza, Holland, Michigan 49423
(Address of principal executive offices) (Zip Code)
(616) 355-9200
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $1 Par Value
(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 the 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) on March 3, 1997: Common Stock, $1.00 Par Value - $775,307,000
(Based on $30.00 per share which was the closing price in the over-the-counter
market as quoted by "NASDAQ" on March 3, 1997. Reference is made to Item 5, Part
II for further information.)
Indicate the number of shares outstanding of each of the Registrant's classes of
common stock, as of the latest practical date.
Common Stock, $1.00 Par Value - 26,379,852 shares outstanding as of March 3,
1997.
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Annual Report to Shareholders for the year ended
December 31, 1996, are incorporated by reference into Part II of this Report.
Portions of the Registrant's proxy statement for its annual meeting to be held
April 15, 1997 are incorporated by reference into Part III of this Report.
PART I
ITEM 1. BUSINESS OF FIRST MICHIGAN BANK CORPORATION
The Registrant was incorporated under the laws of the State of Michigan on
August 15, 1973. The Registrant was incorporated by the management of FMB-First
Michigan Bank for the purpose of acquiring all the outstanding stock of the
FMB-First Michigan Bank and becoming a bank holding company. As used herein, the
term "Registrant" refers to First Michigan Bank Corporation or, if the context
dictates, to First Michigan Bank Corporation and its wholly-owned subsidiaries.
The Registrant is a bank holding company as defined in the Bank Holding Company
Act of 1956, as amended (the "Act"). The Registrant owned, on December 31, 1996,
all of the outstanding stock of fifteen state-chartered banks under Michigan
law: FMB-First Michigan Bank (Zeeland), FMB- Lumberman's Bank (Muskegon),
FMB-Community Bank (Dowagiac), FMB-Oceana Bank (Hart), FMB-State Savings Bank
(Lowell), FMB-Reed City Bank (Reed City), FMB-Commercial Bank (Greenville),
FMB-First Michigan Bank-Grand Rapids (Grand Rapids), FMB-Maynard Allen Bank
(Portland), FMB-Northwestern Bank (Boyne City), FMB-Security Bank (Manistee),
FMB-Old State Bank (Fremont), FMB-Sault Bank (Sault Ste. Marie) through
Registrant's ownership of Superior Financial Corporation, a bank holding
company, FMB-Arcadia Bank (Kalamazoo) and FMB-Trust (the "subsidiary banks").
Registrant also owns four nonbank subsidiaries: First Michigan Life Insurance
Company (FMLIC), incorporated in Arizona, which writes credit life, health and
accident insurance for customers of the affiliates of the Registrant only,
FMB-Brokerage Services, Inc. (Brokerage), doing business as FMB Investment
Services, which provides retail securities brokerage services to customers of
the Registrant's affiliate banks and others and, through FMB-Trust,
FMB-Insurance Agency, Inc. (Agency), which serves as the agency through which
annuity investments are sold by licensed employees and, through FMB-First
Michigan Bank, FMB Title Services, Inc. (Title) which provides title insurance
services to customers of the Registrant's banks.
The Registrant conducts its business incident to the ownership of the
outstanding stock of the subsidiary banks, the collection of revenues from the
subsidiary banks, the payment of operating expenses and the disbursement of
dividends and reports to the Registrant's shareholders. Through certain officers
devoted to the corporate function, the Registrant directs and coordinates the
following activities for the subsidiary banks: investments, marketing and
promotion, personnel administration, employee benefits, auditing, accounting and
tax planning, insurance, operational support, and strategic planning. The
important customer service activities, including receiving deposits and making
of loans, are handled by the local subsidiary banks and their respective
management teams.
Aside from the stock of the subsidiary banks, FMLIC, Brokerage, Agency and
Title, the Registrant has no substantial assets. The Registrant's income depends
primarily upon centralized support service fees, interest income and dividends
received from subsidiary banks. Centralized support service fee income from
subsidiaries reflects the costs incurred by the Registrant in the course of
directing and providing the activities noted above. As noted elsewhere, dividend
income depends upon the subsidiary banks' earnings, their financial condition,
compliance with regulatory requirements (including legal limitations on the
payment of dividends), and other factors and, in addition, are subject to
declaration by their respective boards of directors. Under Federal Reserve Board
policy, the Registrant is expected to act as a source of financial strength to
each subsidiary bank and to commit resources to support each subsidiary bank.
As a bank holding company, the Registrant has broader corporate powers than a
bank or any of its subsidiary banks. These broader corporate powers principally
include the power to engage in certain non-banking businesses closely related to
banking, to own the capital stock of banks located in Michigan and in certain
other states, and to own the capital stock of business corporations which are
not banks, located either within Michigan or outside of Michigan, all subject,
however, to the Act and regulations of the
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Board of Governors of the Federal Reserve System. In general, the Act and
regulations restrict the Registrant, with respect to its own activities or the
activities of corporations other than banks which it owns, to activities which
are closely related to banking. (See "Supervision and Regulation.") The
Registrant is continually reviewing and evaluating the possibility of expanding
bank services and non-banking services to be offered by affiliates.
Business of Subsidiary Banks
Except for FMB-Trust, which provides trust and trust related services only, the
subsidiary banks are engaged in the business of general commercial and retail
banking and, indirectly through other subsidiaries, the business of trust
services and investment services. Financial services and products are delivered
through a network of full service branches, specialized offices, automatic
teller machines, telephones and on-line banking. Commercial and retail banking
activities entail offering to businesses, individuals and governmental units a
variety of deposit products including checking accounts, savings accounts and
time deposits and short term deposits. The banks conduct lending activities in
the commercial and consumer marketplaces, offering the following types of
credits - secured and unsecured business and personal loans; commercial,
residential and home equity mortgage loans; construction financing; letters of
credit; consumer installment loans (automobiles and recreational vehicles and
equipment); personal, home equity and overdraft protection lines of credit; and
credit cards.
The lending activities of the banks are governed by a uniform bank loan policy
(the "policy") established by the Registrant and adopted by the board of
directors of each bank. The policy specifies the types of credits that are
acceptable to the banks. It also establishes lending limits for the banks' loan
officers and guidelines for appropriate, conservative collateral margins for
secured loans. Loan officers at the banks conduct the day-to-day credit process
in accordance with the policy, initiating and approving all extensions of credit
and monitoring credit quality. An independent loan review function, established
by the Registrant, assists bank management in the process of monitoring credit
underwriting standards and ensures that lending decisions are made within the
established policy guidelines. Under the policy, senior loan officers are
responsible for identifying, monitoring and managing concentrations of credit
that may occur. As of December 31, 1996, the Registrant had no significant
concentration of loans to any group of borrowers engaged in similar activities
that would be impacted by changes in economic or other conditions and have a
materially adverse impact on the business of the Registrant.
All lending activities of the banks involve credit and interest rate risk to
varying degrees. Interest rate risk is managed through asset/liability
management committees at both the bank and consolidated levels, which are
discussed in detail in management's discussion and analysis of financial
condition and results of operations in Item 7. Regarding credit risk, a larger
potential risk of loss to the banks exists on individual credits in the
commercial portfolio. Commercial credit risk is mitigated through the loan
underwriting process with reference to the policy guidelines regarding
acceptable credit risk and collateral margins. In the consumer portfolio, there
is much less potential risk of loss on an individual credit, but there is a
greater frequency of loss, which is both anticipated and predictable. Consumer
credit risk is also mitigated by reference to the policy guidelines for
collateral margins. Problem loan situations are identified by individual loan
officers for commercial credits and by collections departments for consumer
credits, both of which are responsible for initiating corrective action to
control losses within reasonable limits.
Three of the subsidiaries of the Registrant meet the definition of significant
subsidiaries. On a combined basis they account for 65% of December 31, 1996
total consolidated assets and 75% of consolidated earnings for the year then
ended. These subsidiaries are located in Zeeland, Grand Rapids and Muskegon.
Together they serve the largest banking markets in West Michigan. The other
subsidiaries of the Registrant serve various retail and commercial banking
markets of West Michigan from the southern-most counties of the State into the
upper peninsula serving the Sault Ste. Marie area.
Supervision and Regulation
The Registrant operates in a highly regulated industry and thus may be affected
by changes in state and federal legislation and regulations. As a registered
bank holding company under the Bank Holding Company Act of 1956, as amended (the
"Act"), the Registrant is subject to supervision and examination by the Board of
Governors of the Federal Reserve System (Federal Reserve Board) and is required
to file with the Federal Reserve Board annual reports and information regarding
its business operations and those of its subsidiaries.
<PAGE>
The Act requires the Registrant to obtain Federal Reserve Board approval before:
(a) acquiring (except in certain limited circumstances) more than a five percent
ownership interest in any class of the voting securities of any bank or bank
holding company; (b) acquiring all or substantially all of the assets of a bank
or bank holding company; or (c) merging or consolidating with another bank
holding company.
On September 29, 1994 the Riegle-Neal Interstate Banking and Branching
Efficiency Act was signed into law. This legislation authorizes adequately
capitalized and adequately managed bank holding companies, beginning September
29, 1995, to acquire banks located outside their respective home state,
irrespective of state law. This legislation also authorizes, effective June 1,
1997, (subject to individual state's rights to (a) accelerate this date, or (b)
to prohibit interstate branching within their borders) banking organizations to
branch nationwide by acquisition or consolidation of existing banks in other
states. Effective November 29, 1995, subject to approval by the Michigan
Financial Institutions Bureau, Michigan law authorizes out-of-state banks to
acquire and establish branches in Michigan, provided the laws of the
out-of-state bank permits Michigan banks to acquire or establish branches in
that state. Interstate acquisitions and branching are subject to the approval of
various federal and state agencies and other conditions. While it is too early
to assess the impact of this legislation, it is reasonable to assume it could
foster further industry consolidation. The Registrant could benefit indirectly
from this legislation through lower supervisory costs related to overall
improved quality in the industry. Although interstate banking and branching will
bring challenges through increased price competition, the Registrant will
continue to address those challenges through improved efficiency and continued
emphasis on local decision-making.
Subject to certain exceptions, a bank holding company is normally not permitted
to acquire direct or indirect ownership or more than five percent of any class
of voting securities of any company that is not a bank or not engaged in
activities determined by the Federal Reserve Board to be closely related to
banking. Under Federal Reserve Board regulations, activities deemed to be
closely related to banking include such business ventures as consumer finance,
equipment leasing, certain data processing services, mortgage banking, brokerage
and investment advisory services and insurance services. The Act does not place
geographic restrictions on the activities of non-bank subsidiaries of bank
holding companies.
The 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. Under EGRPRA,
qualified bank holding companies may commence a regulatory approved nonbanking
activity without prior notice to the Federal Reserve; written notice is merely
required within ten days after commencing the activity. Also, under EGRPRA, the
prior notice period is reduced to twelve days in the event of any nonbanking
acquisition or share purchase, assuming the size of the acquisition does not
exceed 10% of risk-weighted assets of the acquiring bank holding company and the
consideration does not exceed 15% in Tier I capital. This prior notice
requirement also applies to commencing a nonbanking activity de novo which has
been previously approved by order of the Federal Reserve, but not yet
implemented by regulations.
The Federal Reserve Board has jurisdiction to regulate the terms of certain debt
issues of bank holding companies, including the authority to impose interest
ceilings and reserve requirements on such debt issues. In addition, bank holding
companies and their subsidiaries are prohibited from engaging in certain
"tie-in" arrangements in connection with any extensions of credit, leases, sales
of property or furnishing of services.
The fifteen subsidiary banks are organized as Michigan banking corporations and
thus are regulated and supervised by the Financial Institutions Bureau of the
Michigan Department of Commerce. Michigan law permits Michigan state-chartered
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
Financial Institutions Bureau, a Michigan bank may relocate its 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. The Registrant's
subsidiary banks, excluding FMB-Trust, have entered into an interbank branching
agreements whereby each of the banks may act as branches of the other banks.
Fourteen of the subsidiary banks accept customer deposits, and the deposits of
each bank are insured by the Federal Deposit Insurance Corporation (FDIC).
Consequently, these subsidiary banks are subject to the provisions of the
Federal Deposit Insurance Act and to examination by the FDIC. As a result of
such supervision and regulation, these subsidiary banks are subject to
requirements to maintain reserves
<PAGE>
against deposits, restrictions on the nature and amount of loans which may be
made and the interest which may be charged thereon, restrictions relating to
investments and other activities, limitations based on capital and surplus,
limitations on branching and limitations on the payment of dividends on their
common stock. These regulations are intended primarily for the protection of the
depositors and customers of the subsidiary banks, rather than shareholders of
the Registrant.
The provisions of the Financial Institutions Reform, Recovery and Enforcement
Act of 1989 (FIRREA) directly affect banks and bank holding companies. FIRREA
requires the FDIC to maintain two funds to insure customer deposits: for banks
the Bank Insurance Fund (BIF), and for savings and loan associations, the
Savings Association Insurance Fund. FIRREA also allows bank holding companies to
acquire financially sound thrift institutions. Previously, bank holding
companies could acquire only failing thrift institutions. Through a "cross-
guarantee" provision in FIRREA, the FDIC may hold commonly controlled depository
institutions liable if an affiliated depository institution fails. In such an
event, the interests of the FDIC are placed ahead of the bank holding company
shareholders.
As a Michigan business corporation, the Registrant may generally declare and pay
dividends, provided that the Registrant is not insolvent and that the payment of
the dividend would not render it insolvent, and, after giving effect to the
distribution, that the Registrant's total assets equal or exceed its total
liabilities plus the dissolution preference of any senior equity securities.
However, the Registrant's ability to pay dividends to its stockholders is
limited by its ability to obtain funds from its subsidiary banks and by
regulatory capital guidelines applicable to the Registrant. Dividend
restrictions are discussed in Note 19 of the Notes to the Consolidated Financial
Statements in Part II.
The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FIDCIA")
generally prohibits a depository institution from making any capital
distribution (including payment of a dividend) or applying 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. In addition, 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. The Federal Reserve Board has issued a policy statement providing that
bank holding companies and insured banks should generally only pay dividends out
of current operating earnings.
The Michigan legislature adopted, effective March 28, 1996, the Credit Reform
Act. This statute, together with amendments to other related laws, permits
regulated lenders, indirectly including Michigan chartered banks, to charge and
collect higher rates of interest and increased fees on certain types of loans to
individuals and businesses. The laws prohibit "excessive fees and charges," and
authorize governmental authorities and borrowers to bring actions for injunctive
relief and statutory and actual damages for violations by lenders. The statutes
specifically authorize class actions, and also civil money penalties for knowing
and willful, or persistent violations.
FDIC regulations which became effective April 1, 1996, impose limitations (and
in certain cases, prohibitions) on (i) certain "golden parachute" severance
payments by troubled depository institutions and their affiliated holding
companies to institution-affiliated parties (primarily directors, officers,
employees or principal shareholders of the institution) and (ii) certain
indemnification payments by a depository institution or its affiliated holding
company, regardless of financial condition, to institution-affiliated parties.
The FDIC regulations impose limitations on indemnification payments which could
restrict, in certain circumstances, payments by the Registrant or the Bank's to
their respective directors or officers otherwise permitted under the Michigan
Business Corporation Act or the Michigan Banking Code, respectively.
Competition
The banking business in Michigan is highly competitive. Large Michigan
metropolitan-based bank holding companies have established offices and branches
throughout the state. This has resulted in an increasing competitive atmosphere
in the market areas where the Registrant's banking business is conducted. As
noted above, out-of-state bank holding companies may acquire Michigan banking
institutions. This is expected to further intensify competition. Based on total
consolidated assets of $3,520,433,000 at December 31, 1996, the Registrant
ranked 6th in size among bank holding companies located in Michigan.
<PAGE>
Each of the Registrant's subsidiaries is subject to competition from banks
located within their respective markets and in surrounding communities. Many of
these banks are affiliated with major bank holding companies in Michigan. The
subsidiaries also compete with savings and loan associations, finance companies,
credit unions, money market mutual funds, personal loan companies, investment
firms and other financial institutions, many of which are substantially larger
in size. The principal methods of competition include loan and deposit pricing,
the quality and variety of services provided to customers, and advertising and
marketing efforts.
Employees
At December 31, 1996, the Registrant and its subsidiary banks had approximately
1,570 employees, calculated in terms of full-time equivalents. Employee
relationships are considered to be excellent. Benefit programs, generally for
full-time employees, include a pension plan, cash or deferred compensation plan,
group comprehensive medical and long-term disability plans, group life
insurance, paid vacation and sick-leave programs.
Franchises
The Registrant has no material patents, licenses or franchises, except the
corporate franchises of its subsidiaries to engage in the banking business.
These franchises to engage in the banking business are perpetual in duration but
may be revoked under certain circumstances in accord with the provisions of the
laws to which each is applicable.
Industry Segments
The Registrant and its subsidiaries are engaged in a single industry segment,
commercial banking, broadly defined to include commercial and retail banking and
trust activities along with other permitted activities closely related to
banking, namely brokerage services, credit life and accident and health
insurance and certain other insurance agency services.
ITEM 2. PROPERTIES
The Registrant and its subsidiaries conduct business from 97 banking and
administrative offices. Of these 84 are owned, covering approximately 606,000
square feet, and 13 are leased, covering approximately 40,000 square feet. The
Registrant's corporate headquarters, at 135,000 square feet, is the largest of
the owned properties and is utilized primarily for centralized support services
and for corporate administration. Other owned and leased properties are banks,
banking branches and specialized offices for bank administration and delivery of
the subsidiaries' financial products and services located in the communities
they serve. All of the facilities are believed to be in excellent condition and
adequate to meet the Registrant's present needs.
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings against the Registrant or its
subsidiaries.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the three
months ended December 31, 1996.
ADDITIONAL ITEM - EXECUTIVE OFFICERS OF REGISTRANT
The following are the executive officers of the Registrant:
Name Age Position (Date Elected to Position)
David M. Ondersma 55 Chairman (August, 1989)
Chief Executive Officer (June, 1985)
Stephen A. Stream 54 President and Chief Operating Officer
(January 1, 1995)
Secretary (May, 1992)
Merle J. Prins 59 Executive Vice President (January, 1994)
Larry D. Fredricks 60 Executive Vice President and Chief
Financial Officer (January, 1994)
Senior Vice President and Chief Financial
Officer (May, 1991).
<PAGE>
The foregoing officers serve at the pleasure of the Board of Directors and are
appointed by the Board annually. There are no family relationships among the
directors of the Registrant and the executive officers. Furthermore, there are
no arrangements or understandings between any officer and any other person
pursuant to which the officer was elected.
PART II
Certain portions of the Registrant's Annual Report to Shareholders for the year
ended December 31, 1996 ("1996 Annual Report"), are filed as Exhibit 13 to this
Form 10-K Report. The following information items in Part II of this Report,
which are contained in portions of the Annual Report on the pages noted, are
specifically incorporated by reference into this Form 10-K Report.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Dividend restrictions are set forth in Note 19 to Registrant's consolidated
financial statements included in Item 8 of this form 10-K Annual Report.
The Registrant's common stock is quoted on the NASDAQ National Market System
under the symbol FMBC. As of March 3, 1997, there were approximately 13,200
shareholders of record of the Registrant's common stock.
The prices shown below are based on reports published for representative
quotations in the over-the-counter market supplied by the National Association
of Securities Dealers, Inc. In all periods, the prices shown reflect
inter-dealer prices and do not include retail mark-ups, markdowns or
commissions. There may have been transactions or quotations at higher or lower
prices of which management is not aware. The per share dividend and market price
information set forth below has been adjusted to give retroactive effect to the
four-for-three stock split paid in July 1996, and 5% stock dividends paid in May
1996 and 1995.
<TABLE>
Closing Dividends
Per Share and Unaudited High Bid Low Bid Bid Declared
<S> <C> <C> <C> <C>
Year ended December 31, 1996
First Quarter 21.250 19.625 21.250 .15
Second Quarter 23.500 21.250 23.250 .16
Third Quarter 24.750 22.500 24.750 .16
Fourth Quarter 29.500 24.500 29.500 .19
Year ended December 31, 1995
First Quarter 16.375 15.500 16.375 .13
Second Quarter 17.625 16.375 17.375 .13
Third Quarter 18.375 17.375 18.375 .14
Fourth Quarter 21.125 18.375 19.625 .15
</TABLE>
ITEM 6. SELECTED FINANCIAL DATA
The information required by this item is incorporated by reference from pages
44-45 of the 1996 Annual Report under the captions "Summary of Earnings,"
"Summary Balance Sheet," "Per Share Data," and "Credit Quality Ratios."
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information required by this item is incorporated by reference from pages
47-58 of the 1996 Annual Report under the caption "Management's Discussion and
Analysis."
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is incorporated by reference from pages
21-43 and pages 46 and 59 of the 1996 Annual Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None.
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Directors of Registrant
Information relating to directors and director nominees of the Registrant and
compliance with Section 16(a) of the Exchange Act is contained under the caption
"Information About Directors and Director Nominees" in the Registrant's
definitive Proxy Statement, dated March 13, 1997, for the Annual Meeting of
Shareholders to be held on April 15, 1997, as filed with the Commission, which
information is incorporated by reference in this Form 10-K Annual Report.
Executive Officers of Registrant
Information relating to Executive Officers of the Registrant is included in Part
I of this Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
Information relating to compensation of the Registrant's executive officers is
contained under the caption "Compensation of Executive Officers" in the
Registrant's definitive Proxy Statement, dated March 13, 1997, for the Annual
Meeting of Shareholders to be held on April 15, 1997 as filed with the
Commission, which information is incorporated by reference in this Form 10-K
Annual Report, excluding the information included under the captions "Committee
Report on Executive Compensation" and "Shareholder Return Performance Graph".
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information concerning security ownership of certain beneficial owners and
management is contained under the captions "Voting Securities and Beneficial
Ownership of Management" and "Information about Directors and Director Nominees"
in the definitive proxy statement dated March 13, 1997 for the Annual Meeting of
Shareholders to be held April 15, 1997 as filed with the Commission, which
information is incorporated herein by reference in this Form 10-K Annual Report.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information relating to management transactions with the Registrant is contained
under the caption "Other Transactions" in the Registrant's definitive Proxy
Statement, dated March 13, 1997, for the Annual Meeting of Shareholders to be
held on April 15, 1997, as filed with the Commission, which information is
incorporated by reference in this Form 10-K Annual Report.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
The following financial statements of First Michigan Bank Corporation
are incorporated by reference under Item 8 of this Report, from the
Registrant's 1996 Annual Report to Shareholders, certain portions of
which are filed as Exhibit 13 to this 10-K Report.
Consolidated Balance Sheets as of December 31, 1996 and 1995.
Consolidated Statements of Income 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.
Consolidated Statements of Cash Flows for the years ended December 31,
1996, 1995 and 1994.
Notes to Consolidated Financial Statements
Independent Auditors' Report
(a) 2. Financial Statement Schedules
All financial statement schedules have been included in the
consolidated financial statements or are either not applicable or not
significant.
<PAGE>
(a) 3. Exhibits
Reference is made to the Exhibit Index which is found in this Form
10-K Annual Report.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended December
31, 1996.
For purposes of complying with the amendments to the rules governing Form S-8
under the Securities Act of 1933, the undersigned Registrant hereby undertakes
as follows, which undertaking shall be incorporated by reference into
Registrant's Registration Statements on Form S-8 Nos.: 2-73711; 33-24591; and
33-34461:
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
of 1933 and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
<PAGE>
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.
FIRST MICHIGAN BANK CORPORATION
/s/ David M. Ondersma
By: David M. Ondersma
(Chairman of the Board and
Chief Executive Officer)
/s/ Larry D. Fredricks
By: Larry D. Fredricks
(Principal Financial Officer)
(Principal Accounting Officer)
Date: March 13, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below on March 13, 1997 by the following persons on behalf of
the registrant in the capacities indicated. Each Director of the Registrant,
whose signature appears below hereby appoints David M. Ondersma as his or her
attorney-in-fact, to sign in his or her name and on his on her behalf, as a
Director of the Registrant, and to file with the Commission any and all
amendments to this Report on Form 10-K.
/s/ Roger A. Andersen /s/ Meriam B. Leeke
Roger A. Andersen, Director Meriam B. Leeke, Director
/s/ Ronald A. Bieke /s/ Donald W. Maine
Ronald A. Bieke, Director Donald W. Maine, Director
/s/ James H. Bloem /s/ Jack H. Miller
James H. Bloem, Director Jack H. Miller, Director
/s/ David M. Cassard /s/ David M. Ondersma
David M. Cassard, Director David M. Ondersma, Director
/s/ Doyle A. Hayes /s/ John W. Spoelhof
Doyle A. Hayes, Director John W. Spoelhof, Director
/s/ Robert J. Kapenga /s/ Stephen A. Stream
Robert J. Kapenga, Director Stephen A. Stream, Director
<PAGE>
EXHIBIT INDEX
The following exhibits are filed herewith, indexed according to the applicable
assigned number:
Exhibit
Number
(13) Certain portions of the Company's 1996 Annual Report to Shareholders.
This information was delivered to the Company's shareholders in
compliance with Rule 14(a)-3 of the Securities Exchange Act of 1934, as
amended.
(21) Subsidiaries of the Registrant.
(23)(a) Consent of Independent Certified Public Accountants, dated March 26,
1997.
(23)(b) Consent of Independent Certified Public Accountants, dated March 26,
1997, regarding the Registrant's Cash Option Plan.
(27) Financial data schedule.
(99) Financial statements, financial statement schedules and report of
independent accountants for the Registrant's Cash Option Plan.
The following exhibits, indexed according to the applicable assigned number,
were previously filed by the Registrant and are incorporated by reference in
this Form 10-K Annual Report.
Exhibit
Number Original Filing Form and Date
- ------ -----------------------------
(3)(a) Section 7 of Article VIII of Exhibit 3 of Form S-4
the Articles of Incorporation Registration Statement File
of Registrant as added to No. 33-87996.
Article VIII by amendment
approved by a vote of
shareholders on April 13, 1994.
(b) Article III of the Articles of Exhibit (3) of Form 10-K for
Incorporation of the Registrant the year ended December 31,
as amended, approved by a vote 1991.
of shareholders on April 16, 1991.
(c) Article VI of the Articles of Exhibit 3(a) of Form 10-K for
Incorporation of the Registrant the year ended December 31,
as amended, approved by a vote of 1988.
the shareholders on April 12, 1988.
(d) Articles of Incorporation of the Exhibit 3(a) of Form 10-K for
Registrant except for amendments the year ended December 31,
to the Articles of Incorporation 1987.
referenced above.
(e) Bylaws of the Registrant Exhibit 3(b) of Form 10-K for
the year ended December 31,
1987.
(4) Instruments defining the rights of
security holders, including indentures:
(a) Automatic Dividend Reinvestment and Exhibit 4(a) of Form S-3,
Stock Purchase Plan of the Registrant. dated February 13, 1985, File
#2-95898.
(b) Shareholder Protection Rights Exhibit 1 of Form 8-A
Agreement dated as of October 11, Registering Junior Preferred
1990. Stock Purchase Rights-
Effective November 8, 1990.
(10) Material Contracts:
*(a) First Michigan Bank Corporation Exhibit 10(d) of Form 10-K for
Employee Benefit Trust, the year ended December 31,
August 14, 1980. 1980.
<PAGE>
*(b) First Michigan Bank Corporation Exhibit 10(e) of Form 10-K for
Bonus Plan effective January 1, 1981. the year ended December 31,
1980.
*(c) Senior Management Bonus Plan of First Exhibit 10(f) of Form 10-K
Michigan Bank, Zeeland, effective for the year ended December
January 1, 1980 as revised 31, 1980.
December 31, 1980.
*(d) First Michigan Bank Corporation Exhibit 10 of Form 10-K for
1981 Stock Option Plan as the year ended December 31,
amended and restated March 19, 1981.
1982.
*(e) First Michigan Bank Corporation Appendix A of the definitive
1987 Stock Option Plan, approved Proxy Statement, dated on
by the Registrant's Board of March 20, 1987.
Directors March 12, 1987, approved
by the shareholders and
effective April 14, 1987.
*(f) Form of Management Continuity Exhibit 10 Registration
Agreement entered into between the Statement on Form S-4 dated
Registrant and certain executive January 10, 1996.
officers of the Registrant. (Reg. No. 333-00131).
*(g) Deferred Compensation, Deferred Appendix A of the definitive
Stock, and Current Stock Purchase proxy statement, dated
Plan for Non-Employee Directors, March 9, 1995.
approved by the Registrant's
Board of Directors December 8, 1994,
approved by the shareholders and
effective April 13, 1995.
*(h) First Michigan Bank Corporation Exhibit 10 of Form 10-K for
Pension Benefit Restoration Plan. the year ended December 31,
1995.
* Indicates a compensatory arrangement.
<PAGE>
EXHIBIT 13
Consolidated Financial Statements and Financial Review
Table of Contents
Consolidated Financial Statements 22
Notes to Consolidated Financial Statements 26
Five-Year Consolidated Financial Summary 44
Independent Auditors' Report 46
Management's Discussion and Analysis 47
Statement of Management Responsibility
The management of First Michigan Bank Corporation (FMB) is responsible for the
preparation and accuracy of the consolidated financial statements and related
financial data contained in this annual report. The financial statements have
been prepared in accordance with generally accepted accounting principles to
reflect, in all material respects, the substance of financial transactions
occurring during the period. Where appropriate, the amounts reflect management's
judgments and estimates.
FMB maintains effective internal controls which provide reasonable
assurance that assets are safeguarded and that transactions are properly
recorded and executed in accordance with management's authorization. Management
relies on these internal controls to ensure that financial statement information
and related financial data are presented fairly and consistently.
As part of these internal controls, FMB maintains an internal audit staff
which monitors compliance with established policies, procedures and controls and
reports independently to the Audit Committee of the Board of Directors. The
Audit Committee is composed entirely of outside directors and meets on a regular
basis with the internal auditors and independent certified public accountants.
The Committee reviews all matters related to internal controls, financial
reporting and regulatory compliance for FMB.
The consolidated financial statements and notes to the consolidated
financial statements of FMB have been audited by the independent certified
public accounting firm, BDO Seidman, LLP. Their report is contained herein.
/s/ David M. Ondersma
David M. Ondersma
Chairman and Chief
Executive Officer
/s/ Larry D. Fredricks
Larry D. Fredricks
Executive Vice President and
Chief Financial Officer
<PAGE>
<TABLE>
Consolidated Statements of Income
(Dollars in Thousands, Except for Per Share Data)
Year ended December 31,
1996 1995 1994
<S> <C> <C> <C>
Interest Income
Loans and fees on loans ............... $ 221,856 $ 202,395 $ 156,755
Securities:
Taxable ............................... 32,244 29,376 28,128
Tax-exempt ............................ 12,899 13,824 14,307
Other ................................. 2,472 3,002 1,051
Total interest income ................. 269,471 248,597 200,241
Interest Expense
Deposits .............................. 121,172 113,037 77,957
Other borrowed funds .................. 6,911 5,793 4,395
Long-term debt ........................ 1,008 697 857
Total interest expense ................ 129,091 119,527 83,209
Net Interest Income ................... 140,380 129,070 117,032
Provision for loan losses ............. 11,321 7,991 6,670
Net interest income after
provision for loan losses ........... 129,059 121,079 110,362
Non-Interest Income
Service charges on deposits ........... 14,239 12,792 11,939
Trust and investment management
fees ................................ 8,228 7,250 6,829
Mortgage banking revenue .............. 6,351 4,017 3,847
Other operating ....................... 9,003 6,758 7,144
Net realized securities gains
(losses) ............................. (84) 324 (297)
Total non-interest income ............. 37,737 31,141 29,462
Non-Interest Expense
Salaries and employee benefit ......... 59,348 55,157 50,153
Occupancy ............................. 7,132 6,561 6,013
Equipment ............................. 7,187 6,062 5,757
FDIC insurance ........................ 29 2,918 5,180
Other operating ....................... 34,653 30,886 28,218
Total non-interest expense ............ 108,349 101,584 95,321
Income Before Income Taxes ............ 58,447 50,636 44,503
Income taxes .......................... 16,279 13,324 10,776
Net Income ............................ $ 42,168 $ 37,312 $ 33,727
Net Income Per Share .................. $ 1.57 $ 1.40 $ 1.27
Average Shares Outstanding
(in thousands) ...................... 26,779 26,652 26,643
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
Consolidated Balance Sheets
(Dollars in Thousands)
December 31,
1996 1995
<S> <C> <C>
Assets
Cash and due from banks ...................... $ 155,725 $ 128,168
Federal funds sold ........................... 12,950 117,100
Total cash and cash equivalen1 ............... 68,675 245,268
Interest bearing deposits with banks ......... 1,713 5,361
Securities:
Available-for-sale ........................... 465,460 329,688
Held-to-maturity (market values
of $293,595 and $362,788) ................... 284,691 349,227
Total securities ............................. 750,151 678,915
Loans ........................................ 2,499,038 2,216,947
Allowance for loan losses .................... (31,720) (28,031)
Net loans .................................... 2,467,318 2,188,916
Net premises and equipment ................... 68,667 68,551
Other assets ................................. 63,909 53,728
Total assets ................................. $ 3,520,433 $ 3,240,739
Liabilities and Shareholders' Equity
Deposits:
Non-interest bearing demand .................. $ 361,692 $ 337,370
Interest bearing:
Savings and NOW accounts ..................... 1,011,153 893,732
Time ......................................... 1,643,124 1,582,589
Total deposits ............................... 3,015,969 2,813,691
Other borrowed funds ......................... 163,220 134,323
Other liabilities ............................ 37,563 33,219
Long-term debt ............................... 29,537 5,678
Total liabilities ............................ 3,246,289 2,986,911
Shareholders' equity:
Preferred stock - no par value;
1,000,000 shares authorized,
none outstanding ........................... -- --
Common stock - $1 par value;
50,000,000 shares authorized;
issued and outstanding:
26,304,157 and 18,848,338 .................. 26,304 18,848
Surplus ...................................... 163,828 146,930
Retained earnings ............................ 83,374 86,232
Securities valuation, net of tax ............. 638 1,818
Total shareholders' equity ................... 274,144 253,828
Total liabilities and
shareholders' equity ....................... $ 3,520,433 $ 3,240,739
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
Consolidated Statements of Cash Flows
(Dollars in Thousands)
<TABLE>
Year ended December 31,
1996 1995 1994
<S> <C> <C> <C>
Cash Flows From Operating Activities
Net income ................................ $ 42,168 $ 37,312 $ 33,727
Adjustments to reconcile
net income to net cash
provided by operating activities:
Provision for loan losses ................. 11,321 7,991 6,670
Origination of loans held
for sale in secondary market ............. (218,158) (169,861) (140,356)
Proceeds from sale of loans
in secondary market ...................... 219,540 171,135 141,499
Gain on sale of loans ..................... (1,382) (1,274) (1,143)
Capitalization of mortgage
servicing rights ......................... (1,865) -- --
Net realized securities (gains)
losses ................................... 84 (324) 297
Provision for depreciation,
amortization and accretion ............... 7,725 8,234 6,265
Deferred income taxes ..................... (874) (853) 58
Net increase in interest
receivable ............................... (763) (1,519) (3,850)
Net increase (decrease)
in interest payable ...................... (166) 3,964 1,799
Other-net ................................. 2,343 4,353 (402)
Total adjustments ......................... 16,345 21,337 12,806
Net cash provided by
operating activities ..................... 58,513 58,649 46,533
Cash Flows From Investing Activities
Net (increase) decrease in interest bearing
deposits with banks ....................... 3,648 (1,395) (1,183)
Purchase of securities
available-for-sale ...................... (260,713) (104,623) (52,427)
Proceeds from sales of
securities available-for-sale ............ 27,906 6,240 16,097
Proceeds from maturities and
prepayments of securities
available-for-sale ....................... 96,254 29,961 17,357
Purchase of securities
held-to-maturity ......................... (15,247) (6,451) (132,336)
Proceeds from maturities and
prepayments of securities
held-to-maturity ......................... 80,418 131,671 143,575
Net increase in loans ..................... (288,893) (262,497) (287,190)
Purchase of premises and
equipment and other assets ............... (13,723) (11,314) (12,616)
Net cash used in investing act ............ (370,350) (218,408) (308,723)
Cash Flows From Financing Activities
Net increase in non-interest
bearing demand and savings and
NOW account deposits ..................... 133,908 19,315 19,205
Net increase in time deposits ............. 40,258 306,437 227,659
Deposits from branch acquisitions ......... 28,112 -- --
Net increase (decrease) in
other borrowed funds ..................... 53,897 (38,456) 56,666
Repayment of long-term debt ............... (1,141) (2,384) (1,833)
Cash dividends and fractional
shares ................................... (16,073) (13,386) (10,846)
Proceeds from issuance of
common stock ............................. 5,538 4,278 3,854
Common stock repurchased .................. (9,255) (1,911) (6,311)
Net cash provided by
financing activities ..................... 235,244 273,893 288,394
Increase (Decrease) In Cash
and Cash Equivalents ..................... (76,593) 114,134 26,204
Cash and Cash Equivalents,
At Beginning of Year ..................... 245,268 131,134 104,930
Cash and Cash Equivalents,
At End of Year ........................... $ 168,675 $ 245,268 $ 131,134
Supplemental Cash Flow Information
Interest paid ............................. $ 129,257 $ 115,563 $ 81,410
Income taxes paid ......................... 17,836 12,559 10,638
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
Consolidated Statements of Shareholders' Equity
(Dollars in Thousands)
<TABLE>
Securities
Common Retained Valuation,
Stock Surplus Earnings Net of Tax
<S> <C> <C> <C> <C>
Balance, January 1, 1994,
as previously reported ............. $ 16,493 $ 108,154 $ 77,728 $ 1,853
Adjustment to record acquisition
of subsidiary on pooling-of-
interests basis .................... 541 2,951 693 --
Balance, January 1, 1994, as adjusted 17,034 111,105 78,421 1,853
Net income .......................... -- -- 33,727 --
Cash dividends - $.47 per share ..... -- -- (11,488) --
Cash dividends paid by
subsidiary prior to
acquisition ........................ -- -- (142) --
Stock issued under terms of
dividend reinvestment and
employee stock purchase plans ...... 125 2,597 -- --
Stock issued upon
exercise of stock options .......... 101 1,233 -- --
Stock issued in payment
of 5% stock dividend, at
market ............................. 853 15,676 (16,579) --
Common stock repurchased ............ (277) (6,034) -- --
Effect of stock issued by
subsidiary under terms of
employee stock ownership plan
prior to acquisition ............... -- 34 -- --
Net unrealized loss on
available-for-sale securities ....... -- -- -- (4,788)
Balance, December 31, 1994 .......... 17,836 124,611 83,939 (2,935)
Net income .......................... -- -- 37,312 --
Cash dividends - $.55 per
share .............................. -- -- (14,021) --
Stock issued under terms
of dividend reinvestment
and employee stock purchase
plans .............................. 152 3,524 -- --
Stock issued upon exercise
of stock options ................... 41 466 -- --
Stock issued under terms
of directors' current
stock purchase plan ................. 4 91 -- --
Stock issued in payment of
5% stock dividend,
at market .......................... 893 20,071 (20,998) --
Common stock repurchased ............ (78) (1,833) -- --
Net unrealized gain
on available-for-sale
securities ......................... -- -- -- 4,753
Balance, December 31, 1995 .......... 18,848 146,930 86,232 1,818
Net income .......................... -- -- 42,168 --
Cash dividends - $.65
per share .......................... -- -- (16,906) --
Stock issued under
terms of dividend
reinvestment and employee
stock purchase plans ............... 179 4,357 -- --
Stock issued upon exercise
of stock options ................... 93 840 -- --
Stock issued under terms
of directors' current
stock purchase plan ................ 3 88 -- --
Stock issued in payment of
5% stock dividend,
at market .......................... 944 27,105 (28,095) --
Four-for-three common
stock split ........................ 6,564 (6,564) (25) --
Common stock repurchased ............ (327) (8,928) -- --
Net unrealized loss on
available-for-sale
securities ......................... -- -- -- (1,180)
Balance, December 31, 1996 .......... $ 26,304 $ 163,828 $ 83,374 $ 638
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
Note 1. Summary of Significant Accounting Policies
Organization and Nature of Operations
First Michigan Bank Corporation (FMB) is a bank holding company with 14
subsidiary community banks engaged in the business of commercial banking (the
Banks). FMB has four non-bank subsidiaries providing trust, brokerage, credit
and title insurance services to customers of the Banks.
The Banks are engaged in the business of general commercial, retail and
mortgage banking. The Banks offer a variety of deposit products including
checking accounts, savings accounts, time deposits and short-term deposits. The
Banks conduct lending activities in the residential and commercial mortgage
markets, in the general commercial market and in the consumer installment
marketplace. These financial services and products are delivered through a
network of full-service branches, specialized offices, automatic teller machines
and various electronic delivery channels.
The principal markets for the Banks' financial services are the Michigan
communities in which each of the banks is located and the areas immediately
surrounding these communities. The Banks serve these markets through 90 branch
offices in or near these communities.
Principles of Consolidation and Basis of Presentation
The consolidated financial statements include the accounts of FMB and its
subsidiaries. Upon consolidation, all significant intercompany accounts and
transactions have been eliminated. Goodwill is being amortized over periods up
to 20 years.
In March 1995, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of."
SFAS No. 121 requires that long-lived assets and certain identifiable
intangibles held and used by an entity be reviewed for impairment and reported
at the lower of carrying amount or fair value, less cost to sell, whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable.
Management periodically reviews goodwill and other long-lived assets for
impairment based upon the projected, undiscounted net cash flows of the
subsidiaries to which the goodwill relates or the long-lived assets belong. FMB
has not experienced any impairment of its goodwill and long-lived assets.
In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." The Statement
provides consistent standards for distinguishing transfers of financial assets
that are sales from transfers that are borrowings and for derecognition of
liabilities that have been extinguished. This Statement also requires that
liabilities and derivatives incurred or obtained as part of a transfer be
measured initially at fair value. SFAS No. 125 also amends SFAS No. 122
(discussed under "Mortgage Banking Operations") to provide further guidance on
measurement of servicing rights relating to assets transferred. The Statement is
effective for transfers, servicing or extinguishments occurring after December
31, 1996, except for certain provisions which are effective after December 31,
1997. Adoption of the accounting provisions of this standard is not expected to
have a material effect upon FMB's financial condition or results of operations.
Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported revenues and expenses during the reporting
period. The amount of those assets actually realized and liabilities actually
settled in future periods could differ from those estimates. The differences, if
any, would be reflected in the reported amounts of revenues and expenses in
future periods.
Cash and Cash Equivalents
For the purposes of reporting cash flows, cash equivalents include amounts due
from banks and federal funds sold. Generally, federal funds are purchased and
sold for one-day periods.
Securities
Management has identified as "available-for-sale" certain securities which may
be sold in the future to meet FMB's investment objectives of quality, liquidity
and yield and to avoid significant market value deterioration. Securities
available-for-sale are adjusted to fair market value each reporting period with
unrealized gains and losses reported as a separate component of shareholders'
equity, net of tax. Securities held-to-maturity are stated at cost adjusted for
amortization of premium and accretion of discount. The adjusted cost of the
specific security sold is used to compute gain or loss on all securities
transactions.
Loans and Allowance for Loan Losses
Loans are stated at their principal balance outstanding, net of unearned income.
The allowance for loan losses is maintained at a level considered by management
to be adequate to absorb possible future loan losses inherent in
<PAGE>
the current portfolio. Management's assessment of the adequacy of the allowance
is based upon type and volume of the loan portfolio, past loan loss experience,
existing and anticipated economic conditions, and other factors which deserve
current recognition in estimating possible future loan losses.
A portion of the total allowance for loan losses is related to impaired
loans. A loan is impaired when it is probable that the creditor will be unable
to collect all principal and interest amounts due according to the contracted
terms of the loan agreement. FMB considers loans that have been placed on
non-accrual status or which have been renegotiated in a troubled debt
restructuring to be impaired. The allowance for loan losses for an impaired loan
is recorded at the amount by which the outstanding recorded principal balance
exceeds the fair value of the collateral on the impaired loan. For a loan that
is not collateral-dependent, the allowance for loan losses is recorded at the
amount by which the outstanding recorded principal balance exceeds the current
best estimate of the future cash flows on the loan, discounted at the loan's
effective interest rate. FMB adopted the accounting provisions for impaired
loans prospectively as of January 1, 1995. Accordingly, the required disclosures
are presented for 1995 and 1996 only.
Net Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation.
Depreciation is computed by the straight-line method for financial reporting
purposes. Accelerated depreciation methods are used for income tax purposes.
Other Real Estate
Other real estate, which is included in other assets, is comprised of properties
in the possession of the subsidiary banks which are generally acquired through
foreclosure proceedings or deed in lieu of foreclosure. These properties are
held for sale and are carried at the lower of the amount of the related loan or
the fair market value of the property minus estimated costs to sell the property
(net realizable value). Losses which may result from the acquisition of such
properties are charged against the allowance for loan losses. Losses in net
realizable value during the holding period are expensed immediately, while gains
are recognized in other operating income only upon disposition.
Employee Benefit Plans
FMB has a noncontributory pension plan for the benefit of all full-time
employees and part-time employees working more than 1,000 hours per year.
Benefits under the plan are based on the employee's years of service and
compensation during the five consecutive highest paid plan years of the last ten
plan years preceding retirement. FMB's funding policy is to contribute an
actuarially-determined amount that can be deducted for federal income tax
purposes.
FMB also sponsors a defined contribution 401(k) plan for the benefit of all
employees over 21 years old. For those employees who work 1,000 or more hours
per year, FMB matches employee contributions at levels that management
determines to be appropriate.
FMB acts as a self-insurer for employees' medical, dental and accident
insurance whereby it assumes limited liabilities with the excess liability
assumed by underwriters. Claims for active employees are charged to operations
during the year in which they occur.
FMB has a postretirement benefit plan that provides medical and dental
coverage between the ages of 60 and 65 to any full-time employee who elects
early retirement after 10 or more years of service. The plan contains the same
cost-sharing features of deductibles and copayments that are contained in the
medical and dental insurance plans provided to active employees. Partial funding
of the plan is accomplished through monthly contributions to a self-insurance
trust fund which was established to cover the medical and dental benefits of
both retirees and active participants. The monthly contribution to the
self-insurance trust fund for each retiree is equivalent to the amount
contributed each month for an active participant.
Mortgage Banking Operations
FMB originates mortgage loans which it sells into the secondary market. Closed
mortgage loans are held for sale generally less than 15 days, and book value
approximates market value. FMB retains the servicing rights when it sells the
mortgage loans. Servicing income is recognized in other non-interest income when
received and expenses are recognized in operating expenses when incurred.
On January 1, 1996, FMB prospectively adopted the accounting provisions for
mortgage servicing rights promulgated by SFAS No. 122, "Accounting for Mortgage
Servicing Rights," which is an amendment to SFAS No. 65, "Accounting for Certain
Mortgage Banking Activities." SFAS No. 122 amends SFAS No. 65 to require that an
asset be recognized for the rights to service mortgage loans including those
rights that are created by the origination of mortgage loans which are sold or
securitized with the servicing rights retained by the originator. The amount of
the asset for these originated mortgage servicing rights (OMSR) is determined
based upon the relative fair value of the underlying mortgage loans without the
OMSR and the OMSR itself. Recognition of these assets results in an increase in
the gains recognized upon the sale of the underlying loans. The OMSR assets are
being amortized in proportion to and over the life of the estimated net future
servicing income. FMB
<PAGE>
stratifies the mortgage loans sold by sale date, term and interest rate for
purposes of applying SFAS No. 122 both for the origination valuation of the OMSR
and for evaluating the remaining book value of the OMSR assets for impairment.
Any impairment is recognized as a separate valuation allowance for each impaired
stratum. Due to the prospective adoption of these accounting provisions, the
required disclosures are presented for 1996 only. The overall impact of adoption
was not material to FMB's results of operations for the year.
Stock Options
FMB applies the intrinsic value method of accounting promulgated under
Accounting Principles Board (APB) Opinion 25, "Accounting for Stock Issued to
Employees," and related interpretations for its fixed-price, stock option plan.
Accordingly, no compensation cost is recognized as a result of options awarded
to employees under the plan.
SFAS No. 123, "Accounting for Stock-Based Compensation," which became
effective January 1, 1996, establishes a fair value method of accounting for all
stock-based compensation, but it allows companies to continue to account for
stock options granted to employees under the intrinsic value method in
accordance with APB Opinion 25. Companies electing to maintain their accounting
for employee stock compensation under APB Opinion 25 are required to provide pro
forma net income and earnings per share disclosures, determined as if the
company had applied the fair value accounting method under SFAS No. 123. FMB has
elected to continue to account for its stock option plans in accordance with APB
Opinion 25 and, accordingly, has provided the supplemental disclosures for 1995
and 1996 that are required by this new accounting standard.
Interest Income and Fees on Loans
Interest on loans is accrued based upon the principal balance outstanding. The
recognition of interest income is discontinued when, in the opinion of
management, there is sufficient doubt that the borrower will be able to meet the
scheduled repayments. When the accrual of interest is discontinued, the balance
of interest accrued but not collected is eliminated from income.
For impaired loans that are on non-accrual status, cash payments received
are generally applied to reduce the outstanding recorded principal balance of
the loans. However, all or a portion of a cash payment received on a non-accrual
loan may be recognized as interest income to the extent allowed by the loan
contract, provided that the borrower's financial condition or the underlying
collateral on the loan support the collection in full of the remaining
outstanding recorded principal balance of the loan. For an impaired loan that
has been renegotiated in a troubled debt restructuring, interest income is
recognized on an accrual basis according to the modified contractual terms so
long as the restructured loan continues to perform in accordance with the
modified contractual terms.
For loans with an initial term exceeding one year, loan origination and
commitment fees and related lending costs are deferred, and the net amount is
amortized as an adjustment of the related loan's yield over its original term.
The net unamortized amount related to a loan that is subsequently sold is
recognized currently as other operating income. For loans with an initial term
of one year or less, the effect of the deferral of loan fees and costs is
immaterial to the operations of FMB.
Interest Rate Swap Agreements
Interest rate swap agreements are derivative financial instruments entered into
for the purpose of hedging short-term interest sensitivity positions against the
impact of changes in interest rates. The interest rate differential to be paid
or received is recognized in interest income over the life of the agreements.
Advertising Costs
All advertising costs incurred are expensed in the period in which they are
incurred.
Income Taxes
FMB and its subsidiaries file a consolidated federal income tax return. The
parent company and its subsidiaries each report current income tax expense as
allocated under a consolidated tax sharing agreement. Deferred tax assets and
liabilities are computed by each member of the consolidated group based on the
difference between the financial statement and income tax basis of assets and
liabilities using enacted tax rates. The reversal of these temporary differences
will result in taxable or deductible amounts in future years when the related
asset or liability is recovered or settled within each entity.
Trust Assets and Income
Property, other than cash deposits, held by subsidiary banks in fiduciary or
agency capacities for their customers is not included in the accompanying
consolidated balance sheets since such property is not an asset of FMB. Trust
income is reported on an accrual basis.
Income Per Share
Income per share is computed based on the average number of shares outstanding
during each period including the assumed exercise of dilutive stock options, and
is retroactively adjusted for stock dividends and splits.
<PAGE>
Note 2. Acquisitions
On April 15, 1996, FMB acquired Arcadia Financial Corporation (Arcadia) and its
wholly-owned subsidiary, which was subsequently renamed FMB-Arcadia Bank. The
acquisition was effected through the exchange of 1.648 shares of FMB common
stock (653,749 shares in total) for each outstanding share of Arcadia. The
acquisition was accounted for as a pooling-of-interests. Accordingly, the
accompanying consolidated financial statements have been restated to include the
balances and results of operations of Arcadia prior to the acquisition.
Separate pro forma results of operations of the combined entities for the
periods prior to their respective acquisition dates are as follows (dollars in
thousands, except for per share data):
<TABLE>
Year ended
Three months ended December 31,
March 31, 1996 1995 1994
(unaudited) (unaudited) (unaudited)
<S> <C> <C> <C>
Total interest income and non-interest income:
FMB ................. $ 70,958 $270,651 $222,489
Arcadia ............. 2,436 9,087 7,214
Combined ............ $ 73,394 $279,738 $229,703
Net income:
FMB ................. $ 9,215 $ 35,910 $ 32,380
Arcadia ............. 364 1,402 1,347
Combined ............ $ 9,579 $ 37,312 $ 33,727
Net income per share:
FMB ................. $ 0.36 $ 1.39 $ 1.25
Combined ............ 0.36 1.40 1.26
</TABLE>
Note 3. Securities
The amortized cost and carrying value, which is estimated market value, of
securities available-for-sale are as follows (dollars in thousands):
<TABLE>
December 31, 1996 December 31, 1995
Gross Gross Gross Gross
Amortized Unrealized Unrealized Carrying Amortized Unrealized Unrealized Carrying
Cost Gains Losses Value Cost Gains Losses Value
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies ... $346,264 $ 1,436 $ 1,217 $346,483 $232,745 $ 1,910 $ 512 $234,143
Obligations of states
and political subdivisions .. 32,575 899 109 33,365 28,895 1,426 9 30,312
Corporate securities ......... -- -- -- -- 500 -- -- 500
Mortgage-backed securities ... 73,419 391 418 73,392 57,016 420 439 56,997
Equity securities ............ 12,220 -- -- 12,220 7,736 -- -- 7,736
Total ........................ $464,478 $ 2,726 $ 1,744 $465,460 $326,892 $ 3,756 $ 960 $329,688
</TABLE>
The carrying value and estimated market value of securities held-to-maturity are
as follows (dollars in thousands):
<TABLE>
December 31, 1996 December 31, 1995
Gross Gross Estimated Gross Gross Estimated
Carrying Unrealized Unrealized Market Carrying Unrealized Unrealized Market
Value Gains Losses Value Value Gains Losses Value
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies .... $ 48,864 $ 181 $ 110 $ 48,935 $ 81,793 $ 610 $ 144 $ 82,259
Obligations of states
and political subdivisions .. 173,170 8,935 392 181,713 178,034 12,462 98 190,398
Corporate securities ......... 118 1 -- 119 2,530 23 -- 2,553
Mortgage-backed securities ... 62,539 466 177 62,828 86,870 931 225 87,576
Total ........................ $284,691 $ 9,583 $ 679 $293,595 $349,227 $ 14,026 $ 467 $362,786
</TABLE>
<PAGE>
As permitted by the transition provisions in the guide to implementation of
SFAS No. 115 issued by the FASB in November 1995, FMB transferred securities
with an amortized cost of $110,674,000 from the held-to-maturity to the
available-for-sale category on December 27, 1995. The net unrealized gain on the
securities transferred amounted to $421,000.
As of December 31, 1996, all holdings of debt securities were of investment
grade with over 95% of the holdings rated A or better by either Moody's or
Standard and Poor's. Securities not rated by a nationally recognized
organization represent smaller local issues which in management's opinion, if
rated, would qualify as A or better. Securities with a carrying value of
$171,380,000 at December 31, 1996 were pledged for various purposes as required
or permitted by law.
The carrying value and estimated market value of debt securities, by
contractual maturity, are shown in the table below. Expected maturities will
differ from contractual maturities because borrowers may have the right to call
or prepay obligations with or without call or prepayment penalties. For the
purposes of this table, the maturities of mortgage-backed securities have been
determined using weighted-average expected lives, taking into account
anticipated future prepayments. Maturities of investments in debt securities as
of December 31, 1996 are as follows (dollars in thousands):
<TABLE>
Available-for-sale Held-to-maturity
Estimated
Amortized Carrying Carrying Market
Cost Value Value Value
<S> <C> <C> <C> <C>
Due in one year or less .............. $124,785 $124,603 $ 83,011 $ 83,381
Due after one year through five years 301,597 302,587 137,689 143,063
Due after five years through ten years 22,596 22,717 60,751 63,837
Due after ten years .................. 3,280 3,333 3,240 3,314
Total debt securities ............. 452,258 453,240 $284,691 $293,595
Equity securities .................... 12,220 12,220 -- --
Total ............ $464,478 $465,460 -- --
</TABLE>
Proceeds from sales of securities during 1996, 1995 and 1994 were $27,906,000,
$6,240,000 and $16,097,000, respectively. Gross gains of $19,000, $339,000 and
$45,000 and gross losses of $103,000, $15,000 and $342,000 were realized on
those sales for 1996, 1995 and 1994, respectively.
Note 4. Loans
The composition of the loan portfolio is as follows (dollars in thousands):
<TABLE>
December 31,
1996 1995
<S> <C> <C>
Commercial, financial
and agricultural ... $ 667,200 $ 608,718
Real estate:
Commercial .... 521,283 474,887
Construction .. 225,043 155,872
Residential ... 637,991 548,869
Held-for-sale . 2,220 8,626
Consumer ............ 445,301 419,975
Total . $2,499,038 $2,216,947
</TABLE>
The Banks have granted loans to directors and executive officers of FMB and
its significant subsidiaries and to their associates. These related party loans
are made on substantially the same terms, including interest rates and
collateral, as those prevailing at the time for comparable transactions with
unrelated persons and do not involve more than normal risk of collectibility.
The aggregate dollar amount of these loans was $28,295,000 and $31,797,000 at
December 31, 1996 and 1995, respectively. During 1996, $12,791,000 of new loans
were made, repayments amounted to $12,387,000 and changes in persons included,
decreased the aggregate loans to related parties by $3,906,000.
<PAGE>
Note 5. Allowance for Loan Losses
A summary of the activity in the allowance for loan losses is as follows
(dollars in thousands):
<TABLE>
Year ended December 31,
1996 1995 1994
<S> <C> <C> <C>
Balance, at beginning of year . $ 28,031 $ 24,733 $ 21,288
Provision charged to operations 11,321 7,991 6,670
Loan losses ................... (9,918) (6,846) (5,370)
Loan loss recoveries .......... 2,286 2,153 2,145
Balance, at end of year ....... $ 31,720 $ 28,031 $ 24,733
</TABLE>
Information about FMB's impaired loans as of and for the year ended (dollars in
thousands):
<TABLE>
December 31,
1996 1995
<S> <C> <C>
Recorded balance of impaired loans, at end of year:
With related allowance for loan loss .............. $ 634 $1,683
With no related allowance for loan loss ........... 7,958 3,933
Total ............................................. $8,592 $5,616
Average balance of impaired loans for the year .... $8,108 $7,360
Allowance for loan loss related to impaired loans . $ 260 $ 609
Interest income on impaired loans:
Recorded on a cash basis .......................... $ 261 $ 67
Recorded on an accrual basis ...................... 276 169
Foregone due to impairment ........................ 1,063 801
</TABLE>
Note 6. Premises and Equipment
Premises and equipment consists of the following (dollars in thousands):
<TABLE>
December 31,
1996 1995
<S> <C> <C>
Land and improvements .... $ 17,164 $ 15,967
Building and improvements 47,654 47,869
Furniture and equipment .. 48,989 44,672
Total .................... 113,807 108,508
Accumulated depreciation . (45,140) (39,957)
Net premises and equipment $ 68,667 $ 68,551
</TABLE>
Note 7. Mortgage Loan Servicing
Mortgage loans serviced for others are not included in the accompanying
consolidated balance sheets. The total unpaid principal balance of mortgage
loans serviced for others was $815,367,834 and $709,385,980 at December 31, 1996
and 1995, respectively. Custodial escrow balances maintained in connection with
the foregoing loan servicing are included in demand deposits and amounted to
$942,060 and $1,189,389 at December 31, 1996 and 1995, respectively.
Beginning January 1, 1996, FMB began to account for the rights to service
mortgage loans that the Banks have originated and sold to others under SFAS No.
122. A summary of the activity relating to mortgage servicing rights is as
follows (dollars in thousands):
<TABLE>
December 31, 1996
<S> <C>
Book value, at beginning of year ............... $ --
Originated mortgage servicing rights capitalized 1,934
Amortization of mortgage servicing rights ...... (158)
Book value, at end of year ..................... 1,776
Impairment valuation allowance ................. (69)
Carrying value, at end of year ................. $ 1,707
</TABLE>
<PAGE>
Note 8. Other Borrowed Funds
Other borrowed funds consist of the following (dollars in thousands):
<TABLE>
December 31,
1996 1995
Short-term borrowings:
<S> <C> <C>
Securities sold under
agreements to repurchase .................... $ 78,543 $108,110
Other ........................................ 5,009 12,713
Total short-term borrowings .................. 83,552 120,823
Federal Home Loan Bank advances .............. 79,668 13,500
Total ........................................ $163,220 $134,323
</TABLE>
FMB's only significant category of short-term borrowings during the year is
securities sold under agreements to repurchase, of which over 95% are one-day
retail repurchase agreements. The securities underlying all of these repurchase
agreements remain under FMB's control for the duration of the agreement. The
amounts and interest rates for this category for the applicable periods are as
follows (dollars in thousands):
<TABLE>
1996 1995 1994
End of period:
<S> <C> <C> <C>
Balance ..................... $ 78,543 $108,110 $122,758
Weighted average
interest rate .............. 4.14% 3.47% 3.51%
Daily average:
Balance ..................... $ 98,904 $110,216 $109,029
Interest rate ............... 3.82% 3.84% 2.88%
Maximum amount
outstanding at
any month-end .............. $119,419 $114,630 $122,758
</TABLE>
At both December 31, 1995 and 1994, other short-term borrowings included
$10,000,000 that had been advanced under a line of credit and standby loan
agreement with another financial institution. Advances on the agreement bore
interest at seven-tenths of a percent over the daily federal funds rate. This
replaces the previous $10,000,000 line of credit. All amounts advanced on the
loan agreement were converted to a term note as of August 15, 1996, which is
recorded as long-term debt. Various of the Banks have obtained advances from the
Federal Home Loan Bank of which they are members. The advances are secured by
blanket collateral agreements covering certain unpledged assets of the
respective bank. Federal Home Loan Bank advances for all of the Banks consist of
the following (dollars in thousands):
<TABLE>
December 31,
1996 1995
Weighted- Weighted-
Average Average
Total Interest Total Interest
Year of Maturity Outstanding Rate Outstanding Rate
<S> <C> <C> <C> <C>
1997 $27,500 5.65% $ 4,000 5.82%
1998 47,500 5.77 8,500 5.63
1999 -- -- -- --
2000 773 5.86 1,000 5.86
2001 1,000 6.36 -- --
After 2001 2,895 6.58 -- --
Total $79,668 5.77% $13,500 5.70%
</TABLE>
<PAGE>
Note 9. Long-Term Debt
Long-term debt consists of the following (dollars in thousands):
<TABLE>
December 31,
1996 1995
<S> <C> <C>
Term note .................................... $25,000 $ --
10% Subordinated debentures .................. 4,537 4,537
Other ........................................ -- 1,141
Total ........................................ $29,537 $ 5,678
</TABLE>
The term note is payable to another financial institution. The note bears
interest at seven-tenths of a percent over the daily federal funds rate and is
scheduled to mature on August 15, 2002. The term note is unsecured and provides
for various restrictions related to nonperforming loans, equity, regulatory
capital, total indebtedness and dividend payments. FMB is in compliance with all
requirements of the note as of December 31, 1996. The 10% subordinated
debentures are payable to former shareholders of Northwestern Bank Corporation.
Interest is payable semiannually on January 30 and July 30 of each year. The
debentures are scheduled to mature on May 31, 2001. The debentures may not be
called for redemption by FMB prior to May 31, 1998. FMB does not have any
long-term debt maturing until 2001, at which time $4,537,000 will become due.
Note 10. Shareholders' Equity
Common stock consists of 50,000,000 shares authorized, at $1 par value, of which
26,304,157 and 18,848,338 were outstanding at December 31, 1996 and 1995,
respectively. On June 13, 1996, the Board of Directors declared a four-for-three
stock split to shareholders of record on July 1, 1996, payable July 26, 1996.
There are 1,904,553 common shares reserved for issuance under the dividend
reinvestment, employee stock purchase and stock option plans, and the deferred
compensation, deferred stock and current stock purchase plan for non-employee
directors. Preferred stock consists of 1,000,000 shares authorized, at no par
value, none of which are issued. There are 120,000 shares reserved for issuance
under the Shareholder Protection Rights Plan (Plan) Under the Plan, one
preferred share right (Right) was distributed as a dividend on each outstanding
share of common stock. The Plan is designed to protect shareholders against
unsolicited attempts to acquire control of FMB in a manner that does not offer a
fair price to all shareholders. Each right will entitle shareholders to buy one
one-hundredth of a share of preferred stock from FMB at an exercise price of
$20.99. The Rights will be exercisable only if a person or group acquires 15
percent or more of the common stock. If any person or group does acquire 15
percent or more of FMB common stock, each Right will entitle its holder to
purchase, for the exercise price, shares of FMB's common stock having a market
value of twice the exercise price. Also, if any person or group acquires between
15 percent and 50 percent of FMB's common stock, the Board of Directors may
elect to exchange one share of FMB's common stock or one one-hundredth of a
share of preferred stock for each Right. FMB will be entitled to redeem the
Rights at one cent per Right at any time before a 15 percent position has been
acquired.
<PAGE>
Note 11. Stock Option Plan
At December 31, 1996, 1,069,326 shares of common stock were reserved for
issuance in connection with FMB's stock option plan. Options may be granted to
certain executives and key employees at the fair market value of the stock on
the date of grant. The plan provides that 100% of the shares become exercisable
one year following the date granted and expire 10 years following the grant
date.
The activity in FMB's stock option plan is as follows:
<TABLE>
Year ended December 31,
1996 1995 1994
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
<S> <C> <C> <C> <C> <C> <C>
Outstanding,
at beginning of year 816,605 $10.75 721,834 $9.34 676,713 $.80
Granted ............. 162,106 20.08 161,586 16.33 182,289 13.42
Exercised ........... (65,895) 10.15 (62,626) 8.62 (133,652) 7.09
Forfeited ........... (3,780) 20.00 (4,189) 16.33 (3,516) 9.74
Outstanding,
at end of year ..... 909,036 $12.42 816,605 $10.75 721,834 $9.34
Exercisable,
at end of year ..... 750,681 $10.80 659,109 $9.41 539,441 $7.96
</TABLE>
Stratification and additional detail regarding the options outstanding at
December 31, 1996 is as follows:
<TABLE>
Options Outstanding Options Exercisable
Excercise Number Weighted-Average Weighted-Average Number Weighted-Average
Price Range Outstanding Remaining Life Exercise Price Exercisable Exercise Price
<S> <C> <C> <C> <C> <C>
$4.49-$7.16 230,972 2.84 years $ 6.22 230,972 $ 6.22
$8.60-$13.24 358,179 6.10 years 11.29 358,179 11.29
$15.48-$23.25 319,885 8.48 years 18.15 161,530 16.25
</TABLE>
The weighted-average grant-date fair value of stock options granted to employees
during the year and the weighted-average significant assumptions used to
determine those fair values, using a modified Black-Sholes option pricing model,
and the pro forma effect on earnings of the fair value accounting for stock
options under SFAS No. 123 are as follows:
<TABLE>
Year ended December 31,
1996 1995
<S> <C> <C>
Grant-date fair value per share ........... $ 5.01 $ 5.76
Significant assumptions (weighted-average):
Risk-free interest
rate at grant date ....................... 5.50% 7.79%
Expected stock price
volatility ............................... 22.01 23.64
Expected dividend payout .................. 3.00 2.90
Expected option life* ..................... 7.5 years 10.0 years
Net income (in thousands):
As reported ............................... $ 42,168 $ 37,312
Pro forma ................................. 41,375 36,405
Net income per share:
As reported ............................... $ 1.57 $ 1.40
Pro forma ................................. 1.55 1.37
</TABLE>
*The expected option life considers historical option exercise patterns and
future changes to those exercise patterns anticipated at the date of grant.
<PAGE>
Note 12. Income Taxes
Income tax components are as follows (dollars in thousands):
<TABLE>
Year ended December 31,
1996 1995 1994
<S> <C> <C> <C>
Income tax expense:
Current ................ $ 17,153 $ 14,177 $ 10,718
Deferred ............... (874) (853) 58
Total .................. $ 16,279 $ 13,324 $ 10,776
Income tax expense
(credit) included above
which relates to
security transactions . $ (30) $ 114 $ (105)
</TABLE>
The tax effect of temporary differences which give rise to a significant portion
of FMB's deferred tax assets (liabilities) are as follows (dollars in
thousands):
<TABLE>
December 31,
1996 1995 1994
<S> <C> <C> <C>
Allowance for loan losses .. $ 10,963 $ 9,563 $ 8,318
Accumulated depreciation ... (3,755) (3,607) (3,146)
Net prepaid retirement plans (1,680) (1,709) (1,863)
Capitalized mortgage
servicing rights .......... (598) -- --
Deferred loan fees ......... (327) (394) (316)
Deferred compensation ...... 1,015 895 1,001
Available-for-sale
securities valuation ...... (344) (977) 1,554
Other ...................... 166 162 63
Net deferred tax assets
included in other assets .. $ 5,440 $ 3,933 $ 5,611
</TABLE>
The amounts shown for income tax expense on the consolidated statements of
income are less than amounts computed by applying the statutory federal income
tax rate to income before taxes. A reconciliation of such amounts is as follows
(dollars in thousands):
<TABLE>
Year ended December 31,
1996 1995 1994
<S> <C> <C> <C>
Income taxes at
statutory rate ......... $ 20,456 $ 17,723 $ 15,574
Tax-exempt interest
income ................. (4,477) (4,729) (4,918)
Goodwill amortization ... 103 103 103
Other ................... 197 227 17
Income tax expense ...... $ 16,279 $ 13,324 $ 10,776
Effective income tax rate 27.9% 26.3% 24.2%
Statutory income tax rate 35.0 35.0 35.0
</TABLE>
<PAGE>
Note 13. Employees' Benefit Plans
Net pension cost includes the following components (dollars in thousands):
<TABLE>
Year ended December 31,
1996 1995 1994
<S> <C> <C> <C>
Service cost ................. $ 1,750 $ 1,535 $ 1,558
Interest cost ................ 2,535 2,152 1,959
Return on plan assets ........ (2,828) (2,339) (2,260)
Net amortization and deferral 209 367 252
Net periodic pension cost .... $ 1,666 $ 1,715 $ 1,509
Major actuarial assumptions:
Weighted-average discount rate 7.75% 7.5% 7.5%
Rate of increase in future
compensation levels ......... 4.5 5.0 5.0
Expected long-term rate of
return on plan assets ....... 9.0 9.0 9.0
</TABLE>
The pension plan's funded status and amounts recognized in FMB's consolidated
balance sheets are as follows (dollars in thousands):
<TABLE>
December 31,
1996 1995
<S> <C> <C>
Accumulated benefit obligation,
including vested benefits of
$25,674,000 and $23,120,000,
respectively ........................ $ 27,412 $ 25,054
Projected benefit obligation
for service rendered to date ........ $ 33,562 $ 31,671
Plan assets at fair value,
primarily corporate and governmental
obligations and mutual funds ........ 36,806 32,046
Plan assets in excess of projected
benefit obligation .................. 3,244 375
Unrecognized prior service cost ...... (2,013) (2,152)
Unrecognized net loss ................ 5,776 7,630
Unrecognized net transition obligation 26 40
Prepaid pension cost included in other
assets ............................... $ 7,033 $ 5,893
</TABLE>
The matching contributions to FMB's defined contribution 401(k) plan amounted to
$933,000 for 1996, $769,000 for 1995 and $568,000 for 1994.
Net periodic postretirement benefit cost includes the following components
(dollars in thousands):
<TABLE>
Year ended December 31,
1996 1995 1994
<S> <C> <C> <C>
Service cost ................. $ 144 $ 18 $ 114
Interest cost ................ 124 60 76
Return on plan assets ........ (2) (2) (2)
Net amortization and deferral 76 36 61
Net periodic postretirement
benefit cost ................ $ 342 $ 112 $ 249
Major actuarial assumptions:
Weighted-average discount rate 7.75% 7.5% 7.5%
Health care cost trend rate .. 10.0 10.5 12.5
</TABLE>
Changes to, and refinement of, the retirement age assumptions during 1995 and
1996 also had a significant impact on the net periodic postretirement benefit
cost from year to year.
<PAGE>
The postretirement benefit plan's funded status and amounts recognized in FMB's
consolidated balance sheet are as follows (dollars in thousands):
<TABLE>
December 31,
1996 1995
<S> <C> <C>
Accumulated postretirement
benefit obligation:
Retirees ........................... $ 238 $ 168
Fully eligible active
plan participants ................. 291 562
Other active plan participants ..... 1,301 115
Total .............................. 1,830 845
Plan assets at fair value,
primarily cash .................... (55) 26
Accumulated postretirement
benefit obligation in excess
of plan assets .................... 1,885 819
Unrecognized transition obligation . (838) (908)
Unrecognized gain (loss) ........... (345) 539
Accrued other postretirement benefit
cost included in other liabilities . $ 702 $ 450
</TABLE>
The health care cost trend rate is assumed to decrease 0.5% annually through the
year 1997 and 1.0% annually through the year 2002 to a rate of 5.0% and remain
at that level thereafter. The health care cost trend rate assumption has a
significant effect on the amounts reported. An increase of 1.0% each year in the
assumed health care cost trend rate would increase the accumulated
postretirement benefit obligation at December 31, 1996 by $388,000 and the
aggregate of the service and interest cost components of the net periodic
postretirement benefit cost for 1996 by $71,000.
Note 14. Data Processing Commitments
FMB is a party to an agreement with a service company under which the latter
furnishes data processing services and equipment to FMB and certain of its
subsidiaries. FMB is required to pay minimum charges under the agreement and
additional service fees depending on the volume of accounts. FMB furnishes the
facilities to house the service center and is responsible for utilities,
maintenance and other related costs. Total expense for services under this
agreement was $4,754,000 for 1996, $3,888,000 for 1995 and $3,503,000 for 1994,
including charges for data processing and professional services and amortization
of software costs. The remaining minimum charges are payable as follows (dollars
in thousands):
<TABLE>
<S> <C>
1997 $ 4,510
1998 4,446
1999 792
Total $ 9,748
</TABLE>
Note 15. Supplemental Income Statement Information
The components of other operating expenses that are detailed pursuant to various
reporting requirements are as follows (dollars in thousands):
<TABLE>
Year ended December 31,
1996 1995 1994
<S> <C> <C> <C>
Other operating expenses:
Printing and supplies ... $3,704 $3,279 $2,814
Computer processing ..... 4,604 4,197 3,768
Professional services ... 1,867 2,580 2,350
Advertising and promotion 2,500 2,486 2,250
</TABLE>
<PAGE>
Note 16. Financial Instruments with Off-Balance-Sheet Risk
FMB is party to financial instruments with off-balance-sheet risk, all of which
are entered into for purposes other than trading. These instruments are used in
the normal course of business to meet the financing needs of its customers and
reduce its own exposure to fluctuations in interest rates and include
commitments to extend credit, letters of credit, foreign exchange forward
contracts, interest rate forward contracts and interest rate swap agreements. To
varying degrees, they involve elements of credit and interest rate risk in
excess of the amounts recognized in the consolidated balance sheets. The
contract or notional amounts of these instruments reflect the extent of
involvement FMB has in these particular categories of financial instruments.
Commitments to extend credit are agreements to lend to customers as long as
there are no violations of any conditions established in the contracts.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements.
Letters of credit are conditional commitments issued by the Banks to
guarantee the performance of customers to third parties. Letters of credit are
written for a fixed period of time, usually one year or less, and generally
require payment of a fee. The credit risk involved in issuing letters of credit
is essentially the same as that involved in extending loan facilities to
customers.
For both commitments to extend credit and letters of credit, the Banks
evaluate each customer's credit worthiness on a case-by-case basis. The amount
of collateral obtained, if deemed necessary by the Banks upon extension of
credit, is based on management's credit evaluation. Collateral held varies but
may include accounts receivable, inventory, property, plant and equipment, and
income-producing commercial properties.
FMB enters into foreign exchange forward contracts to purchase or sell
foreign currencies at a future date at a predetermined exchange rate. These
contracts are used to assist customers with international transactions based
upon foreign denominated currencies. There is credit risk and exposure to
foreign currency exchange fluctuations inherent in these transactions to the
extent that the customer would fail to fulfill its purchase or delivery
responsibility and FMB would execute the transaction at the prevailing currency
valuation, which may be different than the value of the original contract.
Interest rate forward contracts are utilized by FMB in its mortgage banking
operations to hedge the value of residential real estate loans that are being
underwritten for anticipated sale to secondary market investors. Changes in
market interest rates, between the time that a customer receives a rate-lock
commitment and the sale of the fully-funded loan, can change the sale value of
the loan. FMB enters into forward contracts to sell exchange traded instruments
whose change in value, due to the same change in market interest rates,
substantially offsets the change in sale value of the underlying rate-locked
loans which are anticipated to be funded.
FMB and its subsidiaries enter into interest rate swap agreements as part
of the asset/liability management process to hedge its short-term interest
sensitivity position against the impact of changes in interest rates. Interest
rate swap agreements generally involve the exchange of fixed and floating
interest payment obligations without the exchange of the underlying principal
amounts. The interest rate differential to be paid or received is recognized in
interest income over the life of the agreements.
The exposure to credit loss in the event of nonperformance by the other
party to the financial instruments for commitments to extend credit and letters
of credit written is represented by the contractual amount of those instruments.
The Banks use the same credit policies in making commitments and conditional
obligations as they do for on-balance-sheet instruments. For foreign exchange
and interest rate forward contracts and interest rate swap agreements, the
notional or contract amounts do not represent exposure to credit loss. FMB
controls the credit risk for these instruments through credit approvals, limits
and monitoring procedures.
Substantially all of FMB's business during the years presented is with
customers in the State of Michigan with no group concentration of credit.
The contract or notional amounts of financial instruments with
off-balance-sheet risk, held for purposes other than trading, are as follows
(dollars in thousands):
<TABLE>
December 31,
1996 1995
<S> <C> <C>
Financial instruments whose
contract amounts represent credit risk:
Commitments to extend credit ........... $718,951 $588,727
Letters of credit ...................... 101,432 38,233
Financial instruments whose notional
or contract amounts exceed the
amount of credit risk:
Foreign exchange forward contracts ..... 924 --
Interest rate forward contract ......... 15,000 --
Interest rate swap agreements .......... 50,000 30,000
</TABLE>
Note 17. Disclosures About Estimated Fair Value of Financial Instruments
Most of FMB's assets and liabilities are considered financial instruments. Many
of FMB's financial instruments lack an available trading market, and it is the
intent and general practice of FMB to hold its financial instruments to
maturity. As a result, significant assumptions and present value calculations
were used in determining estimated fair values.
For financial instruments bearing a variable interest rate, it is presumed
that recorded book values are reasonable estimates of fair value. For all other
financial instruments, the following methods and assumptions were used to
estimate fair values:
Cash and cash equivalents
Recorded book value of cash and due from banks and federal funds sold is a
reasonable estimate of fair value.
Interest bearing deposits with banks
The present value of future cash flows from interest bearing deposits with banks
is used to determine estimated fair value. The discount rates used are the
current rates that FMB would receive for similar deposits.
Securities
Quoted market prices for the specific instruments owned, or for similar
securities, are used to determine estimated fair value.
Loans
FMB holds in its portfolio few loans of the type that are readily salable in the
secondary market, or that are commonly used to collateralize investment
securities. Therefore, the present value of estimated future cash flows from the
loan portfolio is used to determine fair value. The discount rates used are the
current rates at which loans with similar terms would be made to borrowers with
similar credit ratings.
Mortgage servicing rights
The estimated fair value of mortgage servicing rights is computed by discounting
the projected future net cash flows relating to mortgage loans sold with
servicing retained given period-end assumptions regarding, among other things,
market servicing costs and estimated long-term prepayments.
Deposits without stated maturities
Recorded book value of non-interest bearing demand deposits and savings and NOW
account deposits, representing the amount payable on demand at the reporting
date, is a reasonable estimate of fair value.
The relationship value of these instruments, commonly referred to as the
core deposit intangible, is not considered a financial instrument and is not
included in the fair value disclosure. The value of the core deposit intangible
would significantly increase the estimated fair value of FMB's financial assets.
Deposits with stated maturities
The present value of future cash flows for time deposits is used to determine
estimated fair value. The discount rates used are the current rates offered for
time deposits with similar maturities.
Other borrowed funds
For short-term borrowings, recorded book value is a reasonable estimate of fair
value due to the relatively short period between origination and expected
repayment of these instruments.
For Federal Home Loan Bank advances, the present value of future cash flows
is used to determine estimated fair value. The discount rates used are the
current rates offered for advances with similar maturities.
Long-term debt
The present value of future cash flows for long-term debt issues is used to
determine estimated fair value. The discount rate used is the average of quoted
yields to maturity on trades of similarly-rated financial institution debt
issues.
Accrued interest
Accrued interest receivable and payable on financial instruments is included in
the reported values of the underlying instruments. For accrued interest
receivable and payable, the recorded book values are reasonable estimates of
fair value.
Off-balance-sheet financial instruments held for purposes other than trading
For foreign exchange and interest rate forward contracts and interest rate swap
agreements, dealer quotes for the specific instruments owned are used to
determine estimated fair value. These values represent the estimated amount FMB
would pay to terminate the agreements, taking into account the current interest
rates. For
<PAGE>
commitments to extend credit and letters of credit, the fees currently charged
for similar agreements are used to determine estimated fair value. Given the
market in which it operates, FMB seldom charges fees on commitments to extend
credit.
The estimated fair values of FMB's financial instruments are as follows (dollars
in thousands):
<TABLE>
December 31, 1996 December 31, 1995
Carrying Fair Carrying Fair
Value Value Value Value
<S> <C> <C> <C> <C>
Financial Assets
Cash and cash equivalents ............. $ 168,675 $ 168,675 $ 245,268 $ 245,319
Interest bearing deposits
with banks ........................... 1,716 1,731 5,370 5,348
Securities ............................ 760,012 768,915 688,590 702,149
Loans, net of allowance ............... 2,482,394 2,498,122 2,203,054 2,224,673
Mortgage servicing rights ............. 1,707 1,769 -- --
Total financial assets ................ $ 3,414,504 $ 3,439,212 $ 3,142,282 $ 3,177,489
Financial Liabilities
Deposits without stated maturities .... $ 1,373,565 $ 1,373,565 $ 1,231,982 $ 1,231,982
Deposits with stated maturities ....... 1,652,668 1,658,253 1,592,096 1,600,953
Other borrowed funds .................. 163,512 163,006 134,412 134,412
Long-term debt ........................ 29,726 29,968 5,869 6,228
Total financial liabilities ........... $ 3,219,471 $ 3,224,792 $ 2,964,359 $ 2,973,575
Off-Balance-Sheet Financial Instruments
Held For Purposes Other Than Trading
Interest rate swap agreements ......... $ (3) $ 70 $ (4) $ (607)
Foreign exchange forward contracts .... n/a 20 n/a --
Interest rate forward contracts ....... n/a 35 n/a --
Commitments to extend credit .......... n/a -- n/a --
Letters of credit ..................... n/a (347) n/a (173)
Total off-balance-sheet financial
instruments .......................... $ (3) $ (222) $ (4) $ (780)
</TABLE>
The remaining balance sheet assets and liabilities of FMB are not considered
financial instruments and have not been valued differently than is customary
under historical cost accounting. Since assets and liabilities that are not
financial instruments are excluded above, the difference between total financial
assets and financial liabilities does not, nor is it intended to, represent the
market value of FMB. Furthermore, the estimated fair value information may not
be comparable between financial institutions due to the wide range of valuation
techniques permitted, and assumptions necessitated, in the absence of an
available trading market.
<PAGE>
Note 18. First Michigan Bank Corporation (Parent Company Only) Financial
Information
<TABLE>
Balance Sheets (dollars in thousands)
December 31,
1996 1995
<S> <C> <C>
Assets
Cash and cash equivalents .......... $ 1,976 $ 811
Interest bearing deposits with banks 17,100 15,200
Investment in subsidiaries ......... 265,755 232,730
Net premises and equipment ......... 18,899 18,684
Other assets ....................... 14,352 11,600
Total assets ....................... $318,082 $279,025
Liabilities and Shareholders'
Equity
Liabilities:
Short-term borrowings .............. $ 11 $ 10,011
Long-term debt ..................... 29,537 4,883
Other liabilities .................. 14,390 10,303
Total liabilities .................. 43,938 25,197
Shareholders' equity ............... 274,144 253,828
Total liabilities and
shareholders' equity ............... $318,082 $279,025
</TABLE>
Statements of Income (dollars in thousands, except per share data)
<TABLE>
Year ended
December 31,
1996 1995 1994
<S> <C> <C> <C>
Income
From subsidiaries:
Dividends ................. $ 22,287 $ 27,600 $ 16,550
Centralized support
service fees ............. 19,853 15,696 12,093
Interest on notes
receivable ............... -- -- 17
Investment interest ....... 861 451 534
Other ..................... (8) 15 (6)
Total income .............. 42,993 43,762 29,188
Expense
Salaries and employee
benefits ................. 16,548 13,325 10,576
Interest on long-term
debt ..................... 993 508 643
Other ..................... 12,917 9,241 6,927
Total expense ............. 30,458 23,074 18,146
Income before income
tax benefit and equity
in undistributed net
income of subsidiaries ... 12,535 20,688 11,042
Income tax benefit ........ 3,210 2,225 1,723
Income before equity in
undistributed net
income of subsidiaries ... 15,745 22,913 12,765
Equity in undistributed
net income of subsidiaries 26,423 14,399 20,962
Net Income ................ $ 42,168 $ 37,312 $ 33,727
Net Income Per Share ...... $ 1.57 $ 1.40 $ 1.27
</TABLE>
<PAGE>
<TABLE>
Statements of Cash Flows (dollars in thousands)
Year ended December 31,
1996 1995 1994
<S> <C> <C> <C>
Cash Flows From Operating Activities
Net income ......................... $ 42,168 $ 37,312 $ 33,727
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Provision for depreciation,
amortization and accretion ........ 3,178 2,378 1,914
Deferred income taxes .............. (350) (53) 428
Other-net .......................... 1,902 2,102 (536)
Equity in undistributed net
income of subsidiaries ............ (26,423) (14,399) (20,962)
Total adjustments .................. (21,693) (9,972) (19,156)
Net cash provided by
operating activities .............. 20,475 27,340 14,571
Cash Flows From Investing
Activities
Net (increase) decrease
in interest bearing deposits
with banks ........................ (1,900) (8,200) 8,000
Purchase of premises and
equipment and other assets ........ (4,492) (3,525) (959)
Proceeds from sale of
premises and equipment ............ -- 293 2,034
Contribution to capital
of subsidiaries ................... (7,500) (4,250) (8,900)
Net cash provided by
(used in) investing
activities ........................ (13,892) (15,682) 175
Cash Flows From Financing
Activities
Increase (decrease) in
short-term borrowings ............. 15,000 -- (3)
Repayment of long-term debt ........ (346) (598) (1,497)
Cash dividends and
fractional shares ................. (16,073) (13,386) (10,703)
Proceeds from issuance
of common stock ................... 5,256 4,278 3,641
Common stock repurchased ........... (9,255) (1,911) (6,311)
Net cash used in financing
activities ........................ (5,418) (11,617) (14,873)
Increase (decrease) In Cash
and Cash Equivalents .............. 1,165 41 (127)
Cash and Cash Equivalents,
At Beginning of Year .............. 811 770 897
Cash and Cash Equivalents,
At End of Year .................... $ 1,976 $ 811 $ 770
</TABLE>
Note 19. Regulatory Restrictions
The Banks may, from time to time, be required to maintain certain average
reserve balances with the Federal Reserve Bank. During 1996 and 1995, these
reserves were $9,021,000 and $7,594,000, respectively.
Federal and state banking laws and regulations place certain restrictions
on the amount of dividends and loans that a bank must pay to its parent company.
Of the $263,349,000 in net assets of the Banks, $49,311,000 is available for
dividends to the parent company in 1997 (before considering 1997 net income),
and the remaining $214,038,000 is restricted based on minimum risk-based capital
requirements now in effect.
Note 20. Regulatory Capital Requirements
FMB and the Banks individually are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory and possibly
additional discretionary actions by the regulators that could have a direct
material effect on the financial statements of the Banks and of FMB as a whole.
Under the capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Banks must meet specific capital guidelines that involve
quantitative measures the Banks' assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory accounting practices. In
addition, the Banks' capital amounts and classifications are subject to
qualitative judgments by the regulators about components, risk weightings and
other factors.
<PAGE>
The table below sets forth the quantitative measures established by regulation
to ensure capital adequacy for FMB and the Banks which are considered
significant subsidiaries (dollars in thousands):
<TABLE>
To Be Well
Capitalized Under Minimum
Prompt Corrective For Capital
Actual Action Provisions: Adequacy Purposes:
Amount Ratio Amount Ratio Amount Ratio
As of December 31, 1996
<S> <C> <C> <C> <C> <C> <C>
Total Capital
(to risk weighted assets):
FMB ..................................... $300,186 11.1% $269,505 10.0% $215,604 8.0%
FMB-First Michigan Bank ................. 114,563 10.1 113,071 10.0 90,456 8.0
FMB-First Michigan Bank-
Grand Rapids ............................ 47,311 10.5 45,096 10.0 36,077 8.0
FMB-Lumberman's Bank .................... 35,184 10.3 34,037 10.0 27,230 8.0
Tier 1 Capital
(to risk weighted assets):
FMB ..................................... $264,836 9.8% $161,703 6.0% $107,802 4.0%
FMB-First Michigan Bank ................. 102,449 9.1 67,842 6.0 45,228 4.0
FMB-First Michigan Bank-
Grand Rapids ............................ 42,102 9.3 27,057 6.0 18,038 4.0
FMB-Lumberman's Bank .................... 31,095 9.1 20,422 6.0 13,615 4.0
Tier 1 Capital
(to average assets):
FMB ..................................... $264,836 7.6% $173,252 5.0% $103,951 3.0%
FMB-First Michigan Bank ................. 102,449 7.9 64,680 5.0 38,808 3.0
FMB-First Michigan Bank-
Grand Rapids ............................ 42,102 8.0 26,300 5.0 15,780 3.0
FMB-Lumberman's Bank .................... 31,095 7.1 21,867 5.0 13,120 3.0
As of December 31, 1995
Total Capital (to risk weighted assets):
FMB ..................................... $278,229 11.9% $233,308 10.0% $186,646 8.0%
FMB-First Michigan Bank ................. 99,606 10.3 96,800 10.0 77,440 8.0
FMB-First Michigan Bank-
Grand Rapids ............................ 40,042 11.0 36,284 10.0 29,027 8.0
FMB-Lumberman's Bank .................... 31,494 10.7 29,367 10.0 23,494 8.0
Tier 1 Capital (to risk weighted assets):
FMB ..................................... $245,625 10.5% $139,985 6.0% $ 93,323 4.0%
FMB-First Michigan Bank ................. 88,571 9.2 58,080 6.0 38,720 4.0
FMB-First Michigan Bank-
Grand Rapids ............................ 35,614 9.8 21,771 6.0 14,514 4.0
FMB-Lumberman's Bank .................... 28,011 9.5 17,620 6.0 11,747 4.0
Tier 1 Capital (to average assets):
FMB ..................................... $245,625 7.8% $157,980 5.0% $ 94,788 3.0%
FMB-First Michigan Bank ................. 88,571 7.4 59,597 5.0 35,758 3.0
FMB-First Michigan Bank-
Grand Rapids ............................ 35,614 7.9 22,646 5.0 13,587 3.0
FMB-Lumberman's Bank .................... 28,011 7.1 19,658 5.0 11,795 3.0
</TABLE>
As of December 31, 1996, the most recent notifications from the Federal Deposit
Insurance Corporation have respectively categorized the Banks as
well-capitalized under the regulatory framework for prompt corrective action.
There are no conditions or events since that notification that, in the opinion
of management, have changed the categories under which any of the Banks would be
classified.
<PAGE>
<TABLE>
Summary of Earnings (dollars in thousands)
Year ended December 31,
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Interest Income
Loans and fees on loans ... $ 221,856 $ 202,395 $ 156,755 $ 131,768 $ 132,675
Securities:
Taxable ................... 32,244 29,376 28,128 29,731 32,246
Tax-exempt ................ 12,899 13,824 14,307 13,661 12,755
Other ..................... 2,472 3,002 1,051 959 1,778
Total interest income ..... 269,471 248,597 200,241 176,119 179,454
Interest Expense
Deposits .................. 121,172 113,037 77,957 70,408 79,727
Short-term borrowings ..... 6,911 5,793 4,395 3,372 3,393
Long-term debt ............ 1,008 697 857 920 625
Total interest expense .... 129,091 119,527 83,209 74,700 83,745
Net Interest Income ....... 140,380 129,070 117,032 101,419 95,709
Provision for loan losses . 11,321 7,991 6,670 5,388 6,651
Net interest income after
provision for loan losses 129,059 121,079 110,362 96,031 89,058
Non-Interest Income
Service charges on deposits 14,239 12,792 11,939 10,687 9,345
Trust and investment
management fees .......... 8,228 7,250 6,829 5,931 5,139
Mortgage banking revenue .. 6,351 4,017 3,847 8,818 7,775
Other operating ........... 9,003 6,758 7,144 6,640 5,395
Net realized securities
gains (losses) ........... (84) 324 (297) 127 219
Total non-interest income . 37,737 31,141 29,462 32,203 27,873
Non-Interest Expense
Salaries and employee
benefits ................. 59,348 55,157 50,153 46,630 42,762
Occupancy ................. 7,132 6,561 6,013 5,541 5,116
Equipment ................. 7,187 6,062 5,757 5,649 5,135
FDIC insurance ............ 29 2,918 5,180 4,720 4,400
Other operating ........... 34,653 30,886 28,218 26,829 26,511
Total non-interest expense 108,349 101,584 95,321 89,369 83,924
Income Before Income Taxes 58,447 50,636 44,503 38,865 33,007
Income taxes .............. 16,279 13,324 10,776 8,852 6,911
Net Income ................ $ 42,168 $ 37,312 $ 33,727 $ 30,013 $ 26,096
Profitability Ratios
Return on average assets .. 1.27% 1.22% 1.23% 1.21% 1.13%
Return on average equity .. 16.01 15.55 15.46 15.05 14.48
Net interest margin ....... 4.73 4.77 4.87 4.70 4.83
</TABLE>
<PAGE>
<TABLE>
Summary of Balance Sheet (dollars in thousands)
December 31,
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Total assets ............. $3,520,433 $3,240,739 $2,917,865 $2,596,128 $2,407,095
Total securities ......... 750,151 678,915 729,007 730,941 671,818
Total loans .............. 2,499,038 2,216,947 1,959,237 1,673,358 1,491,172
Total deposits ........... 3,015,969 2,813,691 2,487,939 2,241,075 2,078,147
Total long-term debt ..... 29,537 5,678 8,062 9,895 10,869
Total shareholders' equity 274,144 253,828 223,451 208,413 189,660
Averages for the year:
Assets ................... 3,325,927 3,050,873 2,748,680 2,489,858 2,299,726
Shareholders' equity ..... 263,401 239,915 218,129 199,369 180,224
Per Share Data*
</TABLE>
<TABLE>
Year ended December 31,
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Net income ............... $ 1.57 $ 1.40 $ 1.27 $ 1.12 $ .98
Shareholders' equity
at year end ............. 10.42 9.62 8.52 7.93 7.13
Cash dividends declared .. .65 .55 .47 .37 .28
Dividend payout ratio .... 41% 39% 37% 33% 29%
Average shares outstanding
(in thousands) ........... 26,779 26,652 26,643 26,738 26,745
</TABLE>
*Per share data is based on the average number of shares outstanding during the
year, except for shareholders' equity at year end which is based on shares
outstanding at year end. Average shares outstanding include the assumed exercise
of dilutive stock options and have been adjusted to give retroactive effect to
stock dividends and stock splits. Cash dividends declared are the actual cash
dividends that were declared by FMB on a historical basis, adjusted to give
retroactive effect to stock dividends and stock splits.
<TABLE>
Credit Quality Ratios
Year ended December 31,
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Allowance for loan losses
to total loans .......... 1.27% 1.26% 1.26% 1.27% 1.31%
Nonperforming assets
to total loans ......... .59 .51 .61 .86 1.12
Net charge-offs
to average loans ....... .33 .22 .18 .23 .37
</TABLE>
<PAGE>
First Michigan Bank Corporation
Holland, Michigan
We have audited the accompanying consolidated balance sheets of First Michigan
Bank Corporation and subsidiaries as of December 31, 1996 and 1995, and the
related consolidated statements of income, shareholders' equity and cash flows
for each of the three years in the period ended December 31, 1996. These
financial statements are the responsibility of FMB's management. Our
responsibility is to express an opinion on these 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 aspects, the financial position of First
Michigan Bank Corporation and subsidiaries at December 31, 1996 and 1995, and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 1996 in conformity with generally accepted
accounting principles.
/s/ BDO Seidman, LLP
BDO Seidman, LLP
January 16, 1997
Grand Rapids, Michigan
<PAGE>
The following is management's analysis of operating results and financial
condition as presented in the Five-Year Consolidated Financial Summary shown on
the preceding pages. This analysis should be read in conjunction with the
consolidated financial statements and their accompanying notes.
First Michigan Bank Corporation (FMB) is incorporated under the laws of
Michigan and is registered under the Bank Holding Company Act of 1956, as
amended. FMB is engaged in commercial and retail banking through 14 subsidiary
community banks (the Banks) and provides other financial services including
trust, brokerage, title insurance and credit insurance.
Since the formation of the holding company in 1974, the following
acquisitions have occurred:
Bank Year Acquired Accounting Method
FMB-First Michigan Bank 1974 Pooling
FMB-First Michigan Bank-Grand Rapids 1974 De novo
FMB-Community Bank 1976 Pooling
FMB-Lumberman's Bank 1979 Pooling
FMB-Oceana Bank 1984 Purchase
FMB-State Savings Bank 1986 Pooling
FMB-Reed City Bank 1987 Pooling
FMB-Commercial Bank 1988 Purchase
FMB-Security Bank 1989 Pooling
FMB-Maynard Allen Bank 1990 Purchase
FMB-Northwestern Bank 1991 Purchase
FMB-Old State Bank 1994 Pooling
Superior Financial Corporation 1995 Pooling
FMB-Arcadia Bank 1996 Pooling
The April 15, 1996 acquisition of Arcadia Financial Corporation and its
wholly-owned subsidiary, which was subsequently renamed FMB-Arcadia Bank
(Arcadia), was accounted for as a pooling-of-interests, and Arcadia's financial
condition and results of operations are included for all years presented.
On December 6, 1996, two of the Banks acquired three banking branches from
another financial institution. These Banks assumed a total of $28,255,000 in
deposit liabilities and accrued interest and received assets consisting of cash,
branch fixed assets and deposit premium.
The principal source of revenues of FMB and its subsidiaries is interest
and fees on loans which amounted to 72% of total revenues in 1996 and 1995 and
68% in 1994. Interest on securities amounted to 15% of total revenues in 1996
and 1995 and 19% in 1994. The principal markets for FMB's banking services are
the communities within the State of Michigan in which the subsidiaries are
located. As of December 31, 1996, FMB and its subsidiaries served these markets
through 90 offices located in these communities.
<TABLE>
Earnings Summary (dollars in thousands, except per share data)
Year ended December 31,
1996 1995 1994
<S> <C> <C> <C>
Net income ............. $ 42,168 $ 37,312 $ 33,727
Per share .............. 1.57 1.40 1.27
Earnings ratios:
Return on average assets 1.27% 1.22% 1.23%
Return on average equity 16.01 15.55 15.46
</TABLE>
The financial results presented above reflect the continued strong earnings
performance of FMB. 1996 was the fifteenth consecutive year that FMB has
reported record earnings. Net income of $42,168,000 was up $4,856,000, or 13.0%,
over the results for 1995 which were up 10.6% over 1994. FMB's earnings per
share rose to $1.57, a 12.1% increase over the $1.40 per share recorded for
1995. Per share earnings in 1995 were up 10.2% over 1994 results. FMB's return
on average assets was 1.27%, 1.22% and 1.23% for 1996, 1995 and 1994,
respectively. 1996 continued the trend of increasing returns on average equity
for each of the last five years reaching a level of 16.01% for the year.
Dividends per share for the past five years have increased at a 20.1% compounded
annual rate, adjusted for the effect of stock dividends and splits during those
years. The total return on FMB stock has grown at a 34.6% compound annual rate
for the same period when taking into account reinvestment of dividends and stock
price appreciation.
The increases in FMB's earnings over the last three years have primarily
been the result of increased net interest income due to strong loan growth as
average loan volume has increased 11.6%, 15.8% and 14.9% during each of the last
three years. 1996 results also benefited from double-digit increases in the
major categories of fee income. The challenges for FMB in improving future
performance are to maintain or increase net interest margin and efficiency while
growing its core business despite increased competition.
<PAGE>
Net Interest Income
The following schedule presents the average daily balances, interest income (on
a fully-taxable equivalent basis) and interest expense and the average rates
earned and paid for FMB's major categories of assets, liabilities and
shareholders' equity for the periods indicated (dollars in thousands):
<TABLE>
Year ended December 31,
1996 1995 1994
Average Average Average
Interest Rate Interest Rate Interest Rate
Average Income/ Earned/ Average Income/ Earned/ Average Income/ Earned/
Balance Expense Paid Balance Expense Paid Balance Expense Paid
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets
Federal funds sold .................$ 42,844 $ 2,294 5.35% $47,012 $ 2,708 5.76%$ 19,132 $ 828 4.33%
Interest bearing deposits
with banks ......................... 2,929 178 6.08 5,112 294 5.76 3,849 223 5.79
Securities (3):
Taxable ............................ 520,595 32,244 6.19 487,667 29,376 6.02 496,576 28,128 5.66
Tax-exempt (1) ..................... 206,367 18,998 9.21 217,604 20,347 9.35 228,842 21,280 9.30
Loans (1)(2) ....................... 2,341,898 222,621 9.51 2,098,014 203,142 9.68 1,811,340 157,330 8.69
Total earning assets/
total interest income .............. 3,114,633 276,335 8.87% 2,855,409 255,867 8.96% 2,559,739 207,789 8.12%
Cash and due from banks ............ 115,391 -- -- 103,091 -- -- 100,121 -- --
All other assets ................... 126,211 -- -- 118,886 -- -- 112,164 -- --
Allowance for loan losses .......... (30,308) -- -- (26,513) -- -- (23,344) -- --
Total assets .......................$ 3,325,927 -- -- $3,050,873 -- -- $2,748,680 -- --
Liabilities and Shareholders' Equity
Interest bearing deposits:
Savings and NOW accounts ...........$ 945,622 $ 27,769 2.94% $888,961 $ 27,914 3.14% $ 924,334 $25,014 2.71%
Time ............................... 1,591,598 93,403 5.87 1,455,746 85,123 5.85 1,166,951 52,943 4.54
Other borrowed funds ............... 151,889 6,911 4.55 132,418 5,793 4.37 133,818 4,395 3.28
Long-term debt ..................... 13,294 1,008 7.58 7,281 697 9.57 9,346 857 9.17
Total interest bearing
liabilities/
total interest expense ............ 2,702,403 129,091 4.78% 2,484,406 119,527 4.81% 2,234,449 83,209 3.72%
Non-interest bearing
deposits .......................... 325,791 -- -- 298,105 -- -- 274,124 -- --
All other liabilities .............. 34,332 -- -- 28,447 -- -- 21,978 -- --
Shareholders' equity ............... 263,401 -- -- 239,915 -- -- 218,129 -- --
Total liabilities and
shareholders' equity ..............$3,325,927 -- -- $3,050,873 -- -- $2,748,680 -- --
Interest Spread
(average rate earned minus
average rate paid) ................. -- -- 4.09% -- -- 4.15% -- -- 4.40%
Net Interest Income
(fully-taxable equivalent) ........ -- $147,244 -- -- $ 136,340 -- -- $124,580 --
Net Interest Margin
(net interest income/
total earning assets) ............. -- -- 4.73% -- -- 4.77% -- -- 4.87%
</TABLE>
(1) Tax-exempt interest on securities and loans has been converted to
a fully-taxable equivalent basis as follows for the period indicated
(dollars in thousands):
<TABLE>
Fully-taxable
equivalent
adjustments: 1996 1995 1994
<S> <C> <C> <C>
Securities ..... $6,099 $6,523 $6,973
Loans .......... 765 747 575
Total ..... $6,864 $7,270 $7,548
Marginal federal
income tax rate 35% 35% 35%
(2) Non-accrual loans are not significant during the 3-year period
and, for the purposes of the computations above, are included in the
average daily loan balances.
(3) Amortized cost is used to determine the daily average securities
balances for purposes of the above computations.
<PAGE>
</TABLE>
Effect of the Change in Rate and Volume
The effect on FMB's interest income (on a fully-taxable equivalent basis) and
interest expense due to changes in volume and average rates for the periods
indicated are shown below (dollars in thousands):
<TABLE>
Year ended December 31, 1996 Year ended December 31, 1995
Compared to Compared to
Year ended December 31, 1995 Year ended December 31, 1994
Amount of Increase/ Total Amount of Increase/ Total
(Decrease) Due to Amount of (Decrease) Due to Amount of
Change in Increase/ Change in Increase/
Volume Rate (Decrease) Volume Rate (Decrease)
<S> <C> <C> <C> <C> <C> <C>
Interest Income
Federal funds sold ....... $ (231) $ (183) $ (414) $ 1,532 $ 348 $ 1,880
Interest bearing deposits
with banks ............... (131) 15 (116) 72 (1) 71
Securities:
Taxable .................. 2,023 845 2,868 (512) 1,760 1,248
Tax-exempt ............... (1,038) (311) (1,349) (1,050) 117 (933)
Loans .................... 23,242 (3,763) 19,479 26,556 19,256 45,812
Total interest
income .................. 23,865 (3,397) 20,468 26,598 21,480 48,078
Interest Expense
Interest bearing deposits:
Savings and NOW
accounts ................ (1,867) (145) (987) 3,887 2,900
Time ..................... 7,971 309 8,280 14,848 17,332 32,180
Other borrowed funds ..... 879 239 1,118 (46) 1,444 1,398
Long-term debt ........... 480 (169) 311 (196) 36 (160)
Total interest expense ... $ 11,052 (1,488) 9,564 13,619 22,699 36,318
Net Interest Income
(fully taxable equivalent) $ 12,813 $ (1,909) $ 10,904 $ 12,979 $ (1,219) $ 11,760
</TABLE>
For the purposes of this table, changes in interest due to volume and average
rate were determined as follows:
Volume Variance - change in volume multiplied by previous average rate.
Rate Variance - change in average rate multiplied by previous volume.
Rate/Volume Variance - change in volume multiplied by change in average rate.
The rate/volume variances have been allocated to volume and average rate in
proportion to the relationship of the absolute dollar amounts of the change in
each.
As reflected in the above table, FMB's net interest income on a
fully-taxable equivalent basis grew by $10,904,000, or 8.0%, in 1996 and by
$11,760,000, or 9.4%, in 1995. The rate of growth in net interest income is
affected by the relative rates of growth in the underlying earning assets and
costing funds and also by fluctuations in the net interest margin. Average
earning assets grew by 9.1% in 1996 and 11.6% in 1995 primarily due to the very
strong rate of growth in average loans, which, as mentioned earlier, increased
by 11.6% during 1996 and 15.8% during 1995. The effect of the growth in
higher-yielding loans was significantly offset in 1995 by a shift in the mix of
deposits to higher-costing time deposits. Average time deposits grew by 9.3% in
1996 compared to an increase of 24.7% in 1995.
The net interest margin declined by 4 basis points during 1996. The decline
is attributed to an overall decline in the yield on average loans of 17 basis
points due primarily to a decrease in the prime rate experienced during the
year. The net decline in the rate paid on interest bearing liabilities served to
partially offset the reduction in yield. The largest reductions in rate were
seen in savings and NOW accounts in 1996 at 20 basis points less than the rate
paid in 1995. During 1995 there had been a change in FMB's deposit mix
reflecting the customers' preference for longer-term, higher-yielding
certificates of deposit. This was the primary factor in the 109 basis point
increase in overall cost of funds in 1995 versus 1994. This mix remained
essentially unchanged during 1996 compared to 1995.
Retail and commercial banking remain the core of FMB's business activities
and maintaining a steady growth in net interest income is one of FMB's primary
objectives. The historical results of FMB reflect the achievement of this
objective with continued balance sheet growth and maintenance of a strong net
interest margin. Growth in the communities in which the Banks operate is
expected to bring increasing competitive pressure to bear on FMB's loan and
deposit pricing. Management intends to grow net interest income and remain
competitively priced through stepped up sales efforts and product promotion and
development.
<PAGE>
<TABLE>
Non-Interest Income
Year ended December 31,
1996 Change 1995 Change 1994
<S> <C> <C> <C> <C> <C>
Non-interest income (dollars in thousands):
Service charges
on deposits .............. $ 14,239 11.3% $ 12,792 7.1% $ 11,939
Trust and investment
management fees .......... 8,228 13.5 7,250 6.2 6,829
Mortgage banking revenue .. 6,351 58.1 4,017 4.4 3,847
Investment products revenue 1,638 3.5 1,583 10.4 1,434
Credit insurance income ... 2,394 12.5 2,128 12.3 1,895
Other operating income .... 4,971 63.1 3,047 (20.1) 3,815
Subtotal .................. 37,821 22.7 30,817 3.6 29,759
Realized securities
gains (losses) ........... (84) (125.9) 324 209.1 (297)
Total ..................... $ 37,737 21.2% $ 31,141 5.7% $ 29,462
</TABLE>
The table above lists FMB's primary sources of non-interest income. 1996
saw an increase of $6,596,000 to $37,737,000 from the 1995 total of $31,141,000.
The increase in 1995 was $1,679,000 over the 1994 levels. The 21.2% increase in
1996 reflects increases in virtually all non-interest categories.
The largest increase both as a percentage and in amount occurred in
mortgage banking revenues. This is the result of increased mortgage originations
during 1996 as well as the adoption of SFAS No. 122 during the year. The
implementation of SFAS No. 122 accounted for $1,865,000, or 58.1%, of the
$2,334,000 increase. Without the impact of this new accounting standard, the
increase would have been 11.7% for the year. FMB retains the servicing on
residential mortgages originated by the Banks and sold in the secondary market.
The mortgage servicing portfolio amounted to $815,368,000 at the end of 1996
compared to $709,386,000 and $645,721,000 at the end of 1995 and 1994
respectively. Both 1996 and 1995 benefited from the strong local real estate
market and from refinancings, particularly in 1995, with the decline in long
term interest rates from 1994 levels.
Service charges on deposits increased in 1996 by $1,447,000 (11.3%).
Approximately 7 percentage points of this increase is due to deposit volume
increases. The balance of the income improvement is due largely to
standardization of fee schedules among FMB's banks during 1996.
Trust and investment management fees increased $978,000, or 13.5%, above
the 1995 income level to $8,228,000. The increase resulted from growth in
personal and employee benefit balances held in trust. Also included in this
category are mutual fund management fees which reflected an improvement over
1995 of 10.3%. Trust and investment management fees increased by 6.2% during
1995 from 1994 levels while investment product sales revenue increased in 1995
by 10.4%. Management continues to focus significant effort on the delivery of
trust, financial planning and other investment services to our customers.
Credit insurance revenue increased 12.5% in 1996 and 12.3% in 1995. The
growth in this income category is most closely correlated to growth in the
number and dollar volume of consumer loans. The average volume of consumer loans
increased by 10.5% in 1996 following an 18.2% increase for 1995. Management
anticipates continued growth in the consumer lending business and associated
credit insurance revenue.
Other operating income includes fees earned for a variety of bank services
as well as dispositions of fixed assets and other real estate. In 1996, other
operating income reflected increased fees pertaining to debit and credit card
transactions, letter of credit fees and the addition of title insurance to FMB's
product mix. During the year, a block of charged-off consumer loans was sold to
a third party and the proceeds were included in this category. There is a
variety of income sources in this category and fluctuations in the level of
income occur from year to year.
<PAGE>
<TABLE>
Non-Interest Expense
Year ended December 31,
1996 Change 1995 Change 1994
<S> <C> <C> <C> <C> <C>
Non-interest expense (dollars in thousands):
Salaries and employee benefits ............. $ 59,348 7.6% $ 55,157 10.0% $ 50,153
Occupancy and equipment .................... 14,319 13.4 12,623 7.2 11,770
Printing and supplies ...................... 3,704 13.0 3,279 16.5 2,814
Telecommunications ......................... 2,384 28.9 1,850 22.9 1,505
Computer processing ........................ 4,604 9.7 4,197 11.4 3,768
Software ................................... 1,691 65.8 1,020 36.2 749
Postage .................................... 1,964 5.4 1,864 16.9 1,595
Advertising and promotion .................. 2,500 .6 2,486 10.5 2,250
Single Business Tax ........................ 2,308 (3.9) 2,401 14.6 2,095
FDIC insurance ............................. 29 (99.0) 2,918 (43.7) 5,180
Professional services ...................... 1,867 (27.6) 2,580 9.8 2,350
Other operating ............................ 13,631 21.6 11,209 1.1 11,092
Total ...................................... $108,349 6.7% $101,584 6.6% $ 95,321
</TABLE>
The table above lists FMB's most significant operating expense categories.
For 1996 and 1995 FMB experienced overall non-interest expense growth of 6.7%
and 6.6%, respectively. The 1996 and 1995 increases were aided by the 1995
mid-year reduction in FDIC insurance expense, the full year benefit of which was
seen in 1996. Excluding the reduction in FDIC insurance expense, the increases
in operating expenses were 9.8% and 9.5% for 1996 and 1995, respectively.
Salaries and employee benefits remain the largest component of non-interest
expense. During 1996, salaries and employee benefits increased 7.6% following a
10.0% increase during 1995. These increases are less than the rate of asset
growth in both years. The decrease in the rate of growth during 1996 results
from management's continuing efforts to improve efficiencies in the delivery of
financial products and services through increased use of technologies and
consolidation of operational functions. FMB will continue to assess alternative
delivery channels both for the convenience of its customers and for the
contribution such efforts make to the control of the growth in non-interest
expense.
Printing and supplies increased 13.0% in 1996 following a 16.5% increase in
1995. This is primarily due to the continuing effect of a significant increase
in the cost of copier and computer paper which began during 1995.
Telecommunication costs increased $534,000, 28.9%, during 1996. This
follows an increase of $345,000, or 22.9%, in 1995. Additionally, software costs
and computer processing expense increased 65.8% and 9.7%, respectively, in 1996.
These increases result from FMB's ongoing program to expand and upgrade its
products and electronic delivery systems. Management believes these are
essential expenditures that will continue as part of FMB's efforts to enhance
efficiencies while expanding the range of products and improving customer
service levels.
Advertising and promotion expense increased a mere .6% in 1996 following
the 10.5% increase of 1995 during which FMB had introduced its new debit and
credit cards. The level of expenditures for product promotions is expected to
increase in future periods above 1996 levels with advertising campaigns targeted
to selected segments of FMB's marketplace.
FDIC insurance expense decreased in 1996 to $29,000, 1% of the $2,918,000
for 1995. This represents the effect of the Bank Insurance Fund legislative
reform process during which this expense had decreased by 43.7% in 1995 from
1994 levels. During 1995, the Bank Insurance Fund exceeded the mandatory balance
levels requiring the FDIC to continue lowering insurance premiums. During 1996,
the FDIC charged only the minimum allowable amount of $2,000 per bank for those
banks that met the FDIC criteria of being well-capitalized and well-managed. All
of the Banks currently meet these FDIC standards. At the end of 1996, FMB had no
Savings Association Insurance Fund deposits, which are subject to a higher
assessment. However, beginning in 1997, FMB will be paying the minimum rate of
$.01296 per $100 of deposits towards the FICO obligations. This higher rate will
continue through 1999.
Income Taxes Income tax expense for 1996 amounted to $16,279,000 compared to
$13,324,000 in 1995 and $10,776,000 for 1994. The percentage increases from the
prior period are 22.2% in 1996 and 23.7% in 1995. These percentage increases
result from FMB's profit improvement, virtually all of which is taxable, as the
tax benefit of exempt income declined with the reduction in the amount of
tax-exempt income earned during 1996 and 1995 from each previous year's level.
This and other components of income tax expense are disclosed in Note 12 of the
Notes to Consolidated Financial Statements included earlier in this report.
<PAGE>
Loan Portfolio
FMB accepts credit risk as an essential part of the lending function in full
service banking. FMB concentrates its lending efforts on its existing market
areas with emphasis on both consumer and commercial credits. These credit
decisions are made as close as possible to the customer by keeping the loan
evaluation and approval process with the management of each of the Banks,
including oversight by a bank board committee. In addition to maintaining a
strong lending staff at the customer level, FMB ensures that a conservative
underwriting philosophy and corporate credit quality standards are adhered to by
an independent, centralized loan review function. The primary objective of the
centralized loan review is to assist bank management in the process of
monitoring the credit underwriting function and to ensure lending decisions are
made within established guidelines.
<TABLE>
December 31,
1996 1995 1994 1993 1992
Components of loan portfolio
Balances (dollars in thousands):
<S> <C> <C> <C> <C> <C>
Commercial, financial and
agricultural ............ $ 667,200 $ 608,718 $ 542,370 $ 469,827 $ 445,427
Real estate-construction 225,043 155,872 109,256 87,598 66,101
Real estate-mortgage .... 1,161,494 1,032,382 931,465 802,354 707,713
Consumer ................ 445,301 419,975 376,146 313,579 271,931
Total ................... $ 2,499,038 $ 2,216,947 $ 1,959,237 $ 1,673,358 $ 1,491,172
Percentages:
Commercial, financial and
agricultural ............ 26.7% 27.5% 27.7% 28.1% 29.9%
Real estate-construction 9.0 7.0 5.6 5.2 4.4
Real estate-mortgage .... 46.5 46.6 47.5 48.0 47.5
Consumer ................ 17.8 18.9 19.2 18.7 18.2
Total ................... 100.0% 100.0% 100.0% 100.0% 100.0%
</TABLE>
Strong loan demand in FMB's markets is reflected by the growth in period end
balances indicated in the above table, with percentage increases of 12.7%, 13.2%
and 17.1% for 1996, 1995 and 1994, respectively. Average loans increased by
similar percentages during each of those periods as well. The table further
indicates the mix of the portfolio has remained essentially unchanged from year
to year reflecting the overall strength of the economy and the Company's ability
to provide retail and commercial customers with competitive credit options. The
largest component of FMB's loan portfolio remains real estate-mortgage loans. In
the above mortgage category, 45% represents commercial real estate lending and
55% residential, ratios that are similar to those of 1995. The commercial real
estate together with the commercial, financial and agricultural loans amount to
47% of FMB's total loan portfolio. Management believes this is indicative of the
balance between commercial lending, primarily to small and medium-sized
businesses, and retail lending to individuals. The loan portfolio continues to
be well-diversified as of December 31, 1996 as FMB had no concentration of loans
to any group of borrowers engaged in similar activities that would be
significantly impacted by economic or other conditions.
<TABLE>
December 31, 1996
Under 1 to 5 Over
1 year years 5 years Total
<S> <C> <C> <C> <C>
Maturity of selected loans (dollars in thousands):
Commercial, financial
and agricultural ............... $366,733 $280,402 $ 20,065 $667,200
Real estate-construction ........ 113,346 107,680 4,017 225,043
Total ........................... $480,079 $388,082 $ 24,082 $892,243
Rate sensitivity of
above loans due after
one year (dollars in thousands):
Fixed interest rates ............ -- $186,782 $ 8,895 $195,677
Variable interest rates ......... -- 201,300 15,187 216,487
Total ........................... -- $388,082 $ 24,082 $412,164
</TABLE>
<PAGE>
Nonperforming Assets
Nonperforming assets consist of nonperforming loans and other real estate owned.
Nonperforming loans include loans on which interest is not being accrued,
accruing loans contractually past due ninety days or more as to interest or
principal payments, and other loans whose terms have been renegotiated to
provide a reduction or deferral of interest or principal because of a
deterioration in the financial position of the borrower. Other real estate
includes assets acquired through loan foreclosure and repossession.
<TABLE>
December 31,
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Nonperforming assets (dollars in thousands):
Non-accrual ................................ $ 7,885 $ 4,754 $ 5,595 $ 5,377 $ 8,301
Ninety days past due ....................... 5,211 3,919 2,876 3,073 5,269
Renegotiated ............................... 1,096 1,021 1,218 1,826 992
Total nonperforming loans .................. 14,192 9,694 9,689 10,276 14,562
Other real estate .......................... 436 1,572 2,244 4,132 2,136
Total nonperforming assets ................. $14,628 $11,266 $11,933 $14,408 $16,698
As a percent of total loans ................ .59% .51% .61% .86% 1.12%
</TABLE>
FMB's nonperforming asset ratios have historically been very low by
traditional bank performance measures. As indicated in the schedule above,
nonperforming assets are .59% of total loans at year end 1996. While this ratio
has increased slightly over 1995, management does not believe this to be
indicative of a deterioration in the loan portfolio. This favorable ratio is
primarily attributable to the prevailing strength of the local economies in the
communities in which the Banks operate and their timely attention to potential
problem credits.
Loans are placed in non-accrual status when, in the opinion of management,
the collectibility of principal and interest is considered doubtful or when the
payment of interest and principal is 90 days past due, unless the loans are both
well secured and in the process of collection. Consumer loans are generally not
placed on non-accrual status as they are normally charged-off when 120 days past
due. Interest in the amount of approximately $537,000 on loans classified as
non-accrual and renegotiated was included in net income during 1996. Additional
interest in the amount of approximately $1,063,000 would have been earned in
1996 had the loans classified as non-accrual and renegotiated remained at
original terms.
As of December 31, 1996, loans which are not included in the above
nonperforming loan total but which management has serious doubts as to the
ability of the borrowers to comply with present loan repayment terms amount to
$674,000. Although these loan customers are having financial difficulties at the
present time and may need adjustments in their repayment terms, no material
losses are anticipated. Payouts are anticipated or collateral or guarantees are
available to reduce any loss incurred.
Allowance for Loan Losses
The following schedule sets forth management's allocation of the allowance for
loan losses by loan type and the resulting ratio of the allowance allocated to
the related outstanding loans. This allowance allocation is necessarily
judgmental and is based primarily upon the risk inherent in each category of
loans as well as past loss experience, estimated loss exposure on specific
loans, current and projected economic conditions and other factors. The entire
allowance is available to absorb any future loan losses and is not necessarily
indicative of the categories in which future charge-offs are to be classified.
The amounts indicated for each loan type include amounts allocated for specific
loans as well as a general allocation.
<TABLE>
December 31,
1996 1995 1994 1993 1992
Alloc. Ratio Alloc. Ratio Alloc. Ratio Alloc. Ratio Alloc. Ratio
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Allowance for loan
losses (dollars in thousands):
Commercial, financial
and agricultural ... $15,730 2.36% $14,091 2.31% $12,620 2.33% $10,741 2.29% $10,237 2.30%
Real estate-
construction ...... 1,278 .57 916 .59 546 .50 423 .48 285 .43
Real estate-mortgage 3,688 .32 4,088 .40 3,924 .42 3,120 .39 3,143 .43
Consumer ........... 11,024 2.48 8,936 2.13 7,643 2.03 7,004 2.23 5,922 2.18
Total .............. $31,720 1.27% $28,031 1.26% $24,733 1.26% $21,288 1.27% $19,587 1.31%
</TABLE>
<PAGE>
<TABLE>
December 31,
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Loan loss experience (dollars in thousands):
Loans:
Average daily balance of loans
outstanding for the period ... $2,341,898 $2,098,014 $1,811,340 $1,576,059 $1,458,328
Amount of loans outstanding,
at end of period ............ $2,499,038 $2,216,947 $1,959,237 $1,673,358 $1,491,172
Allowance for loan losses:
Balance, at beginning
of period ................... $ 28,031 $ 24,733 $ 21,288 $ 19,587 $ 18,268
Loans charged-off:
Commercial, financial
and agricultural ............ 1,288 1,609 1,031 1,109 1,669
Real estate-construction ..... -- 1 -- 10 --
Real estate-mortgage ......... 579 596 412 1,582 1,588
Consumer ..................... 8,051 4,640 3,927 2,544 3,535
Total charge-offs ............ 9,918 6,846 5,370 5,245 6,792
Recoveries on loans
previously charged-off:
Commercial, financial and
agricultural ................ 577 400 465 340 268
Real estate-construction ..... 25 -- -- 5 --
Real estate-mortgage ......... 407 324 353 55 166
Consumer ..................... 1,277 1,429 1,327 1,158 1,026
Total recoveries ............. 2,286 2,153 2,145 1,558 1,460
Net loans charged-off ........ 7,632 4,693 3,225 3,687 5,332
Additions to allowance charged
to operations ................ 11,321 7,991 6,670 5,388 6,651
Balance, at end
of period ................... $ 31,720 $ 28,031 $ 24,733 $ 21,288 $ 19,587
Ratios:
Net loans charged-off
to average loans
outstanding for
the period .................. .33% .22% .18% .23% .37%
Allowance for loan
losses to loans
outstanding, at
end of period ............... 1.27 1.26 1.26 1.27 1.31
</TABLE>
The provision for loan losses charged to operations increased by $3,330,000 in
1996 over the amount charged in 1995, while 1995 reflected a $1,321,000 increase
from 1994. The 1996 increase is primarily due to a higher than normal level of
consumer loans charged-off during the year for the three largest of the Banks.
Management does not consider this to be an indication of any serious
deterioration in overall portfolio credit quality. During 1996, management
centralized the collection function for consumer loans and established more
stringent charge-off criteria for these loans. This, coupled with an overall
increase in consumer bad debt trends in the industry, resulted in the increased
charge-offs for FMB. Increases in the 1996 and 1995 provision were made,
additionally, for the maintenance of an adequate allowance necessitated by the
almost 13% growth in loans outstanding from period to period. The ratio of net
charge-offs to average loans increased from 1995 to 1996 as well as from 1994 to
1995, yet this ratio remains at a low level historically, reflecting the
prevailing strength of the local economies in the communities in which the Banks
operate and FMB's attention to underwriting and monitoring standards for its
loan portfolio. Management rates the overall quality of the loan portfolio as
good and the allowance for loan losses as strong, given the ratio of the
allowance to total loans of 1.27% and the relatively low level of nonperforming
loans.
<PAGE>
Securities Portfolio
Securities are purchased with the ability to hold those assets until maturity.
However, FMB has identified as "available-for-sale" certain securities which may
be sold in the future to meet FMB's investment objectives of quality, liquidity
and yield and to avoid significant market value deterioration. The 1996 year end
total securities increased by 10.5% over the 1995 balance after several years of
modest balance declines as growth was channeled to meet high loan demand during
those periods. A substantial portion of the overall growth and proceeds from
maturing available-for-sale (AFS) and held-to-maturity securities was invested
in the AFS category. As permitted by the transition provisions in the guide to
implementation of Statement of Financial Accounting Standards (SFAS) No. 115
issued by the Financial Accounting Standards Board in November 1995, FMB
transferred securities with an amortized cost of $110,674,000 from the
held-to-maturity to the available-for-sale category on December 27, 1995. The
net unrealized gain on the securities transferred amounted to $421,000.
<TABLE>
December 31,
1996 1995 1994
Available- Held-to Available- Held-to Available- Held-to
for-sale maturity for-sale maturity for-sale maturity
<S> <C> <C> <C> <C> <C> <C>
Securities portfolio (dollars in thousands):
U.S. Treasury and U.S. Government
agencies and corporations ...... $346,483 $ 48,864 $234,143 $ 81,793 $ 82,364 $267,206
State and political subdivisions 33,365 173,170 30,312 178,034 26,419 195,808
Other securities ............... 85,612 62,657 65,233 89,400 34,531 122,679
Total .......................... $465,460 $284,691 $329,688 $349,227 $143,314 $585,693
</TABLE>
Excluding those holdings in the securities portfolio of U.S. Treasury and
U.S. Government agency and corporation securities and various project notes
fully guaranteed by the U.S. Government, FMB held no investments in securities
of any one issuer which exceeded 10% of shareholders' equity at December 31,
1996.
The following schedule sets forth the maturities and weighted average
interest rates of FMB's securities as of December 31, 1996 (dollars in
thousands):
<TABLE>
U.S. Treasury and U.S. States and
Government Agencies Political
and Corporations Subdivisions Other Securities Total
Amount Rate Amount Rate(1) Amount(2) Rate Amount
<S> <C> <C> <C> <C> <C> <C> <C>
Available-for-sale
Under 1 year ........ $114,715 5.97% $4,194 10.67% $5,694 6.52% $124,603
1 to 5 years ........ 231,768 6.21 16,870 9.65 53,949 6.19 302,587
5 to 10 years ....... -- -- 11,280 7.97 11,437 6.53 22,717
Over 10 years ....... -- -- 1,021 9.34 2,312 7.26 3,333
Total debt securities $346,483 6.13% $33,365 9.20% 73,392 6.30 453,240
Equity securities ... -- -- -- -- 12,220 7.85 12,220
Total ............... -- -- -- -- $85,612 6.52% $465,460
</TABLE>
<TABLE>
U.S.Treasury and U.S. States and
Government Agencies Political
and Corporations Subdivisions Other Securities Total
Amount Rate Amount Rate(1) Amount(2) Rate Amount
<S> <C> <C> <C> <C> <C> <C> <C>
Held-to-Maturity
Under 1 year $31,184 5.77% $25,144 9.41% $26,683 6.24% $83,011
1 to 5 years 17,680 5.95 89,430 10.19 30,579 6.88 137,689
5 to 10 years -- -- 57,442 9.26 3,309 7.36 60,751
Over 10 years -- -- 1,154 8.87 2,086 7.08 3,240
Total $48,864 5.84% $173,170 9.76% $62,657 6.64% $284,691
</TABLE>
(1) The yields on tax-exempt obligations have been computed on a fully-taxable
equivalent basis using a marginal federal income tax rate of 35%.
(2) The maturities of mortgage-backed securities are included based upon
weighted-average expected lives, taking into account anticipated future
prepayments.
<PAGE>
Deposits and Short-term Borrowings
Average deposits and short-term borrowings continue to grow each year, with
increases of 7.6% and 11.0% experienced in 1996 and 1995, respectively. The
primary challenge to FMB is to continue to grow deposits in its markets despite
increased competition. Management has targeted an overall internal growth goal
of 10% with increased marketing efforts and competitive pricing.
A comparison of the average balances of deposits and short-term borrowings
and the percentage of average daily assets that were supported by each category
of deposits and short-term borrowings is reflected in the following schedule
(dollars in thousands):
<TABLE>
Average for the year
1996 1995 1994
% of % of % of
Balance Assets Balance Assets Balance Assets
<S> <C> <C> <C> <C> <C> <C>
Deposits
Non-interest bearing demand ..... $ 325,791 9.8% $298,105 9.8% $ 274,124 10.0%
Savings and NOW accounts ........ 945,622 28.4 888,961 29.1 924,334 33.6
Time ............................ 1,591,598 47.9 1,455,746 47.7 1,166,951 42.5
Total deposits .................. 2,863,011 86.1 2,642,812 86.6 2,365,409 86.1
Short-term borrowings
Securities sold under
agreements to repurchase ....... 98,904 3.0 110,216 3.6 109,029 4.0
Other short-term borrowings ..... 21,470 .6 20,727 .7 24,789 .9
Total ........................... $2,983,385 89.7% $2,773,755 90.9% $2,499,227 90.9%
</TABLE>
The maturity distribution of time deposits of $100,000 or more as of December
31, 1996 is as follows (dollars in thousands):
<TABLE>
Under 3 3 to 6 6 months Over 1
months months to 1 year year Total
<S> <C> <C> <C> <C> <C>
Time deposits of $100,000 or more... $339,852 $129,052 $98,551 $32,357 $599,812
</TABLE>
The banks operate in a competitive environment as to rates paid on most
deposits. Money market savings accounts, coupled with a wide range of options in
the area of time deposits, have given consumers the opportunity to invest their
money at competitive rates for the time period that best fits their needs. At
FMB, these opportunities include regular and money market savings programs for
individuals, certificates of deposit (CDs) of varying maturities and interest
rates for public and private depositors, and Cash Investment Checking, which
includes options of a one-day retail repurchase agreement and trust sweep
arrangements for commercial accounts. Market rates are adjusted from time to
time in order to attract additional funds. During 1995 and 1996, FMB also
purchased brokered CDs to meet lending demand. FMB has established guidelines to
limit its exposure to funding from time deposits of $100,000 or more, which
includes brokered CDs. Brokered CDs amount to only 1.2% of total deposits at
December 31, 1996.
Asset/Liability Management
Asset/liability management is a vital function in today's banking environment.
At FMB, this process involves developing, implementing and monitoring strategies
to maintain a proper level of liquidity, maximize net interest income, and
minimize the impact on earnings from major interest rate changes. This process
is carried out through a corporate asset/liability committee. The committee
establishes policies, analyzes strategies and monitors the effectiveness of the
asset/liability management process on a consolidated basis.
Liquidity is monitored through the asset/liability management process in
order to meet the needs of customers, such as depositors withdrawing funds or
borrowers requesting funds to meet their credit needs, while at the same time
maximizing investment and lending opportunities.
Deposit gathering is a principal source of funds for FMB. Development of
consumer deposits is achieved by paying competitive rates and by maintaining an
active marketing program. Larger CDs, issued to public authorities and the
private sector, are purchased primarily from within FMB's market area and are
considered a reliable source of funds. FMB also purchases brokered CDs from time
to time for varying periods of up to three years. Another principal source of
funds derives from the routine payments on loans and the maturities of loans and
securities. FMB's securities portfolio is invested almost exclusively in
investment grade issues, and, as illustrated in previous discussion, FMB
maintains a high-quality loan portfolio. As a result, payments and maturities on
these assets are also a reliable source of funds. Externally, FMB has the
ability to enter the federal funds market as a
<PAGE>
purchaser to meet daily liquidity needs, and, for longer term liquidity needs,
FMB has the ability to enter into funding arrangements with other financial
institutions.
Through the asset/liability process, attention is also placed on a bank's
interest sensitivity, which is the degree net interest income is affected by a
change in market interest rates. One method of estimating sensitivity is by a
gap analysis. Gap is the difference between assets and liabilities maturing or
repricing in the same time period. When the amount of rate-sensitive assets is
greater than rate-sensitive liabilities, an increase in market interest rates
has a positive impact on net interest income while a decrease in rates has a
negative impact. When rate-sensitive liabilities are greater than assets, the
converse is true with falling market rates impacting net income positively and
rising rates impacting it negatively. Minimizing exposure to changes in market
rates is accomplished by keeping the relationship of the rate-sensitive assets
and liabilities in a relatively balanced position.
FMB continued in 1996 to structure its balance sheet and utilize
off-balance-sheet strategies to respond to interest rate fluctuations. To a
limited extent, interest rate swap agreements continued to be utilized to manage
the short-term interest sensitivity position. FMB continues to sell long-term,
fixed-rate residential mortgage loans in the secondary market to minimize its
long-term exposure to rate changes. During 1996, FMB's nominal asset-sensitive
position in the short-term, coupled with consumer preference for
higher-yielding, long-term certificates of deposit had a negative impact on the
net interest margin when compared with 1995. However, as demonstrated in the
table below, FMB has maintained a strong and relatively stable net interest
margin over the past five years.
<TABLE>
December 31,
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Net interest margin..... 4.73% 4.77% 4.87% 4.70% 4.83%
</TABLE>
The following table illustrates FMB's static gap position as of December 31,
1996, with a cumulative 90 day gap position of 0.99 and one year gap of 0.84.
Distribution of non-maturity deposits are based on historical analyses and
management's current assumptions as to the repricing frequency for these funds.
Although the static gap sensitivity varies from time frame to time frame,
management has the ability to adjust rates on deposit accounts enabling FMB to
achieve a neutral interest sensitivity position within the intermediate-term.
Based upon the gap, simulation and market value analysis, management believes
FMB is well positioned to respond to interest rate movements in either
direction.
<TABLE>
Up to 3 4 to 12 1 to 5 5 to 10 After 10
(dollars in thousands) Months Months Years Years Years Total
<S> <C> <C> <C> <C> <C> <C>
Assets
Loans ................ $ 1,230,051 $ 360,106 $ 826,304 $ 43,014 $ 39,563 $ 2,499,038
Securities ........... 75,625 103,752 438,120 107,534 25,120 750,151
Federal funds and
time deposits ........ 14,663 -- -- -- -- 14,663
Other assets ......... -- -- -- -- 256,581 256,581
Total assets ......... $ 1,320,339 $ 463,858 $ 1,264,424 $ 150,548 $ 321,264 $ 3,520,433
Liabilities and Equity
Savings and NOW
accounts ............. $ 571,720 $ 62,018 $ 377,415 $-- $-- $ 1,011,153
Time deposits ........ 600,874 710,324 308,513 23,413 -- 1,643,124
Borrowed funds ....... 128,674 21,378 39,810 2,895 -- 192,757
Other liabilities
and equity ........... -- -- -- 361,695 311,704 673,399
Total liabilities
and equity
$ 1,301,268 $ 793,720 $ 725,738 $ 388,003 $ 311,704 $ 3,520,433
Interest rate
swaps, net .......... 30,000 -- (40,000) 10,000 -- --
Gap .................. $ (10,929) $ (329,862) $ 578,686 $ (247,455) $ 9,560 --
Cumulative gap ....... $ (10,929) $ (340,791) $ 237,895 $ (9,560) $ 0 --
Cumulative rate
sensitive ratio ...... 0.99 0.84 1.08 1.00 1.00 --
</TABLE>
<PAGE>
Use of Derivatives
In addition to use of interest rate swap agreements for asset/liability
management purposes, FMB uses derivative financial instruments to mitigate risks
in its mortgage banking operations and for the accommodation of customers with
international operations.
With regard to mortgage banking operations, FMB utilizes interest rate
forward contracts to hedge the value of residential real estate loans that are
being underwritten for anticipated sale to secondary market investors. Changes
in market interest rates, between the time that a customer receives a rate-lock
commitment and the sale of the fully-funded loan, can change the sale value of
that loan. FMB enters into forward contracts to sell exchange traded instruments
whose change in value due to the same change in market interest rates
substantially offsets the change in sale value of the underlying rate-locked
loans which are anticipated to be funded. As of December 31, 1996, the Banks had
rate-lock commitments totaling $12,322,372 expiring within 60 days. These
commitments were hedged by $15,000,000 in interest forward contracts requiring
settlement also within 60 days. The net unrealized gain to FMB on this hedging
activity was $86,412.
FMB accommodates its customers whose international operations involve
transactions denominated in foreign currencies by entering into foreign exchange
forward contracts to purchase or sell foreign currencies at a future date at a
predetermined exchange rate. There is credit risk and exposure to foreign
currency exchange fluctuations inherent in these transactions to the extent that
the customer would fail to fulfill its purchase or delivery responsibility and
FMB would execute the transaction at the prevailing currency valuation, which
may be different than the value in the original contract. As of December 31,
1996, FMB had foreign exchange contracts in the amount of $924,000 with a
year-end settlement value of $904,000, requiring settlement within 120 days.
Capital
Regulatory agencies have developed guidelines by which the adequacy of a
financial institution's capital may be evaluated. It is FMB's policy to maintain
its capital levels in excess of the regulatory minimums. The Federal Reserve
requires a minimum Tier 1 risk-based capital ratio of 4.0% and a total risk
based capital ratio of 8.0%. The leverage ratio minimum is established at 3.0%
for the most highly-rated bank holding companies. For purposes of determining
risk-based capital ratios, SFAS No. 115 unrealized gains or losses are excluded
from the calculations.
The following table illustrates FMB's leverage and risk-based capital
ratios compared to the current regulatory requirements in accordance with the
Federal Reserve's final guidance:
<TABLE>
Minimum Well-
Regulatory capitalized FMB
Requirements Definition 1996 1995
<S> <C> <C> <C> <C>
Tier 1 Capital 4.0% 6.0% 9.8% 10.5%
Tier 1 and Tier 2 Capital 8.0 10.0 11.1 11.9
Leverage ratio 3.0 5.0 7.6 7.6
</TABLE>
During recent years, FMB has supported its growth in assets with its
ability to generate and retain earnings. Management feels the overall equity
position is very strong as indicated below:
<TABLE>
December 31,
1996 1995 1994
<S> <C> <C> <C>
Shareholders' equity
(dollars in thousands) $274,144 $253,828 $223,451
Ratio of equity to total assets 7.8% 7.8% 7.7%
</TABLE>
Under a plan announced in 1992, FMB repurchases shares of its common stock
from time to time in negotiated transactions. As a result, FMB repurchased
327,000 shares during 1996, 78,000 shares during 1995 and 277,000 shares during
1994 at costs of $9,255,000, $1,911,000 and $6,311,000, respectively. FMB
intends to continue repurchasing shares similarly during 1997.
The strength of FMB's capital position has enabled it to increase the
dividend payout to shareholders over the past three years. FMB's cash dividends
amounted to $16,906,000 in 1996, $14,021,000 in 1995 and $11,488,000 in 1994. On
a per share basis, this represents dividend payout ratios of 41%, 39% and 37%,
respectively. For the fourth quarter of 1996, FMB increased the dividend by
12.5% to $0.18 per share.
FMB's ability to pay dividends to its shareholders is limited by its
ability to obtain funds from the subsidiaries, as specified by applicable
regulatory guidelines. However, the amounts currently available for dividends
are in excess of FMB's current annual dividend payout rate.
<PAGE>
New Regulatory Pronouncements
In June 1996, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." The Statement
provides consistent standards for distinguishing transfers of financial assets
that are sales from transfers that are borrowings and for derecognition of
liabilities that have been extinguished. This Statement also requires that
liabilities and derivatives incurred or obtained as part of a transfer be
measured initially at fair value. SFAS No. 125 also amends SFAS No. 122 to
provide further guidance on measurement of servicing rights relating to assets
transferred. The Statement is effective for transfers, servicing and
extinguishments occurring after December 31, 1996, except for certain provisions
which are effective after December 31, 1997. Adoption of the accounting
provisions of this standard is not expected to have a material effect upon FMB's
financial condition or results of operations.
<TABLE>
Quarterly Financial Information (dollars in thousands, except per share data)
1996 1995
First Second Third Fourth First Second Third Fourth
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Results of operations
Interest income ............... $64,771 $65,677 $68,137 $70,886 $58,162 $61,733 $63,402 $65,300
Interest expense .............. 31,413 31,056 32,509 34,113 27,384 30,010 30,687 31,446
Net interest income ........... 33,358 34,621 35,628 36,773 30,778 31,723 32,715 33,854
Provision for loan losses ..... 2,372 2,317 2,728 3,904 1,816 1,953 2,064 2,158
Non-interest income ........... 8,623 8,733 9,355 11,026 7,135 7,446 7,967 8,593
Non-interest expense .......... 26,533 26,911 26,987 27,918 24,920 25,207 25,384 26,073
Income before
income taxes .................. 13,076 14,126 15,268 15,977 11,177 12,009 13,234 14,216
Income tax expense ............ 3,497 3,925 4,287 4,570 2,749 3,081 3,523 3,971
Net income .................... $ 9,579 $10,201 $10,981 $11,407 $ 8,428 $ 8,928 $ 9,711 $10,245
Total cash dividends .......... $ 3,823 $ 4,144 $ 4,204 $ 4,735 $ 3,284 $ 3,452 $ 3,456 $ 3,829
Per common share
information*
Net income .................... $ .3 $ .38 $ .41 $ .42 $ .32 $ .33 $ .37 $ .38
Cash dividends
declared ..................... .15 .16 .16 .18 .13 .13 .14 .15
Book value .................... 9.73 9.81 10.11 10.42 8.78 9.08 9.32 9.62
Per share market price of stock
High bid $21 1/4 $23 1/2 $24 3/4 $29 1/2 $16 3/8 $17 5/8 $18 3/8 $21 1/8
Low bid 19 5/8 21 1/4 22 1/2 24 1/2 15 1/2 16 3/8 17 3/8 18 3/8
Ending bid 21 1/4 23 1/4 24 3/4 29 1/2 16 3/8 17 3/8 18 3/8 19 5/8
</TABLE>
*Per share information has been adjusted on a retroactive basis to reflect the
four-for-three stock split paid in July, 1996 and 5% stock dividends paid in
May, 1996 and 1995.
<PAGE>
The Annual Report of the Corporation on Form 10-K, as filed with the Securities
and Exchange Commission, will be available after March 31, 1997, and may be
obtained from FMB free of charge. FMB common stock is traded under the symbol
FMBC on the NASDAQ National Market System. FMB offers a Dividend Reinvestment
and Stock Purchase Plan which allows shareholders to reinvest dividends in FMB
stock at a 5% discount from market price. All shareholder inquiries may be
directed to First Michigan Bank Corporation, Shareholder Services Department,
One Financial Plaza, 10717 Adams Street, Holland, Michigan 49423. For additional
information call 616-355-9200. Investor contact: Larry D. Fredricks.
First Michigan Bank Corporation does not discriminate on the basis of race,
color, national origin, sex, religion, age or disability in employment or the
provision of services.
<PAGE>
EXHIBIT (21)
SUBSIDIARIES OF THE REGISTRANT
FMB-First Michigan Bank FMB-Sault Bank
Zeeland, Michigan Sault Ste. Marie, Michigan
100% Owned 100% Owned
FMB-First Michigan Bank-Grand Rapids FMB-Arcadia Bank
Grand Rapids, Michigan Kalamazoo, Michigan
100% Owned 100% Owned
FMB-Community Bank Superior Financial Corporation
Dowagiac, Michigan Sault Ste. Marie, Michigan
100% Owned 100% Owned
FMB-Lumberman's Bank FMB-Trust
Muskegon, Michigan Holland, Michigan
100% Owned 100% Owned
FMB-Oceana Bank First Michigan Life Insurance Company
Hart, Michigan Holland, Michigan
100% Owned 100% Owned
FMB-State Savings Bank FMB-Brokerage Services, Inc.
Lowell, Michigan Holland, Michigan
100% Owned 100% Owned
FMB-Reed City Bank FMB-Insurance Agency, Inc.
Reed City, Michigan Holland, Michigan
100% Owned 100% Owned
FMB-Commercial Bank FMB Title Services, Inc.
Greenville, Michigan Holland, Michigan
100% Owned 100% Owned
FMB-Security Bank
Manistee, Michigan
100% Owned
FMB-Maynard Allen Bank
Portland, Michigan
100% Owned
FMB-Northwestern Bank
Boyne City, Michigan
100% Owned
FMB-Old State Bank
Fremont, Michigan
100% Owned
<PAGE>
Exhibit 23(a)
Consent of Independent Certified Public Accountants
First Michigan Bank Corporation
Holland, Michigan
We hereby consent to the incorporation by reference and use of our report dated
January 16, 1997, which appears on page 46 of First Michigan Bank Corporation's
Annual Report to Shareholders for 1996, in that Corporation's previously file
Form S-3 Registration Statement for that Corporation's Dividend Reinvestment and
Stock Purchase Plan (Registration No. 33-34457) and Form S-8 Registration
Statements for that Corporation's 1981 Stock Option Plan (Registration No.
2-73711), Employees' Stock Purchase Plan (Registration No. 33-34461), 1987 Stock
Option Plan (Registration No. 33-24591) and Cash Option Plan (Registration No.
33-54414).
BDO SEIDMAN, LLP
/s/BDO SEIDMAN, LLP
Grand Rapids, Michigan
March 26, 1997
<PAGE>
Exhibit 23(b)
Consent of Independent Certified Public Accountants
First Michigan Bank Corporation
Holland, Michigan
We hereby consent to the incorporation by reference and use of our report dated
March 17, 1997, which appears on pages 3 and 4 of First Michigan Bank
Corporation Cash Option Plan financial statements included in the Form 10-K
Annual Report for First Michigan Bank Corporation for the year ended December
31, 1996, in First Michigan Bank Corporation's previously filed Form S-8
Registration Statement for First Michigan Bank Corporation Cash Option Plan
(Registration No. 33-54414).
BDO SEIDMAN, LLP
/s/ BDO SEIDMAN, LLP
March 26, 1997
Grand Rapids, Michigan
<PAGE>
EXHIBIT 99
First Michigan Bank Corporation
Cash Option Plan
Financial Statements and Schedules
Years Ended December 31, 1996 and 1995
<PAGE>
First Michigan Bank Corporation
Cash Option Plan
Financial Statements and Schedules
Years Ended December 31, 1996 and 1995
<PAGE>
First Michigan Bank Corporation
Cash Option Plan
Contents
Independent Auditors' Report 3-4
Financial Statements
Statements of Net Assets Available for Benefits -
December 31, 1996 and 1995 5-6
Statements of Changes in Net Assets Available for Benefits -
Years Ended December 31, 1996 and 1995 7-8
Notes to Financial Statements 9-14
Supplemental Schedules
Assets Held for Investment Purposes - December 31, 1996 15
Reportable Transactions - Year Ended December 31, 1996 16
2
<PAGE>
Independent Auditors' Report
Administrative Committee
First Michigan Bank Corporation
Cash Option Plan
Holland, Michigan
We have audited the accompanying statements of net assets available for benefits
of First Michigan Bank Corporation Cash Option Plan as of December 31, 1996 and
1995, and the related statements of changes in net assets available for benefits
for the years then ended. These financial statements are the responsibility of
the Plan's administrative committee. Our responsibility is to express an opinion
on these 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.
As described in Note 3, these financial statements and supplemental schedules
were prepared on the modified cash basis of accounting, which is a comprehensive
basis of accounting other than generally accepted accounting principles.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the net assets available for benefits of First Michigan
Bank Corporation Cash Option Plan as of December 31, 1996 and 1995, and changes
in net assets available for benefits for the years then ended on the basis of
accounting described in Note 3.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The supplemental schedules of assets held
for investment purposes as of December 31, 1996, and reportable transactions for
the year then ended, are presented for the purpose of additional analysis and
are not a required part of the basic financial statements but are supplementary
information required by the Department of
<PAGE>
Labor Rules and Regulations for Reporting and Disclosure under the Employee
Retirement Income Security Act of 1974. The fund information in the statements
of net assets available for benefits and the statements of changes in net assets
available for benefits is presented for purposes of additional analysis rather
than to present the net assets available for plan benefits and changes in net
assets available for plan benefits of each fund. The supplemental schedules and
fund information have been subjected to the auditing procedures applied in the
audits of the basic financial statements and, in our opinion, are fairly stated
in all material respects in relation to the basic financial statements taken as
a whole.
BDO Seidman, LLP
Grand Rapids, Michigan
March 17, 1997
<PAGE>
<TABLE>
First Michigan Bank Corporation
Cash Option Plan
Statements of Net Assets Available for Benefits
FMB FMB
Money FMB Intermediate Special FMBC
Market Diversified Government Quantitative Growth Diversified Common Participant
December 31, 1996 Fund Equity Fund Income Fund Equity Fund Fund Bond Fund Stock Fund Loan Fund Total
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Investments, at fair value
(Notes 2, 3 and 4):
FMB Money Market Fund ..$1,646,134 $ -- $ -- $ -- $ -- $ -- $ 24,301 $ -- $1,670,435
Mutual funds:
FMB Diversified
Equity Fund ......... -- 4,022,028 -- -- -- -- -- -- 4,022,028
FMB Intermediate
Government Income ... -- -- 1,726,893 -- -- -- -- -- 1,726,893
Fund
Quantitative
Equity Fund ........ -- -- -- 3,557,735 -- -- -- -- 3,557,735
Special Growth Fund ... -- -- -- -- 2,726,334 -- -- -- 2,726,334
Diversified Bond
Fund ............... -- -- -- -- -- 1,145,574 -- -- 1,145,574
First Michigan Bank
Corporation
Common Stock .......... -- -- -- -- -- -- 18,531,868 -- 18,531,868
Participant loans ...... -- -- -- -- -- -- -- 725,256 725,256
Total investments ........1,646,134 4,022,028 1,726,893 3,557,735 2,726,334 1,145,574 18,556,169 725,256 34,106,123
Receivables:
Employee contributions .. 4,467 12,326 4,705 10,893 10,173 4,049 44,388 -- 91,001
Company contributions ... 1,656 4,552 1,688 3,821 3,569 1,483 15,969 -- 32,738
Accrued investment
income ................ 6,759 -- 8,665 -- -- -- 113,085 10,731 139,240
Total receivables 12,882 16,878 15,058 14,714 13,742 5,532 173,442 10,731 262,979
Net Assets Available for
Benefits $1,659,016 $4,038,906 $1,741,951 $3,572,449 $2,740,076 $1,151,106 $18,729,611 $735,987 $34,369,102
</TABLE>
<PAGE>
<TABLE>
First Michigan Bank Corporation
Cash Option Plan
Statements of Net Assets Available for Benefits
FMB FMB
Money FMB Intermediate Special FMBC
Market Diversified Government Quantitative Growth Diversified Common Participant
December 31, 1995 Fund Equity Fund Income Fund Equity Fund Fund Bond Fund Stock Fund Loan Fund Total
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Investments, at fair
value (Notes 2, 3 and 4):
FMB Money Market Fund $1,286,219 $ - $ - $ - $ - $ - $ 92,811 $ - $ 1,379,030
Mutual funds:
FMB Diversified Equity
Fund - 2,826,389 - - - - - - 2,826,647
FMB Intermediate
Government Income Fund - - 1,842,389 - - - - - 1,842,389
Quantitative Equity Fund - - - 2,260,687 - - - - 2,260,687
Special Growth Fund - - - - 1,908,749 - - - 1,908,749
Diversified Bond Fund - - - - - 985,906 - - 985,906
First Michigan Bank
Corporation Common
Stock - - - - - - 10,508,592 - 10,508,592
Participant loans - - - - - - - 505,488 505,488
Total investments 1,286,219 2,826,647 1,842,389 2,260,687 1,908,749 985,906 10,601,403 505,488 22,217,488
Accrued investment income 6,053 5,757 9,128 - - - 79,524 3,387 103,849
Net Assets Available
for Benefits $1,292,272 $2,832,404 $1,851,517 $2,260,687 $1,908,749 $985,906 $10,680,927 $508,875 $22,321,337
</TABLE>
See accompanying notes to financial statements.
<PAGE>
<TABLE>
First Michigan Bank Corporation
Cash Option Plan
Statements of Changes in Net Assets Available for Benefits
FMB FMB
Money FMB Intermediate Special FMBC
Year ended Market Diversified Government Quantitative Growth Diversified Common Participant
December 31, 1996 Fund Equity Fund Income Fund Equity Fund Fund Bond Fund Stock Fund Loan Fund Total
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Additions
Employee contributions ..$1,054,654 $408,631 $ 185,159 $411,145 $ 401,270 $ 167,915 $1,681,012 $ -- $4,309,786
Company contributions .... 51,066 126,516 60,618 111,849 103,333 47,871 438,993 -- 940,246
Investment income:
Net appreciation
(depreciation) in fair
value of investments ... -- 355,763 (38,843) 197,521 83,931 (28,398) 5,732,373 -- 6,302,347
Interest and dividends . 72,086 205,075 110,092 412,828 320,151 72,720 466,444 7,343 1,666,739
Total additions ....... 1,177,806 1,095,985 317,026 1,133,343 908,685 260,108 8,318,822 7,343 13,219,118
Deduction - benefits paid
to participants 133,979 175,687 174,506 108,277 131,629 44,924 388,176 14,175 1,171,353
Net increase (decrease) ...1,043,827 920,298 142,520 1,025,066 777,056 215,184 7,930,646 (6,832) 12,047,765
Interfund Transfers ....... (677,083) 286,204 (252,086) 286,696 54,271 (49,984) 118,038 233,944 --
Net Assets Available for
Benefits, beginning
of year 1,292,272 2,832,404 1,851,517 2,260,687 1,908,749 985,906 10,680,927 508,875 22,321,337
Net Assets Available for
Benefits, end of year ...$1,659,016 $4,038,906 $1,741,951 $3,572,449 $2,740,076 $1,151,106 $18,729,611 $735,987 $34,369,102
</TABLE>
<PAGE>
<TABLE>
First Michigan Bank Corporation
Cash Option Plan
Statements of Changes in Net Assets Available for Benefits
FMB FMB
Money FMB Intermediate Special FMBC
Market Diversified Government Quantitative Growth Diversified Common Participant
Year ended December 31, 1995 Fund Equity Fund Income Fund Equity Fund Fund Bond Fund Stock Fund Loan Fund Total
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Additions
Employee contributions .. $ 332,367 $ 472,709 $225,320 $276,702 $ 300,967 $159,901 $ 1,362,813 $ -- $3,130,779
Company contributions ... 43,993 87,995 54,060 69,299 77,017 36,997 333,820 -- 703,181
Investment income:
Net appreciation in fair
value of investments .. -- 579,314 106,585 349,940 214,494 81,705 1,844,776 -- 3,176,814
Interest and dividends .. 67,282 31,326 104,733 220,422 167,583 60,572 304,005 515 956,438
Total additions .......... 443,642 1,171,344 490,698 916,363 760,061 339,175 3,845,414 515 7,967,212
Deduction - benefits paid
to participants
271,635 134,870 190,329 40,687 58,697 18,609 374,602 25,491 1,114,920
Net increase (decrease) .. 172,007 1,036,474 300,369 875,676 701,364 320,566 3,470,812 (24,976) 6,852,292
Interfund Transfers ...... 130,258 (76,293) (159,098) 28,943 (32,578) (128,193) 244,409 (7,448) --
Net Assets Available for
Benefits, beginning
of year ................. 990,007 1,872,223 1,710,246 1,356,068 1,239,963 793,533 6,965,706 541,299 15,469,045
Net Assets Available
for Benefits, end of year $1,292,272 $2,832,404 $1,851,517 $2,260,687 $1,908,749 $985,906 $10,680,927 $508,875 $22,321,337
</TABLE>
See accompanying notes to financial statements.
<PAGE>
First Michigan Bank Corporation
Cash Option Plan
Notes to Financial Statements
1. Plan The following brief description of First Michigan Bank
Description Corporation (Company) Cash Option Plan (Plan) provides only
general information. Participants should refer to the plan
agreement for a more complete description of the Plan's
provisions.
General
The Plan was established by the Company to provide a tax
deferred retirement savings program for its employees.
The Company established the Plan by executing a Plan and
Trust Agreement. This document specifies the terms of the
Plan and establishes a trust fund that is administered by
the Trustee appointed by the Company. The Company is
responsible for the administration of the Plan in accordance
with the terms of the trust document and pays all
administrative expenses incurred by the Plan. The Plan is
subject to the provisions of the Employee Retirement Income
Security Act of 1974 (ERISA).
Participation
All employees of the Company are eligible to participate in
the Plan beginning on the entry dates of January 1, April 1,
July 1 and October 1 of each year after completing 6 months
of service and attaining the age of 21.
Contributions
The Plan allows eligible employees to contribute a
percentage of their salary to the trust fund through a
salary contribution agreement with the Company. The amount
contributed is not currently included in the employee's
taxable income and is not reported on the social security
purposes). For those employees with 1,000 hours or more of
annual service, the Company makes a matching contribution to
the
<PAGE>
employee's account based on the amount elected to be
contributed up to 6% of the employee's annual salary.
Effective July contribution increased from 35% to 50%. All
contributions are immediately vested.
Participant Accounts
Each participant's account is credited with the
participant's contributions, the Company's matching
contribution and the earnings or losses resulting from the
participant's investment selections. Participants' accounts
are valued every business day and reflect transactions
through the previous business day.
Benefit Distributions
Benefits under the Plan depend upon prior employee
contributions, the amount of the Company's matching
contributions and the trustee's investment performance.
An employee is eligible for Plan distributions after age 59
1/2 or upon termination of employment with the Company. The
employee is required to begin withdrawing money from the
Plan by April 1 of the year following the year in which the
employee attains the age of 7 receive the benefit in a lump
sum payment or periodic installments for a period not longer
than the joint life expectancy of the employee and his
designated beneficiary. If the account balance does not
exceed $3,500, a lump sum distribution may be made by the
Administrative Committee without consent.
Hardship Distributions
An employee may, with the consent of the Administrative
Committee, receive a distribution in order to meet a
financial hardship (as defined in the Plan).
<PAGE>
Death Benefit
Upon death of the employee, the balance in his or her
account will be distributed to the designated beneficiary.
Loans
An employee may, with the consent of the Administrative
Committee, borrow a minimum amount of $1,000, up to 50% of
his or her account balance or $50,000, whichever is smaller.
Loans are secured by the balance in the employee's account
and bear interest at a rate determined by the Administrative
Committee to be representative of rates charged by local
commercial lending institutions for comparable loans.
Interest rates range from 6% to 10%. The loan must be repaid
over a period not to exceed five years unless the loan
proceeds were used to acquire or reconstruct a principal
dwelling unit. The repayment must be in the form of a
payroll deduction.
Termination
Although it has not expressed any intent to do so, the
Company has the right under the Plan to terminate it at any
time, subject to the provisions of ERISA. If the Plan is
terminated, the trust would continue for the benefit of the
participants and its assets would not be returned to the
Company. The Plan is not eligible for termination insurance
coverage through the Pension Benefit Guarantee Corporation.
2. Participant Participants may direct the investment of their account
Investment balance in various investment funds established by the
Options Administrative Committee. Investment options may be added or
eliminated periodically to meet the changing needs of the
participants.
<PAGE>
In addition to investing in First Michigan Bank Corporation
common stock, participants may direct the investment of
their account balance in one of the following investment
programs, or a combination thereof.
FMB Money Market Fund
The FMB Money Market Fund aims to preserve capital. Risk is
low, relative to other funds, because the fund invests only
in short-term, high-quality money market instruments. The
objectives of the fund are to provide current income,
preservation of capital and high liquidity.
FMB Diversified Equity Fund
The FMB Diversified Equity Fund is a common stock fund
comprised of primarily "blue chip" stocks and is
well-diversified throughout many established industries.
These stocks have proven track records of earnings and have
a history of solid growth. The objective of the fund is to
provide above-average total return over market cycles within
reasonable limits of risk.
FMB Intermediate Government Income Fund
The FMB Intermediate Government Income Fund is a diversified
portfolio invested primarily in obligations issued or
guaranteed by the U.S. government, its agencies or
instrumentalities, in the form of U.S. Treasury bills,
notes, bonds, mortgage-backed securities an obligations. The
fund selects short-term to medium-term bonds because they
are less volatile than long-term bonds. The objective of the
fund is to provide current income with low volatility of net
asset value (principal).
<PAGE>
Quantitative Equity Fund
The Quantitative Equity Fund primarily invests in large,
well-known companies. Stocks are chosen from companies that
have financial strength, occupy a solid position in their
industry and show a history of consistent profit and
dividend growth. The objective of the fund is to provide
long-term growth and capital appreciation through investment
in common stocks.
Special Growth Fund
The Special Growth Fund is primarily made up of stocks of
smaller companies. Many of these are companies whose
greatest growth potential is over the long-term, where
historically small stocks have outperformed all other asset
classes. The objective of this fund capital appreciation, by
assuming a higher level of volatility than is ordinarily
expected from a core equity fund.
Diversified Bond Fund
The Diversified Bond Fund is comprised of government and
corporate bonds that mature in the intermediate to long-term
(5-20 years). The portfolio is diversified over many
individual issues to reduce risk. The fund fluctuates in
value with the movement of interest rates. The objective of
the fund is to provide a high level of current income
through investment in fixed income securities and to provide
effective diversification against equities.
3. Significant Basis of Preparing Financial Statements
Accounting
Policies The financial statements have been prepared on the modified
cash basis of accounting. Benefit distributions are
recognized when paid.
<PAGE>
Investments
Investments are stated at fair value as determined by
FMB-Trust, the trustee of the Plan, based on quoted market
prices. Participant loans are stated at their outstanding
balances, which approximates fair value.
Use of Estimates
The preparation of financial statements in conformity with
the modified cash basis of accounting requires the Plan's
administrative committee to make estimates and assumptions
that affect the reported amounts of assets and liabilities
and disclosure of contingent of the financial statements and
the reported amounts and deductions during the reporting
period. Actual results could differ from those estimates.
4. Investments The following investments, stated at fair value, were in
excess of 5% of net assets available for benefits at year
end:
<TABLE>
December 31, 1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C>
FMB Money Market Fund $ - $ 1,379,030
Mutual funds:
FMB Diversified Equity Fund 4,022,028 2,826,647
FMB Intermediate Government Income Fund 1,726,893 1,842,389
Quantitative Equity Fund 3,557,735 2,260,687
Special Growth Fund 2,726,334 1,908,749
First Michigan Bank
Corporation Common Stock 18,531,868 10,508,592
===============================================================================
</TABLE>
5. Income Tax The Internal Revenue Service has determined, and informed
Status the Administrative Committee in a letter dated March 14,
1994, that the Plan is qualified and the trust established
under the Plan is tax-exempt under the appropriate sections
of the Internal Revenue Code.
<PAGE>
First Michigan Bank Corporation
Cash Option Plan
Line 27a - Schedule of Assets Held for Investment Purposes
EIN: 38-2024376
Plan Number: 003
<TABLE>
December 31, 1996
- -----------------------------------------------------------------------------
Number of
units or Current
Identity shares Cost value
<S> <C> <C> <C>
FMB Money Market Fund 1,670,435 $1,670,435 $ 1,670,435
Mutual Funds
FMB Diversified Equity Fund 244,352 3,200,451 4,022,028
FMB Intermediate Government Income Fund 172,001 1,768,753 1,726,893
Quantitative Equity Fund 107,647 3,183,110 3,557,735
Special Growth Fund 66,838 2,587,430 2,726,334
Diversified Bond Fund 49,873 1,162,609 1,145,574
Total mutual funds 11,902,353 13,178,564
First Michigan Bank Corporation Common Stock 625,548 10,721,704 18,531,868
Participant Loans, 6% to 10% - - 725,256
</TABLE>
<PAGE>
First Michigan Bank Corporation
Cash Option Plan
Line 27d - Schedule of Reportable Transactions
EIN: 38-2024376
Plan Number: 003
<TABLE>
Year ended December 31, 1996
# of # of
trans- Purchase trans- Selling Net
actions price(a) actions price (a) Cost gain
<S> <C> <C> <C> <C> <C> <C>
FMB Money Market Fund, net - $4,785,972 - $4,517,580 $ 4,517,580 $ -
Mutual funds:
FMB Diversified Equity Fund 134 1,249,049 68 409,431 288,359 121,072
Quantitative Equity Fund 131 1,492,159 64 392,430 304,921 87,509
Special Growth Fund 134 1,125,767 70 392,002 312,609 79,393
First Michigan Bank
Corporation Common Stock 18 2,080,318 1 7 6 1
</TABLE>
(a) Equivalent to current value at date of transaction.
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from SEC
Form 10-K and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 155,725
<INT-BEARING-DEPOSITS> 1,713
<FED-FUNDS-SOLD> 12,950
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 465,460
<INVESTMENTS-CARRYING> 284,691
<INVESTMENTS-MARKET> 293,595
<LOANS> 2,499,038
<ALLOWANCE> 31,720
<TOTAL-ASSETS> 3,520,433
<DEPOSITS> 3,015,969
<SHORT-TERM> 163,220
<LIABILITIES-OTHER> 37,563
<LONG-TERM> 29,537
26,304
0
<COMMON> 0
<OTHER-SE> 247,840
<TOTAL-LIABILITIES-AND-EQUITY> 3,520,433
<INTEREST-LOAN> 221,856
<INTEREST-INVEST> 45,143
<INTEREST-OTHER> 2,472
<INTEREST-TOTAL> 269,471
<INTEREST-DEPOSIT> 121,172
<INTEREST-EXPENSE> 129,091
<INTEREST-INCOME-NET> 140,380
<LOAN-LOSSES> 11,321
<SECURITIES-GAINS> (84)
<EXPENSE-OTHER> 108,349
<INCOME-PRETAX> 58,447
<INCOME-PRE-EXTRAORDINARY> 42,168
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 42,168
<EPS-PRIMARY> 1.57
<EPS-DILUTED> 1.57
<YIELD-ACTUAL> 4.73
<LOANS-NON> 7,885
<LOANS-PAST> 5,211
<LOANS-TROUBLED> 1,096
<LOANS-PROBLEM> 674
<ALLOWANCE-OPEN> 28,031
<CHARGE-OFFS> 9,918
<RECOVERIES> 2,286
<ALLOWANCE-CLOSE> 31,720
<ALLOWANCE-DOMESTIC> 31,720
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
