<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
/X/ Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 [Fee Required] for the fiscal year ended December 31, 1995 or
/ / Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 [No Fee Required] for the transition period
from to
-------------- -------------
Commission file Number 0-7818
--------------------------------------------------------
INDEPENDENT BANK CORPORATION
- ------------------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C>
MICHIGAN 38-2032782
- --------------------------------------------- -------------------------------------
(State or other jurisdiction of incorporation) (I.R.S. employer identification no.)
</TABLE>
230 W. Main St., P.O. Box 491, Ionia, Michigan 48846
- ------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (616) 527-9450
----------------------------
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $1.00 Par Value
- ------------------------------------------------------------------------------
(Title of class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
---- ----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. X
-----
State the aggregate market value of the voting stock held by non-affiliates of
the Registrant. (For this purpose only, the affiliates of the Registrant have
been assumed to be the executive officers and directors of the Registrant and
their associates.)
Common Stock, $1.00 Par Value - $66,474,688
- -------------------------------------------------------------------------------
(Based on $28.00 per common share, the last reported sales price on the Nasdaq
National Market System on March 22, 1996. Reference is made to Part II, Item 5
for further information).
Indicate the number of shares outstanding of each of the registrant's classes
of common stock, as of the latest practicable date.
Common Stock, $1.00 par value - 2,722,722 shares at March 22, 1996
Documents incorporated by reference
Portions of the Registrant's definitive proxy statement, and appendix thereto,
dated March 15, 1996, relating to its April 16, 1996 Annual Meeting of
Shareholders are incorporated by reference into Part II and Part III of this
Form 10-K.
The Exhibit Index appears on Page 19
<PAGE> 2
PART I
ITEM 1. BUSINESS
Independent Bank Corporation (the "Registrant") was incorporated under the laws
of the State of Michigan on September 17, 1973, for the purpose of becoming a
bank holding company. The Registrant is registered under the Bank Holding
Company Act of 1956, as amended, and owns the outstanding stock of four banks
(the "Banks") which are all organized under the laws of the State of Michigan.
Aside from the stock of the Banks, the Registrant has no other substantial
assets. The Registrant conducts no business except for the provision of
certain management and operational services to the Banks, the collection of
fees and dividends from the Banks and the payment of dividends to the
Registrant's shareholders. Certain employee retirement plans (including an
employee stock ownership plan and a deferred compensation plan) as well as
health and other insurance programs have been established by the Registrant.
The proportional costs of these plans are borne by each of the Banks.
The Registrant and the Banks have no material patents, trademarks, licenses or
franchises except the corporate franchises of the Banks which permit them to
engage in commercial banking pursuant to Michigan law.
The following table shows each of the Banks and their total loans and deposits
as of December 31, 1995:
<TABLE>
<CAPTION>
Main
Office Total Total
Bank Location Deposits Loans
- ---- -------- ------------ ------------
<S> <C> <C> <C>
Independent Bank Ionia $122,497,000 $128,321,000
Independent Bank
West Michigan Rockford 115,214,000 144,074,000
Independent Bank
South Michigan Leslie 93,691,000 89,624,000
Independent Bank
East Michigan Caro 82,867,000 72,072,000
</TABLE>
Independent Bank (formerly First Security Bank) affiliated with the Registrant
on June 1, 1974. Independent Bank West Michigan is the result of a merger in
1985 of the First State Bank of Newaygo (acquired December 16, 1974), the
Western State Bank, Howard City (acquired February 7, 1977), and the Bank of
Rockford (organized by the Registrant as a new bank on August 18, 1975).
Independent Bank South Michigan is the result of the merger in 1985 of the
Peoples Bank of Leslie (acquired February 16, 1981) and the Olivet State Bank
(acquired on October 16, 1979). Independent Bank East Michigan is the result
of the consolidation of the former American Home Bank (acquired October 8,
1993), Pioneer Bank (acquired October 15, 1993) and The Kingston State Bank
(acquired March 7, 1994).
The Banks transact business in the single industry segment of commercial
banking. Most of the Banks' offices provide full service lobby and drive-in
services in the communities which they serve. Automatic teller machines are
also provided at most locations.
The Banks' activities cover all phases of commercial banking, including
checking and savings accounts, commercial and agricultural lending, direct and
indirect consumer financing, mortgage lending and deposit box services. The
Banks do not offer trust services. The principal markets are the rural and
suburban communities across lower Michigan that are served by the banks' branch
networks. The local economies of the communities served by the Banks are
relatively stable and reasonably diversified. The Banks serve their markets
through their four main offices and a total of 31 branch and 5 loan production
offices.
1
<PAGE> 3
ITEM 1. BUSINESS (Continued)
The financial services industry continues to be highly competitive. Banks
and bank holding companies compete not only with each other, but with savings
and loan associations, money market mutual funds, credit unions, securities
dealers, providers of insurance and annuity fund products and investment
bankers. Principally located in rural communities, the Banks face limited
competition within certain of their primary markets. Within these markets,
however, the Banks compete with depository institutions in nearby communities,
some of which are affiliated with financial institutions that have
significantly greater resources than that of the Registrant.
Price (the interest charged on loans and/or paid on deposits) remains a
principal means of competition within the financial services industry. The
Banks also compete on the basis of service and convenience, utilizing the
strengths and benefits of the Registrant's decentralized structure.
The principal sources of revenue, on a consolidated basis, are interest and
fees on loans, other interest income and non-interest income. The sources of
income for the three most recent years are as follows:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Interest and fees on loans 76.1% 71.1% 68.3%
Other interest income 16.3 21.3 21.5
Non-interest income 7.6 7.6 10.2
------ ----- -----
100.0% 100.0% 100.0%
===== ===== =====
</TABLE>
As of December 31, 1995, the Registrant and the Banks had 325 full-time
employees and 117 part-time employees.
Supervision and Regulation
Registered under the Bank Holding Company Act, as amended (the "Act"), the
Registrant is subject to the supervision of the Board of Governors of the
Federal Reserve System ("Federal Reserve Board"). As a result, the Registrant
is required to file with the Federal Reserve Board annual and quarterly reports
and other information regarding its business operations and those of the Banks.
The Registrant and the Banks are also subject to examination by the Federal
Reserve Board.
The Act requires a bank holding company to obtain approval of the Federal
Reserve Board before it may acquire more than 5% of the voting stock or before
it acquires all or substantially all of the assets of any bank or merge or
consolidate with any other bank holding company. If the effect of such a
transaction may substantially lessen competition or tend to create a monopoly,
the Federal Reserve Board cannot approve the acquisition unless it finds that
the anti-competitive effects of the acquisition, merger or consolidation are
clearly outweighed by the convenience and needs of the community to be served.
The Act also provides that the consummation of any acquisition, merger or
consolidation must be delayed at least 15 days following the approval of the
Federal Reserve Board and that any action brought under the antitrust laws of
the United States during this time will delay the effectiveness of its approval
during the pendency of the action unless otherwise ordered by the Board.
The Riegle-Neal Interstate Banking and Branching Efficiency Act authorizes
adequately capitalized and adequately managed bank holding companies to acquire
banks located outside their respective home state, irrespective of state law.
This legislation also authorizes, effective June 1, 1997, (subject to
individual states rights to accelerate this date or prohibit interstate
branching within their borders) banking organizations to branch nationwide by
acquisition or consolidation of existing banks in other states. 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 state of the out-of-the state institution permit Michigan financial
institutions to establish branches in that state. It is reasonable to assume
that this legislation could foster further industry consolidation and increase
competition. Interstate acquisitions are subject to the approval of various
federal and state agencies and subject to other conditions.
2
<PAGE> 4
ITEM 1. BUSINESS (Continued)
Subject to certain exceptions, a bank holding company is also prohibited from
acquiring direct or indirect ownership or control of more than 5% of the voting
shares of any company that is not a bank and from engaging directly or
indirectly in activities unrelated to banking or managing or controlling banks.
One of the exceptions to this prohibition permits activities by a bank holding
company or its subsidiaries which the Federal Reserve Board has determined to
be so closely related to banking or managing or controlling banks as to be a
proper incident thereto. In determining whether a particular activity is a
proper incident to banking or managing or controlling banks, the Federal
Reserve Board considers whether performance of the activity by an affiliate of
a bank holding company can reasonably be expected to produce benefits to the
public, such as greater convenience, increased competition or gains in
efficiency that outweigh possible adverse effects, such as undue concentration
of resources, decreased or unfair competition, conflicts of interest or unsound
banking practices. The Federal Reserve Board has adopted regulations
prescribing those activities which it presently regards as permissible for bank
holding companies and their subsidiaries. The Act does not place geographic
restrictions on the activities of the non-bank subsidiaries of bank holding
companies.
The Act, the Federal Reserve Act and the Federal Deposit Insurance Act also
subject bank holding companies and their subsidiaries to certain restrictions
on any extensions of credit by subsidiary banks to the bank holding company or
any of its subsidiaries, or investments in the stock or other securities
thereof, and on the taking of such stock or securities as collateral for loans
to any borrower. Further, under the Act and regulations of the Federal Reserve
Board, a bank holding company and its subsidiaries are prohibited from engaging
in certain tie-in arrangements in connection with any extension of credit, sale
or lease of any property or furnishing of service.
The subsidiary banks are subject to regulation and examination by the Michigan
Financial Institutions Bureau. The Banks are also subject to regulation by the
Federal Reserve Board and to regulation and examination by the Federal Deposit
Insurance Corporation.
As amended by the FDIC Improvement Act of 1991, the Federal Deposit Insurance
Act ("FDIA") provides for regulatory intervention should a bank's capital
deteriorate, limits certain real estate lending and increases audit
requirements. The FDIA defines a reserve ratio at which the Bank Insurance
Fund ("BIF") is to be maintained through FDIC semi-annual assessment rates on
the BIF member banks. The FDIC has also established a system of risk-based
insurance premiums under the FDIA. This system established four levels of
premium rates based on the risk classification of the institution. Given the
designation of the Registrant's Banks as well managed and well capitalized
institutions, the Banks pay the lowest assessment rate possible to BIF. Since
the BIF reserves have reached the legally mandated level of 1.25% of insured
deposits, the Banks, in general, will pay only a membership fee until the BIF
fund again drops below the mandated level.
Applicable regulations restrict transactions by the Banks owned by the
Registrant, including loans to and certain purchases from the Registrant,
principal shareholders, officers, directors and their affiliates and, in some
cases, investments by the Banks in the shares or securities of the Registrant
(or any other non-bank affiliates), and acceptance of such shares or securities
as collateral security for loans to any borrower. The Federal Reserve Board
and other bank regulators review payments, such as management fees made by the
Banks to affiliated companies.
As a Michigan business corporation, the Registrant may generally declare and
pay dividends, provided the Registrant is not insolvent and that the payment of
dividends would not render it insolvent, and, after giving effect to the
distribution, that the Registrant's total assets would equal or exceed its
total liabilities plus the dissolution preference of any senior equity
securities. The payment of dividends to its shareholders is limited by the
Registrant's ability to obtain funds from the Banks and by regulatory capital
guidelines.
The Banks are subject to legal limitations on the frequency and amounts of
dividends that can be paid to the Registrant. The Banks may not declare a cash
dividend or a dividend in kind except out of net profits and unless it will
have a surplus amounting to not less than 20% of its capital after the payment
of the dividend. In addition, the Federal Deposit Insurance Corporation could
take the position that it has the power to prohibit insured state banks from
paying dividends if such payments would constitute unsafe or unsound banking
practices under the circumstances. These regulations and restrictions may
potentially limit the Registrants' ability to obtain funds from the Banks for
its cash needs, including funds for acquisitions, payment of dividends and the
payment of operating expenses.
3
<PAGE> 5
ITEM 1. BUSINESS (Continued)
Various aspects of the banking business, including permissible types and
amounts of loans, investments and other activities, capital adequacy (by
requiring minimum capital-to-asset ratios), branching, interest rates on loans
and on deposits and the safety and soundness of the banking practices are
extensively regulated by federal and state law. In addition, reserve
requirements are imposed by the Federal Reserve Board. These regulations are
intended primarily for the protection of the depositors and customers of the
Banks, rather than the shareholders of the Registrant.
In addition to the authorization of interstate banking discussed above,
Michigan law permits Banks to consolidate on a state-wide basis and to operate
the offices of merged banks as branches of a surviving bank. Also, with the
written approval of the Financial Institutions Bureau, the Banks may relocate
their main office to any location in the state, establish and operate branch
banks anywhere in the state and contract with other banks to act as branches
thereof. To better serve their customers, the Banks have entered into an
interbank branching agreement, whereby each of the Banks may act as a branch of
the other three banks.
4
<PAGE> 6
ITEM 1. BUSINESS -- STATISTICAL DISCLOSURE
I. (A) DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY;
(B) INTEREST RATES AND INTEREST DIFFERENTIAL
The following table sets forth average balances for major categories of
interest earning assets and interest bearing liabilities, the interest earned
(on a tax equivalent basis) or paid on such amounts, and the average interest
rates earned or paid thereon.
<TABLE>
<CAPTION>
1995 1994 1993
------------------------- -------------------------- ---------------------------
Average Yield/ Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ------ ------- -------- ------
ASSETS (dollars in thousands)
- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans--all
domestic (1,2) $382,644 $37,654 9.84% $294,968 $28,936 9.81% $259,334 $26,001 10.03%
Taxable securities 93,064 5,919 6.36 108,905 6,537 6.00 88,869 5,976 6.73
Tax-exempt
securities (2) 31,516 2,914 9.25 29,763 2,857 9.60 28,881 2,761 9.56
Other investments 6,153 421 6.84 12,335 460 3.73 15,359 535 3.48
-------- -------- -------- -------- -------- --------
Interest
earning assets 513,377 46,908 9.14 445,971 38,790 8.70 392,443 35,273 8.99
-------- -------- --------
Cash and due
from banks 16,091 14,359 13,996
Other assets, net 14,115 21,491 16,226
-------- -------- --------
Total assets $543,583 $481,821 $422,665
======== ======== ========
LIABILITIES
- -----------
Savings and NOW $217,721 5,515 2.53 $213,590 4,819 2.26 $185,419 4,887 2.64
Time deposits 141,292 6,955 4.92 150,036 6,273 4.18 150,536 7,140 4.74
Long-term debt 2,195 120 5.47 525 28 5.33
Other borrowings 89,048 5,430 6.10 28,481 1,373 4.82 8,010 250 3.12
-------- -------- -------- -------- -------- --------
Interest
bearing liabilities 448,061 17,900 4.00 394,302 12,585 3.19 344,490 12,305 3.57
-------- -------- --------
Demand deposits 46,539 41,910 37,426
Other liabilities 5,296 5,989 3,900
Shareholders' equity 43,687 39,620 36,849
-------- -------- --------
Total liabilities and
shareholders'
equity $543,583 $481,821 $422,665
======== ======== ========
Net interest income $29,008 $26,205 $22,968
======== ======== ========
Net interest income
as a percent of
earning assets 5.65% 5.88% 5.85%
===== ===== =====
</TABLE>
(1) Average loans outstanding includes the daily average balance of
non-performing loans. Interest on loans does not include additional
interest of approximately $199,000, $157,000 and $118,000 for 1995, 1994
and 1993, respectively, which would have been accrued based on the
original terms of such non-performing loans compared with the interest
that was actually recorded. Interest income on loans includes net
origination fees of $2,702,000 in 1995, $2,590,000 in 1994 and $2,214,000
in 1993.
(2) Interest on tax-exempt securities has been adjusted to reflect
preferential taxation. The adjustment assumes a marginal tax rate of 34%
for each of the three years. For purposes of this analysis, tax-exempt
loans are included in tax-exempt securities.
5
<PAGE> 7
ITEM 1. BUSINESS -- STATISTICAL DISCLOSURE (Continued)
I. (C) INTEREST RATES AND DIFFERENTIAL
The following table summarizes the changes in interest income (on a tax
equivalent basis) and interest expense resulting from changes in volume and
changes in rates:
<TABLE>
<CAPTION>
1995 Compared to 1994 1994 Compared to 1993
--------------------------------- -------------------------------
Volume Rate Net Volume Rate Net
------ ---- ---- ------ ---- ----
(in thousands)
Increase (decrease) in interest income (1)
- ------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Loans--all domestic $8,627 $ 91 $8,718 $3,506 $(571) $2,935
Taxable securities (991) 373 (618) 1,255 (694) 561
Tax-exempt securities (2) 165 (108) 57 85 11 96
Other investments (303) 264 (39) (111) 36 (75)
------ ------- ------ ------ ------ ------
Total interest income 7,498 620 8,118 4,735 (1,218) 3,517
------ ------- ------ ------ ------ ------
Increase (decrease) in interest expense (1)
- -------------------------------------------
Savings and NOW 95 601 696 688 (756) (68)
Time deposits (382) 1,064 682 (24) (843) (867)
Long-term debt (120) (120) 91 1 92
Other borrowings 3,594 463 4,057 930 193 1,123
------ ------- ------ ------ ------ ------
Total interest expense 3,187 2,128 5,315 1,685 (1,405) 280
------ ------- ------ ------ ------ ------
Net interest income $4,311 $(1,508) $2,803 $3,050 $187 $3,237
====== ======= ====== ====== ====== ======
</TABLE>
(1) The change in interest due to both volume and rate has been allocated to
volume and rate changes in proportion to the relationship of the absolute
dollar amounts of the change in each.
(2) Interest on tax-exempt securities has been adjusted to reflect
preferential taxation. The adjustment assumes a marginal tax rate of 34%
for each of the three years.
II. INVESTMENT PORTFOLIO
(A) The following table sets forth the book value of securities at
December 31:
<TABLE>
<CAPTION>
1995 1994 1993
-------- -------- --------
(in thousands)
Held to maturity
- ----------------
<S> <C> <C> <C>
U.S. Treasury $ 5,738 $ 29,385
U.S. Government agencies $ 2,559 11,004 6,601
States and political subdivisions 20,142 27,240 27,241
Mortgage-backed securities 4,487 26,545 35,295
Other securities 718 7,194 7,295
------- ------- --------
Total $27,906 $77,721 $105,817
======= ======= ========
Available for sale
- ------------------
U.S. Treasury $23,272 $34,724 $ 30,330
U.S. Government agencies 6,623
States and political subdivisions 9,290
Mortgage-backed securities 37,722 11,684
Other securities 10,646 6,348
------- ------- --------
Total $87,553 $52,756 $ 30,330
======= ======= ========
</TABLE>
6
<PAGE> 8
ITEM 1. BUSINESS -- STATISTICAL DISCLOSURE (Continued)
II. INVESTMENT PORTFOLIO (Continued)
(B) The following table sets forth contractual maturities of securities
at December 31, 1995 and the weighted average yield of such securities:
<TABLE>
<CAPTION>
Maturing Maturing
Maturing After One After Five Maturing
Within But Within But Within After
One Year Five Years Ten Years Ten Years
------------------ ------------------- ----------------- ----------------
Amount Yield Amount Yield Amount Yield Amount Yield
------ ----- ------ ----- ------ ----- ------ -----
(dollars in thousands)
Held to maturity
- -----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Government agencies $ 1,075 6.99% $ 1,484 7.85%
States and political subdivisions $ 475 8.98% $ 9,028 8.68% 9,532 9.72 1,107 9.31
Mortgage-backed securities
guaranteed or issued by
U.S. Government agencies 413 8.05 4,074 7.66
Other securities 718 4.82
------- ------- ------- -------
Total $ 1,193 6.48% $ 9,441 8.65% $14,681 8.95% $ 2,591 8.47%
======= ======= ======= =======
Tax equivalent adjustment
for calculations of yield $ 15 $ 266 $ 315 $ 35
======= ======= ======= =======
Available for sale
- ------------------
U.S. Treasury $11,534 4.60% $11,738 5.99%
U.S. Government agencies 2,041 4.83 $ 4,582 6.85%
States and political subdivisions 3,426 9.64 5,864 10.21
Mortgage backed securities
Guaranteed or issued by U.S.
Government agencies 121 7.01 5,337 6.73 2,038 6.76 $29,179 7.60%
Other mortgage-backed
securities 1,047 7.38
Other securities 1,405 5.08 2,490 5.82 6,751 6.23
------- ------- ------- -------
Total $13,060 4.67% $26,079 6.57% $12,484 8.41% $35,930 7.34%
======= ======= ======= =======
Tax equivalent adjustment
for calculations of yield $ 0 $ 112 $ 203 $ 0
======= ======= ======= =======
</TABLE>
The rates set forth in the tables above for obligations of state and political
subdivisions have been restated on a fully tax equivalent basis assuming a 34%
marginal tax rate. The amount of the adjustment is as follows:
<TABLE>
<CAPTION>
Tax-Exempt Rate on Tax
Held to maturity Rate Adjustment Equivalent Basis
- ---------------- ---------- ---------- ----------------
<S> <C> <C> <C>
Under 1 year 5.93% 3.05% 8.98%
1-5 years 5.73 2.95 8.68
5-10 years 6.42 3.30 9.72
After 10 years 6.15 3.16 9.31
Available for sale
- ------------------
1-5 years 6.36 3.28 9.64
5-10 years 6.74 3.47 10.21
</TABLE>
7
<PAGE> 9
ITEM 1. BUSINESS -- STATISTICAL DISCLOSURE (Continued)
III. LOAN PORTFOLIO
(A) The following table sets forth loans outstanding at December 31:
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
(in thousands)
<S> <C> <C> <C> <C> <C>
Loans held for sale $ 16,047 $ 5,933 $ 6,376 $ 6,400
Real estate mortgage 225,900 166,794 136,579 133,486 $150,033
Commercial and agricultural 108,879 103,984 91,655 70,360 72,430
Installment 83,265 65,947 54,033 51,388 52,681
-------- -------- -------- -------- --------
Total $434,091 $342,658 $288,643 $261,634 $275,144
======== ======== ======== ======== ========
Agricultural loans included
in commercial and agricultural
and in real estate mortgage
loans above $ 12,394 $ 15,855 $ 17,096 $ 8,179 $ 11,972
======== ======== ======== ======== ========
</TABLE>
The loan portfolio is periodically and systematically reviewed and the
results of these reviews are reported to the Boards of Directors of the
Registrant and the Banks. The purpose of these reviews is to assist in
assuring proper loan documentation, to provide for the early identification of
potential problem loans (which enhances collection prospects) and to evaluate
the adequacy of the allowance for loan losses.
(B) The following table sets forth scheduled loan repayments (excluding
1-4 family residential mortgages and installment loans) at December 31, 1995:
<TABLE>
<CAPTION>
Due
Due After One Due
Within But Within After
One Year Five Years Five Years Total
------- ---------- ---------- -----
(in thousands)
<S> <C> <C> <C> <C>
Real estate mortgage $ 8,973 $15,131 $14,310 $ 38,414
Commercial and agricultural 54,222 50,255 4,402 108,879
------- ------- ------- --------
Total $63,195 $65,386 $18,712 $147,293
======= ======= ======= ========
</TABLE>
The following table sets forth loans due after one year which have
predetermined (fixed) interest rates and/or adjustable (variable) interest
rates at December 31, 1995:
<TABLE>
<CAPTION>
Fixed Variable
Rate Rate Total
---- ---- -----
(in thousands)
<S> <C> <C> <C>
Due after one but within five years $53,061 $12,325 $65,386
Due after five years 15,718 2,994 18,712
------- -------- -------
Total $68,779 $15,319 $84,098
======= ======== =======
</TABLE>
8
<PAGE> 10
ITEM 1. BUSINESS -- STATISTICAL DISCLOSURE (Continued)
III. LOAN PORTFOLIO (Continued)
(C) The following table sets forth non-performing loans at December 31:
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991
------ ------ ------ ------ ------
(in thousands)
<S> <C> <C> <C> <C> <C>
(a) Loans accounted for on a
non-accrual basis (1, 2) $1,886 $2,052 $1,707 $1,581 $1,486
(b) Aggregate amount of loans
ninety days or more past due
(excludes loans in (a) above) 427 254 408 380 1,466
(c) Loans not included above which
are "troubled debt restruc-
turings" as defined in State-
ment of Financial Accounting
Standards No. 15 (2) 247 528 1,098 1,213 1,844
------ ------ ------ ------ ------
Total non-performing loans $2,560 $2,834 $3,213 $3,174 $4,796
====== ====== ====== ====== ======
</TABLE>
(1) The accrual of interest income is discontinued when a loan becomes 90
days past due and/or the borrower's capacity to repay the loan and
collateral values appear insufficient. Non-accrual loans may be restored
to accrual status when interest and principal payments are current and the
loan appears otherwise collectible.
(2) Interest in the amount of $263,000 would have been earned in 1995 had
loans in categories (a) and (c) remained at their original terms, however,
only $64,000 was included in interest income for the year with respect to
these loans.
Other loans of concern identified by the loan review department which are
not included as non-performing totaled approximately $3,200,000 at December 31,
1995. These loans involve circumstances which have caused management to place
increased scrutiny on the credits and may, in some instances, represent an
increased risk of loss to the Banks.
At December 31, 1995, there was no concentration of loans exceeding 10% of
total loans which is not already disclosed as a category of loans in this
section "Loan Portfolio" (Item III(A)).
There were no other interest bearing assets at December 31, 1995, that
would be required to be disclosed above (Item III(C)), if such assets were
loans.
There were no foreign loans outstanding at December 31, 1995.
9
<PAGE> 11
ITEM 1. BUSINESS -- STATISTICAL DISCLOSURE (Continued)
IV. SUMMARY OF LOAN LOSS EXPERIENCE
(A) The following table sets forth loan balances and summarizes the
changes in the allowance for loan losses for each of the years ended December
31:
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991
-------- -------- -------- -------- --------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Loans outstanding at the end of
the year (net of unearned fees) $434,091 $342,658 $288,643 $261,634 $275,144
======== ======== ======== ======== ========
Average loans outstanding for
the year (net of unearned fees) $382,644 $294,968 $259,334 $267,801 $260,594
======== ======== ======== ======== ========
Balance of allowances for loan losses
at beginning of year $ 5,054 $ 5,053 $ 4,023 $ 3,784 $ 3,541
-------- -------- -------- -------- --------
Loans charged-off
Real estate 24 14 38 69 51
Commercial and agricultural 113 311 306 566 421
Installment 575 546 370 581 613
-------- -------- -------- -------- --------
Total loans charged-off 712 871 714 1,216 1,085
-------- -------- -------- -------- --------
Recoveries of loans previously
charged-off
Real estate 28 6 11 26 3
Commercial and agricultural 115 151 156 91 123
Installment 122 242 164 113 189
-------- -------- -------- -------- --------
Total recoveries 265 399 331 230 315
-------- -------- -------- -------- --------
Net loans charged-off 447 472 383 986 770
Additions to allowance charged to
operating expense 636 473 657 1,225 1,013
Allowance on loans acquired 756
-------- -------- -------- -------- --------
Balance at end of year $ 5,243 $ 5,054 $ 5,053 $ 4,023 $ 3,784
======== ======== ======== ======== ========
Net loans charged-off as a percent of
average loans outstanding for the year 0.12% 0.16% 0.15% 0.37% 0.30%
Allowance for loan losses as a
percent of loans outstanding at
the end of the year 1.21 1.48 1.75 1.54 1.38
</TABLE>
The allowance for loan losses reflected above is a valuation allowance in
its entirety and the only allowance available to absorb future loan losses.
Further discussion of the provision and allowance for loan losses as well
as non-performing loans is presented in Management's Discussion and Analysis of
Financial Condition and Results of Operations, incorporated herein by reference
in Item 7, Part II of this report.
10
<PAGE> 12
ITEM 1. BUSINESS -- STATISTICAL DISCLOSURE (Continued)
IV. SUMMARY OF LOAN LOSS EXPERIENCE (Continued)
(B) The Banks have allocated the allowance for loan losses to provide for
the possibility of losses being incurred within the categories of loans set
forth in the table below. The amount of the allowance that is allocated and
the ratio of loans within each category to total loans at December 31, follows:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
Percent Percent Percent
Allowance of Loans to Allowance of Loans to Allowance of Loans to
Amount Total Loans Amount Total Loans Amount Total Loans
--------- ----------- --------- ----------- --------- -----------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Commercial and
agricultural $1,612 25.8% $1,655 30.3% $2,222 31.8%
Real estate
mortgage 162 55.0 177 50.4 270 49.5
Installment 597 19.2 474 19.3 464 18.7
Unallocated 2,872 2,748 2,097
------ ----- ------ ----- ------ -----
Total $5,243 100.0% $5,054 100.0% $5,053 100.0%
====== ===== ====== ===== ====== =====
<CAPTION>
1992 1991
---- ----
Percent Percent
Allowance of Loans to Allowance of Loans to
Amount Total Loans Amount Total Loans
----------- ----------- --------- -----------
(dollars in thousands)
<S> <C> <C> <C> <C>
Commercial and
agricultural $1,971 26.9% $1,452 26.3%
Real estate
mortgage 255 53.5 237 54.5
Installment 434 19.6 478 19.2
Unallocated 1,363 1,617
------ ----- ------ -----
Total $4,023 100.0% $3,784 100.0%
====== ===== ====== =====
</TABLE>
V. DEPOSITS
The following table sets forth average deposit balances and the
weighted-average rates paid thereon for the years ended December 31:
<TABLE>
<CAPTION>
1995 1994 1993
---------------- ---------------- ----------------
Average Average Average
Balance Rate Balance Rate Balance Rate
--------- ----- --------- ----- --------- -----
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Non-interest bearing demand $ 46,539 $ 41,910 $ 37,426
Savings and NOW 217,721 2.53% 213,590 2.26% 185,419 2.64%
Time deposits 141,292 4.92 150,036 4.18 150,536 4.74
-------- -------- --------
Total $405,552 3.08% $405,536 2.74% $373,381 3.22%
======== ======== ========
</TABLE>
The following table summarizes time deposits in amounts of $100,000 or
more by time remaining until maturity as of December 31, 1995:
<TABLE>
<CAPTION>
(in thousands)
<S> <C>
Three month or less $ 6,278
Over three through six months 4,866
Over six months through one year 4,148
Over one year 4,205
-------
Total $19,497
=======
</TABLE>
11
<PAGE> 13
ITEM 1. BUSINESS -- STATISTICAL DISCLOSURE (Continued)
VI. RETURN ON EQUITY AND ASSETS
The ratio of net income to average shareholders' equity and to average
total assets, and certain other ratios, for the years ended December 31,
follow:
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Net income as a percent of
Average common equity 15.59% 15.22% 15.21% 15.88% 13.56%
Average total assets 1.25 1.25 1.33 1.26 1.00
Dividends declared per common share as a
percent of net income per share 37.20 34.78 25.58 24.37 26.53
Average shareholders' equity as a percent
of average total assets 8.04 8.22 8.72 7.94 6.82
</TABLE>
Additional performance ratios are set forth in Selected Consolidated
Financial Data, incorporated herein by reference in Item 6, Part II of this
report. Any significant changes in the current trend of the above ratios are
reviewed in Management's Discussion and Analysis of Financial Condition and
Results of Operations, incorporated herein by reference in Item 7, Part II of
this report.
VII. SHORT-TERM BORROWINGS
Short-term borrowings are discussed in note 9 to the consolidated
financial statements incorporated herein by reference in Item 8, Part II of
this report.
12
<PAGE> 14
ITEM 2. PROPERTIES
The Registrant and the Banks operate a total of 43 facilities in Michigan. The
individual properties are not materially significant to the Registrants' or the
Banks' business or to the consolidated financial statements.
With the exception of the potential remodeling of certain facilities to provide
for the efficient use of work space or to maintain an appropriate appearance,
each property is considered reasonably adequate for current and anticipated
needs.
ITEM 3. LEGAL PROCEEDINGS
Due to the nature of their business, the Banks are often subject to numerous
legal actions. These legal actions, whether pending or threatened, arise
through the normal course of business and are not considered unusual or
material.
Currently, no material legal procedures are pending which involve the
Registrant or the Banks.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
13
<PAGE> 15
ADDITIONAL ITEM - EXECUTIVE OFFICERS
Executive officers of the Registrant are appointed annually by the Board of
Directors at the organizational meeting of Directors following the Annual
Meeting of Shareholders. There are no family relationships among these
officers and/or the Directors of the Registrant nor any arrangement or
understanding between any officer and any other person pursuant to which the
officer was elected.
The following sets forth certain information with respect to the Registrant's
executive officers and certain key officers of its subsidiaries (included for
information purposes only) as of December 31, 1995.
<TABLE>
<CAPTION>
First elected
as an officer of
Name (Age) Position with Registrant the registrant
- ---------- ------------------------ ----------------
<S> <C> <C>
Charles C. Van Loan (48) President, Chief Executive December, 1984
Officer and Director
William R. Kohls (38) Executive Vice President and
Chief Financial Officer May, 1985
Jeffrey A. Bratsburg (52) President and Chief Executive
Officer - Independent Bank
West Michigan
Edward B. Swanson (42) President and Chief Executive
Officer - Independent Bank
South Michigan
Michael M. Magee, Jr. (40) President and Chief Executive
Officer - Independent Bank
Ronald L. Long (36) President and Chief Executive
Officer - Independent Bank
East Michigan
</TABLE>
Prior to being named President and Chief Executive Officer in 1993, Mr. Magee
was Executive Vice President of Independent Bank.
Prior to being named President and Chief Executive Officer in 1993, Mr. Long
was Vice President and Controller of the Registrant. Prior to joining the
Registrant in 1990, he was an audit manager at Ernst & Young.
The President and Chief Executive Officers of the Registrant's subsidiary banks
serve as members of various committees of the Registrant.
14
<PAGE> 16
PART II.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The information set forth under the caption "Quarterly Summary " on Page A-28
of the Appendix to the Registrant's definitive proxy statement, dated March 15,
1996, relating to the April 16, 1996 Annual Meeting of Shareholders (as filed
with the commission and as filed as exhibit 13 to this report on Form 10-K) is
incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
The information set forth under the caption "Selected Consolidated Financial
Data" on Page A-10 of the Appendix to the Registrant's definitive proxy
statement, dated March 15, 1996, relating to the April 16, 1996 Annual Meeting
of Shareholders (as filed with the commission and as filed as exhibit 13 to
this report on Form 10-K) is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The information set forth under the caption "Management's Discussion and
Analysis of Financial Condition and Results of Operations" on pages A-2 through
A-9 of the Appendix to the Registrant's definitive proxy statement, dated March
15, 1996, relating to the April 16, 1996 Annual Meeting of Shareholders (as
filed with the commission and as filed as exhibit 13 to this report on Form
10-K) is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following consolidated financial statements of the Registrant and the
auditors' report are set forth on pages A-11 through A-27 of the Appendix to
the Registrant's definitive proxy statement, dated March 15, 1996, relating to
the April 16, 1996 Annual Meeting of Shareholders (as filed with the commission
and as filed as exhibit 13 to this report on Form 10-K) is incorporated herein
by reference.
Consolidated Statements of Financial Condition at
December 31, 1995 and 1994
Consolidated Statements of Operations for the years ended
December 31, 1995, 1994 and 1993
Consolidated Statements of Cash Flows for the years ended
December 31, 1995, 1994 and 1993
Consolidated Statements of Shareholders' Equity
for the years ended December 31, 1995, 1994 and 1993
Notes to Consolidated Financial Statements
Independent Auditors Report
The supplementary data required by this item set forth under the caption
"Quarterly Financial Data" on page A-28 of the Appendix to the Registrant's
definitive proxy statement, dated March 15, 1996, relating to the April 16, 1996
Annual Meeting of Shareholders (as filed with the commission and as filed as
exhibit 13 to this report on Form 10-K) is incorporated herein by reference.
15
<PAGE> 17
PART II.
ITEM 8. (Continued)
The portions of the Appendix to the Registrant's definitive proxy statement,
dated March 15, 1996, relating to the April 16, 1996 Annual Meeting of
Shareholders (as filed with the commission and as filed as exhibit 13 to this
report on Form 10-K) which are not specifically incorporated by reference as
part of this Form 10-K are not deemed to be a part of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS - The information with respect to Directors of the Registrant, set
forth under the caption "Election of Directors" on pages 3 through 5 of the
Registrant's definitive proxy statement, dated March 15, 1996, relating to the
April 16, 1996 Annual Meeting of Shareholders, (as filed with the commission)
is incorporated herein by reference.
EXECUTIVE OFFICERS - Reference is made to additional item under Part I of this
report on Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
The information set forth under the captions "Summary Compensation Table",
"Option Grants in 1995" and "Aggregated Stock Option Exercises in 1995 and Year
End Option Values" on pages 8 through 9 of the Registrant's definitive proxy
statement, dated March 15, 1996, relating to the April 16, 1996 Annual Meeting
of Shareholders, (as filed with the commission) is incorporated herein by
reference. Information under the caption "Committee Report on Executive
Compensation" on pages 6 through 7 of the definitive proxy statement is not
incorporated by reference herein and is not deemed to be filed with the
Securities and Exchange Commission.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information set forth under the captions "Voting Securities and Record
Date", "Election of Directors" and "Securities Ownership of Management" on
pages 2, 3 and 8, respectively, of the Registrant's definitive proxy statement,
dated March 15, 1996, relating to the April 16, 1996 Annual Meeting of
Shareholders, (as filed with the commission) is incorporated herein by
reference. Information under the captions "Shareholder Return Performance
Graph" and "Committee Report on Executive Compensation" on pages 5 through 7 of
the definitive proxy statement is not incorporated by reference herein and is
not deemed to be filed with the Securities and Exchange Commission.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information set forth under the caption "Transactions Involving Management"
on page 10 of the Registrant's definitive proxy statement, dated March 15,
1996, relating to the April 16, 1996 Annual Meeting of Shareholders, (as filed
with the commission) is incorporated herein by reference.
16
<PAGE> 18
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
(a) 1. Financial Statements
All financial statements of the Registrant are incorporated
herein by reference as set forth in the Appendix to the Registrant's
definitive proxy statement, dated March 15, 1996, relating to the
April 16, 1996 Annual Meeting of Shareholders (filed as exhibit 13
to this report on Form 10-K.)
2. Financial Statement Schedules
Not applicable
3. Exhibits (Numbered in accordance with Item 601 of Regulation S-K)
The Exhibit Index is located on the final page of this report on
Form 10-K.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the fourth quarter of the
year ended December 31, 1995.
17
<PAGE> 19
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, dated March 22, 1996.
INDEPENDENT BANK CORPORATION
s/Charles C. Van Loan Charles C. Van Loan, President and Chief
- ----------------------------------- Executive Officer (Principal
Executive Officer)
s/William R. Kohls William R. Kohls, Executive Vice
- ----------------------------------- President and Chief Financial Officer
(Principal Financial Officer)
s/James J. Twarozynski James J. Twarozynski, Vice President and
- ----------------------------------- Controller (Principal Accounting
Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated. Each director of
the Registrant, who's signature appears below hereby appoints Charles C. Van
Loan and William R. Kohls and each of them severally, as his attorney-in-fact,
to sign in his name and on his behalf, as a director of the Registrant, and to
file with the Commission any and all Amendments to this Report on Form 10-K.
William F. Ehinger, Director s/William F. Ehinger
----------------------
Thomas F. Kohn, Director s/Thomas F. Kohn
----------------------
Robert J. Leppink, Director s/Robert J. Leppink
----------------------
Rex P. O'Connor, Director s/Rex P. O'Connor
----------------------
Charles A. Palmer, Director
----------------------
Charles C. Van Loan, Director s/Charles C. Van Loan
----------------------
Arch V. Wright, Jr., Director s/Arch V. Wright, Jr.
----------------------
18
<PAGE> 20
EXHIBIT INDEX
Exhibit number and description
EXHIBITS FILED HEREWITH
13 Appendix to the Registrant's definitive proxy statement, dated March 15,
1996, relating to the April 16, 1996 Annual Meeting of Shareholders.
This appendix was filed with the Commission as part of the Company's
proxy statement and was delivered to the Company's shareholders in
compliance with Rule 14(a)-3 of the Securities Exchange Act of 1934, as
amended.
21 List of Subsidiaries.
23 Consent of Independent Accountants
24 Power of Attorney (Included on page 18).
27 Financial Data Schedule
EXHIBITS INCORPORATED BY REFERENCE
3(A) Restated Articles of Incorporation (incorporated herein by reference to
Exhibit 3(i) to the Registrant's report on Form 10-Q for the quarter
ended June 30, 1994).
3(B) Amended and Restated Bylaws (incorporated herein by reference to Exhibit
3(ii) to the Registrant's report on Form 10-Q for the quarter ended June
30, 1994).
4(A) Automatic Dividend Reinvestment and Stock Purchase Plan, as amended
(incorporated herein by reference to the Registrant's Form S-3
Registration Statement dated June 13, 1994, filed under Registration No.
33-80088).
10(A) Deferred Benefit Plan for Directors (incorporated herein by reference to
Exhibit 10(C) to the Registrant's report on Form 10-K for the year ended
December 31, 1984).
10(B) The form of Indemnity Agreement approved by the Registrant's
shareholders at its April 19, 1988 Annual Meeting, as executed with all
of the Directors of the Registrant (incorporated herein by reference to
Exhibit 10(F) to the Registrant's report on Form 10-K for the year ended
December 31, 1988).
10(C) Incentive Share Grant Plan, as amended, approved by the Registrant's
shareholders at its April 21, 1992 Annual Meeting (incorporated herein by
reference to Exhibit 10 to the Registrant's report on Form 10-K for the
year ended December 31, 1992).
10(D) Non-Employee Director Stock Option Plan, approved by the Registrant's
shareholders at its April 21, 1992 Annual Meeting (incorporated herein by
reference to Exhibit 28 to the Registrant's Form S-8 Registration
Statement dated April 23, 1993, filed under registration No. 33-62086).
10(E) Employee Stock Option Plan, approved by the Registrant's shareholders at
its April 21, 1992 Annual Meeting (incorporated herein by reference to
Exhibit 28 to the Registrant's Form S-8 Registration Statement dated
April 30, 1993, filed under registration No. 33-62090).
19
<PAGE> 1
EXHIBIT 13
INDEPENDENT BANK CORPORATION - 1995
APPENDIX
Independent Bank Corporation is a bank holding company with
total assets of $590 million and a market capitalization of
approximately $72 million. Its four subsidiary banks principally
serve rural and suburban communities located across Michigan's
lower peninsula.
The Banks emphasize service and convenience as the
principal means of competing in the delivery of financial
services. Accordingly, the Company's community banking
philosophy vests discretion and authority in the Banks'
management while providing financial incentives to align the
interests of such managers with those of its shareholders.
To support the Banks' service and sales efforts, while
providing the internal controls that are consistent with its
decentralized structure, the Company has centralized common
operations and provides administrative and operational services
to the Banks.
CONTENTS
Management's Discussion and Analysis......... A-2
Selected Consolidated Financial Data......... A-10
Consolidated Financial Statements............ A-11
Notes to Consolidated Financial Statements... A-15
Independent Auditor's Report................. A-27
Quarterly Data............................... A-28
Shareholder Information...................... A-29
Executive Officers & Directors............... A-29
<PAGE> 2
INDEPENDENT BANK CORPORATION - 1995
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
This section presents additional information to assess the financial
condition and results of operations of the Company and the Banks. This section
should be read in conjunction with the consolidated financial statements and
supplemental financial data contained in this appendix.
RESULTS OF OPERATIONS
SUMMARY OF RESULTS
Net income totaled $6,810,000 in 1995 and represents the Company's twelfth
consecutive increase in annual earnings. The 12.9% increase in net income
reflects an increase in net interest income that resulted from the successful
implementation of the Banks' balance sheet leverage strategy. (See "Capital
resources" on page A-8.)
As a result of the Banks' ability to generate quality loans as well as the
continued use of disciplined funding strategies, average earning assets and net
interest income increased by 15.1% and 11.3%, respectively. The 21.4% increase
in non-interest income also contributed to the increase in net income. The
increases in such revenues were, however, partially offset by increases in
non-interest expense and the provision for loan losses.
The Company's net income in 1994 totaled $6,031,000. The 7.6% increase
from $5,606,000 in 1993 is the result of a $3,170,000 increase in net interest
income that was partially offset by an increase in non-interest expense as well
as a decline in non-interest income.
<TABLE>
<CAPTION>
KEY PERFORMANCE RATIOS
YEAR ENDED DECEMBER 31,
1995 1994 1993
- ------------------------------------------------------------------
<S> <C> <C> <C>
Net income to
Average equity.......... 15.59% 15.22% 15.21%
Average assets.......... 1.25 1.25 1.33
Income per common share... $2.50 $2.19 $2.05
</TABLE>
Net income was equal to 15.59% of average shareholders' equity in 1995
compared to 15.22% and 15.21% in 1994 and 1993, respectively. The increase in
the Company's return on average equity, relative to its return on average
assets reflects Management's efforts to profitably maintain or enhance
financial leverage. The Company's leverage ratio, its average assets divided by
its average shareholders' equity, increased to 12.44 in 1995 compared to 12.16
and 11.47 in 1994 and 1993, respectively.
NET INTEREST INCOME
Tax equivalent net interest income increased by 10.7% to $29,008,000 in
1995 and by 14.1% to $26,205,000 in 1994. Such increases reflect the increase
in average earning assets. Average earning assets increased by 15.1% to $513.4
million in 1995 and by 13.6% to $446.0 million in 1994.
The implementation of the Banks' balance sheet leverage strategy accounts
for approximately 90% of the $67,406,000 increase in average earning assets
during 1995. A year earlier, the acquisitions of American Home Bank and Pioneer
Bank, effective September 30, 1993, ("The 1993 Acquisitions") accounted for
approximately 70% of the $53,528,000 increase in average earning assets.
Tax equivalent net interest income was equal to 5.65% of average earning
assets in 1995 compared to 5.88% and 5.85% in 1994 and 1993. The 23 basis point
decline during 1995 generally reflects the average cost of other borrowings
utilized to fund the implementation of the Banks' balance sheet leverage
strategy. (See "Asset/liability management" on page A-8.) Management estimates,
however, that the use of such non-deposit funds to support the increase in
average loans contributed as much as $1,750,000 to tax equivalent net interest
income. Accordingly, the Bank's balance sheet leverage strategy is consistent
with Management's goal to profitably deploy capital.
<PAGE> 3
INDEPENDENT BANK CORPORATION - 1995
<TABLE>
<CAPTION>
1995 1994 1993
AVERAGE ------------------------------------------------------------------------------------
BALANCES AND TAX AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
EQUIVALENT RATES BALANCE INTEREST COST BALANCE INTEREST COST BALANCE INTEREST COST
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(dollars in thousands)
ASSETS
Loans-all domestic(1,2).............. $382,644 $37,654 9.84% $294,968 $28,936 9.81% $259,334 $26,001 10.03%
Taxable securities................... 93,064 5,919 6.36 108,905 6,537 6.00 88,869 5,976 6.73
Tax-exempt securities(2).............. 31,516 2,914 9.25 29,763 2,857 9.60 28,881 2,761 9.56
Other investments..................... 6,153 421 6.84 12,335 460 3.73 15,359 535 3.48
-------- ------- --------- -------- --------- --------
Interest earning assets............. 513,377 46,908 9.14 445,971 38,790 8.70 392,443 35,273 8.99
------- -------- --------
Cash and due from banks............... 16,091 14,359 13,996
Other assets, net..................... 14,115 21,491 16,226
-------- --------- ---------
Total assets...................... $543,583 $481,821 $422,665
======== ========= =========
LIABILITIES
Savings and NOW..................... $217,721 5,515 2.53 $213,590 4,819 2.26 $185,419 4,887 2.64
Time deposits....................... 141,292 6,955 4.92 150,036 6,273 4.18 150,536 7,140 4.74
Long-term debt...................... 2,195 120 5.47 525 28 5.33
Other borrowings.................... 89,048 5,430 6.10 28,481 1,373 4.82 8,010 250 3.12
-------- ------- --------- -------- --------- --------
Interest bearing
liabilities...................... 448,061 17,900 4.00 394,302 12,585 3.19 344,490 12,305 3.57
------- -------- --------
Demand deposits..................... 46,539 41,910 37,426
Other liabilities................... 5,296 5,989 3,900
Shareholders' equity................ 43,687 39,620 36,849
-------- --------- ---------
Total liabilities and
shareholders' equity............ $543,583 $481,821 $422,665
======== ========= =========
Net interest income.............. $29,008 $26,205 $22,968
======= ======== ========
Net interest income
as a percent of
earning assets.................. 5.65% 5.88% 5.85%
==== ==== ====
</TABLE>
(1) Interest on loans includes net origination fees totaling $2,702,000,
$2,590,000 and $2,214,000 in 1995, 1994 and 1993, respectively.
(2) Interest on tax-exempt securities has been adjusted to reflect
preferential taxation. The adjustment assumes a marginal tax rate of 34%
for each of the three years. For purposes of analysis, tax-exempt loans
are included in tax-exempt securities.
<TABLE>
<CAPTION>
CHANGE IN TAX EQUIVALENT 1995 COMPARED TO 1994 1994 COMPARED TO 1993
NET INTEREST INCOME VOLUME RATE NET VOLUME RATE NET
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
(in thousands)
Increase (decrease) in interest income(1)
Loans-all domestic....................... $8,627 $91 $8,718 $3,506 $(571) $2,935
Taxable securities....................... (991) 373 (618) 1,255 (694) 561
Tax-exempt securities(2)................. 165 (108) 57 85 11 96
Other investments........................ (303) 264 (39) (111) 36 (75)
----------------------------------------------------
Total interest income.................. 7,498 620 8,118 4,735 (1,218) 3,517
----------------------------------------------------
Increase (decrease) in interest expense(1)
Savings and NOW.......................... 95 601 696 688 (756) (68)
Time deposits............................ (382) 1,064 682 (24) (843) (867)
Long-term debt........................... (120) (120) 91 1 92
Other borrowings......................... 3,594 463 4,057 930 193 1,123
----------------------------------------------------
Total interest expense................. 3,187 2,128 5,315 1,685 (1,405) 280
----------------------------------------------------
Net interest income.................. $4,311 $(1,508) $2,803 $3,050 $187 $3,237
====================================================
</TABLE>
(1) The change in interest due to changes in both balance and rate has been
allocated to change due to balance and change due to rate in
proportion to the relationship of the absolute dollar amounts of change in
each.
(2) Interest on tax exempt securities has been adjusted to reflect
preferential taxation. The adjustment assumes a marginal tax rate of 34%
for each of the three years.
<PAGE> 4
INDEPENDENT BANK CORPORATION - 1995
The increase in loans as a percent of average earning assets had a
favorable impact on tax equivalent net interest income as a percent of average
earning assets. Loans were equal to approximately 74.5% of average earning
assets in 1995, compared to 66.1% during both 1994 and 1993. Management
believes that the increase in loans as a percent of average earning assets
partially offsets the impact of the funding costs associated with other
borrowed funds that have been utilized to fund the Banks' leverage strategy.
<TABLE>
<CAPTION>
COMPOSITION OF AVERAGE EARNING ASSETS YEAR ENDED DECEMBER 31,
AND INTEREST PAYING LIABILITIES 1995 1994 1993
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
As a percent of average earning assets
Loans-all domestic....................... 74.53% 66.14% 66.08%
Other earning assets..................... 25.47 33.86 33.92
--------------------------
Average earning assets............... 100.00% 100.00% 100.00%
==========================
Savings and NOW........................... 42.41% 47.89% 47.25%
Time deposits............................. 27.52 33.64 38.36
Other borrowings and long-term debt....... 17.35 6.88 2.17
--------------------------
Average interest bearing liabilities.. 87.28% 88.41% 87.78%
==========================
Earning asset ratio....................... 94.44% 92.56% 92.85%
Free-funds ratio.......................... 12.72 11.59 12.22
</TABLE>
PROVISION FOR LOAN LOSSES
The provision for loan losses totaled $636,000 in 1995 compared to
$473,000 in 1994 and $657,000 in 1993. The $163,000 increase in the provision
during 1995 reflects the increase in loan balances excluding loans held for
sale ("Portfolio Loans").
Management's assessment of the allowance for loan losses includes a
subjective analysis of economic conditions as well as an objective evaluation
of the unallocated portion of the allowance, trends in non-performing loans and
the Banks' loan loss history. (See "Loan portfolios" on page A-6.) The
provision for loan losses during future periods will be dependent upon the
foregoing factors.
NON-INTEREST INCOME
Non-interest income totaled $3,766,000 in 1995 compared to $3,101,000 and
$3,898,000 in 1994 and 1993, respectively. The increase in net gains on real
estate mortgage loans accounts for approximately 72% of the $665,000 increase
in non-interest income during 1995. A year earlier, a decline in net gains on
the sale of real estate mortgage loans and a net loss on the sale of securities
available for sale accounted for the $797,000 decrease in non-interest income.
<TABLE>
<CAPTION>
NON-INTEREST INCOME
YEAR ENDED DECEMBER 31,
1995 1994 1993
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
Service charges on deposit accounts ..... $1,919,000 $1,892,000 $1,589,000
Net gains (losses) on asset sales
Real estate mortgage loans ............ 728,000 249,000 721,000
Securities ............................ (120,000) (174,000) 637,000
Real estate mortgage loan servicing ..... 371,000 335,000 217,000
Primevest commisssions .................. 73,000 120,000 139,000
Other ................................... 795,000 679,000 595,000
----------------------------------
Total non-interest income .......... $3,766,000 $3,101,000 $3,898,000
==================================
</TABLE>
Service charges on deposit accounts, the largest component of non-interest
income, totaled $1,919,000 in 1995, essentially unchanged from $1,892,000 in
1994. A year earlier, the $303,000 increase from $1,589,000 in 1993 principally
reflects The 1993 Acquisitions.
Net gains on the sale of real estate mortgage loans totaled $728,000 in
1995. In addition to an increase in loans sold, the 192% increase in such gains
reflects an increase in net gains as a percent of loans sold. A year earlier,
net gains on the sale of residential real estate mortgage loans totaled
$249,000. The decline from $721,000 in 1993 reflects the combined effects of a
decrease in loans sold as well as a decrease in net gains as a percent of loans
sold.
<PAGE> 5
INDEPENDENT BANK CORPORATION - 1995
<TABLE>
<CAPTION>
NET GAINS ON THE SALE OF REAL ESTATE YEAR ENDED DECEMBER 31,
MORTGAGE LOANS 1995 1994 1993
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Real estate mortgage loan originations..................... $163,500,000 $97,800,000 $80,200,000
Real estate mortgage loan sales............................ 52,000,000 38,100,000 50,100,000
Net gains on the sale of real estate mortgage loans........ 728,000 249,000 721,000
Net gains as a percent of real estate mortgage loan sales.. 1.40% 0.65% 1.44%
</TABLE>
Consistent with Management's desire to maintain profitable financial
leverage, the Banks continue to retain rate-sensitive real estate mortgage
loans and sell the majority of fixed-rate obligations. (See "Asset/liability
management" on page A-8.) Accordingly, the volume of loans sold is dependent
upon the Banks' ability to sustain or increase the origination of real estate
mortgage loans as well as consumer demand for fixed-rate loans. Net gains on
the sale of such loans are also dependent upon economic and competitive factors
as well as the Banks' ability to effectively manage exposure to changes in
interest rates.
To help maintain customer relationships, the Banks have historically
retained servicing on real estate mortgage loans sold. During 1995, however,
the Banks sold the related servicing rights on $19.7 million of real estate
mortgage loans, principally loans underwritten pursuant to government
guarantees and loans that have been originated in markets that are not served
by the Banks' branch networks.
The Banks realized net losses of $120,000 on the sale of securities
available for sale during 1995 compared to net losses of $174,000 in 1994. The
Banks realized net gains of $637,000 on the sale of such securities in 1993.
Future gains and losses will be dependent upon the Banks' asset/liability
management needs as well as the slope of the yield curve, the level of interest
rates and other pertinent factors. (See "Asset/liability management" on page
A-8.)
NON-INTEREST EXPENSE
Non-interest expense totaled $21,702,000 in 1995 compared to $19,503,000
and $17,535,000 in 1994 and 1993, respectively. Salaries and benefits,
including incentive compensation payments as well as commissions and other
salaries that relate to the origination of real estate mortgage loans, account
for the majority of the $2,199,000 increase during 1995.
Management estimates that The 1993 Acquisitions and certain non-recurring
costs associated with a 1994 acquisition that was accounted for as a pooling of
interests, account for approximately 90% of the $1,968,000 increase in total
non-interest expense during 1994. Commissions and other costs relating to the
origination of real estate mortgage loans also contributed to the increase in
non-interest expense during that year.
Salaries and benefits totaled $12,163,000 in 1995 compared to $10,562,000
and $9,316,000 in 1994 and 1993, respectively. The Company and the Banks
maintain compensation policies and practices that are intended to provide
incentives for superior performance and align the interests of officers and
employees with those of the Company's shareholders. Such "pay-for-performance"
compensation plans include annual cash performance awards, the Employee Stock
Ownership Plan, the Employee Stock Option Plan and the Incentive Share Grant
Plan.
<TABLE>
<CAPTION>
NON-INTEREST EXPENSE YEAR ENDED DECEMBER 31,
1995 1994 1993
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Salaries........................................ $ 8,005,000 $ 7,817,000 $ 6,593,000
Performance-based compensation and benefits..... 2,351,000 1,052,000 1,182,000
Other benefits.................................. 1,807,000 1,693,000 1,541,000
-------------------------------------------------
Total salaries and benefits................... 12,163,000 10,562,000 9,316,000
Occupancy, net.................................. 1,548,000 1,392,000 1,237,000
Furniture and fixtures.......................... 1,345,000 1,248,000 968,000
Loan and collection............................. 1,030,000 626,000 724,000
Deposit insurance............................... 499,000 966,000 858,000
Other........................................... 5,117,000 4,709,000 4,432,000
-------------------------------------------------
Total non-interest expense................ $21,702,000 $19,503,000 $17,535,000
=================================================
</TABLE>
Including commissions relating to the origination of real estate mortgage
loans, aggregate performance-based compensation accounts for approximately 81%
of the $1,601,000 increase in salaries and benefits during 1995. The 1993
Acquisitions accounted for approximately 65% of the increase in salary and
benefits during 1994.
<PAGE> 6
INDEPENDENT BANK CORPORATION - 1995
Increases in occupancy, furniture and fixtures and other non-interest
expense during 1995 largely reflect the cost of new loan production offices and
other costs relating to the origination of real estate mortgage loans.
Environmental remediation costs associated with two foreclosed properties also
contributed approximately $200,000 to the increase in non-interest expense.
Such remediation costs were covered under the Michigan Underground Storage Tank
Financial Assurance fund ("MUSTFA"). MUSTFA announced that it was unable to
fund all claims, however, and the Bank has provided for all remaining
remediation costs as estimated by environmental engineers. A reduction of
$467,000 in FDIC deposit insurance premiums partially offset the increases in
other components of non-interest expense. FDIC deposit insurance premiums are
anticipated to be further reduced during 1996.
FINANCIAL CONDITION
FINANCIAL SUMMARY
To profitably deploy capital in the absence of suitable acquisition
opportunities, the Banks have committed significant resources to loan
origination efforts, including new loan production offices. Portfolio Loans
increased to $418.0 million at December 31, 1995, compared to $336.7 million a
year earlier. Increases in rate-sensitive real estate mortgage loans account
for more than 70% of the $81.3 million increase in Portfolio Loans. (See "Loan
portfolios".)
Notwithstanding the acquisition of a $14.4 million branch facility in
Clio, Michigan, total deposits were largely unchanged from December 31, 1994.
In addition to the proceeds from security sales and maturities, the Banks have
relied on other borrowings to fund the increase in Portfolio Loans. The use of
such non-deposit funds, principally advances from the Federal Home Loan Bank
("FHLB"), complements the Banks' core deposits and may further assist the
Banks' efforts to manage interest-rate risk. (See "Asset/liability management"
on page A-8.)
LOAN PORTFOLIOS
The stable and diversified economies of the Banks' principal markets
provide attractive lending opportunities. In addition to the communities served
by the Banks' branch networks and loan production offices, the principal
lending markets include nearby communities and metropolitan areas. Subject to
established underwriting criteria, the Banks may also participate in commercial
lending transactions with certain non-affiliated banks and purchase real estate
mortgage loans from third-party originators.
<TABLE>
<CAPTION>
LOAN PORTFOLIO COMPOSITION DECEMBER 31,
1995 1994
- ---------------------------------------------------------------------------------
<S> <C> <C>
Real estate
Residential first mortgages....................... $211,690,000 $158,432,000
Residential home equity and other junior
mortgages....................................... 19,733,000 17,704,000
Construction and land development................. 29,328,000 27,289,000
Other............................................. 56,675,000 44,982,000
Consumer............................................ 64,821,000 49,075,000
Commercial.......................................... 23,403,000 23,388,000
Agricultural........................................ 12,394,000 15,855,000
--------------------------
Total loans................................... $418,044,000 $336,725,000
==========================
</TABLE>
The consistent application of appropriate underwriting standards within
its decentralized management structure is critical to the Company's continued
success. Although Management and the Board of Directors of each of the Banks
retain authority and responsibility for all credit decisions, each of the Banks
has adopted uniform underwriting standards.
The Company's loan committee and the centralization of credit services
promote compliance with established underwriting standards and provide the
requisite internal controls that are consistent with the needs of a
decentralized management structure. In addition to certain administration
functions, such credit services that include credit analysis and commercial
loan review services, also provide economies of scale. The centralization of
retail loan services further provides for consistent service quality and
enhances compliance with applicable consumer protection laws and regulations.
<PAGE> 7
INDEPENDENT BANK CORPORATION - 1995
<TABLE>
<CAPTION>
NON-PERFORMING ASSETS DECEMBER 31,
1995 1994 1993
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Non-accrual loans...................................... $1,886,000 $2,052,000 $1,707,000
Loans 90 days or more past due and
still accruing interest.............................. 427,000 254,000 408,000
Restructured loans..................................... 247,000 528,000 1,098,000
------------------------------------
Total non-performing loans........................... 2,560,000 2,834,000 3,213,000
Other real estate...................................... 760,000 1,381,000 2,647,000
------------------------------------
Total non-performing assets...................... $3,320,000 $4,215,000 $5,860,000
====================================
As a percent of total loans............................
Non-performing loans................................. 0.61% 0.84% 1.14%
Non-performing assets................................ 0.79 1.25 2.08
</TABLE>
The decline in non-performing loans and assets during the most recent year
largely reflects a decrease in substandard assets acquired in connection with
the acquisition of banks in 1993 and 1994. Non-performing assets totaled
$3,320,000 at December 31, 1995, compared to $4,215,000 and $5,860,000 at
December 31, 1994 and 1993, respectively. At those same dates, non-performing
assets associated with bank acquisitions totaled $1,443,000, $2,288,000 and
$2,028,000, respectively.
<TABLE>
<CAPTION>
ALLOWANCE FOR LOAN LOSSES YEAR ENDED DECEMBER 31,
1995 1994 1993
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of period.......................... $5,054,000 $5,053,000 $4,023,000
Allowance on loans acquired........................... 756,000
Provision charged to operating expense................ 636,000 473,000 657,000
Recoveries credited to allowance...................... 265,000 399,000 331,000
Loans charged against allowance....................... (712,000) (871,000) (714,000)
----------------------------------
Balance at end of period................................ $5,243,000 $5,054,000 $5,053,000
==================================
Allowance for loan losses as a
percent of non-performing loans....................... 205% 178% 157%
</TABLE>
The allowance for loan losses is maintained by the associated provision
for loan losses at a level that Management considers appropriate based upon its
assessment of relevant circumstances. (See "Provision for loan losses" on page
A-4.) Although the allowance for loan losses increased to $5,243,000 at
December 31, 1995, from $5,054,000 and $5,053,000 at December 31, 1994 and
1993, respectively, the allowance declined as a percent of Portfolio Loans. The
allowance was equal to 1.25% of Portfolio Loans at December 31, 1995, compared
to 1.50% and 1.79% at December 31, 1994 and 1993, respectively.
<TABLE>
<CAPTION>
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES DECEMBER 31,
1995 1994 1993
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Commercial and agricultural......................... $1,612,000 $1,655,000 $2,222,000
Real estate mortgage................................ 162,000 177,000 270,000
Installment......................................... 597,000 474,000 464,000
Unallocated......................................... 2,872,000 2,748,000 2,097,000
------------------------------------
Total......................................... $5,243,000 $5,054,000 $5,053,000
====================================
Allocated allowance as a percent of total allowance 45.2% 45.6% 58.5%
</TABLE>
In addition to its evaluation of general and local economic conditions,
Management's assessment of the allowance for loan losses is based upon the
composition of Portfolio Loans, a systematic review of specific credits and
historical loss experience, as well as the absolute level of non-performing and
impaired loans. Based upon the forgoing criteria, Management has allocated
approximately 45% of the allowance for loan losses to specific loans and loan
portfolios at December 31, 1995. Management's allocation was equal to
approximately 46% and 59% of the allowance for loan losses at December 31, 1994
and 1993, respectively.
<PAGE> 8
INDEPENDENT BANK CORPORATION - 1995
CAPITAL RESOURCES
The ability to profitably deploy the capital generated by the Company's
results of operations or otherwise maintain financial leverage is critical to
Management's mission to create value for the Company's shareholders.
Implementation of the Banks' balance sheet leverage strategy, that combines the
Banks' loan origination efforts and the use of non-traditional funding sources,
is consistent with that mission. (See "Net interest income" on page A-2.)
<TABLE>
<CAPTION>
CAPITAL RATIOS DECEMBER 31,
1995 1994
- ------------------------------------------------------------------------------
<S> <C> <C>
Equity capital.......................................... 7.97% 7.81%
Tier 1 leverage (tangible equity capital)............... 7.58 7.40
Primary capital......................................... 8.78 8.70
Tangible primary capital................................ 8.39 8.30
Risk-based capital...................................... 12.75 13.03
</TABLE>
During 1995, shareholders' equity increased by $6,714,000 to $47,025,000
at December 31, 1995. Excluding the impact of net unrealized gains and losses
on securities available for sale, shareholders' equity was equal to 7.86% and
8.17% of assets at December 31, 1995 and 1994, respectively. In the absence of
the Banks' leverage strategy, however, Management estimates that shareholders'
equity would have increased to more than 8.75% of assets at December 31, 1995.
Management believes that its disciplined approach to the acquisition of
other financial institutions is also consistent with its goal to maintain or
enhance profitable financial leverage. In view of the franchise value that is
associated with core deposits and other customer relationships, Management
further believes that such acquisitions may provide greater value to the
Company's shareholders than the continued reliance on the Banks' leverage
strategies. Management continues to pursue the acquisition of insurance
agencies which would provide product-line diversification while offering
similar cross-sale opportunities.
The Company's dividend policies and share repurchase plan are also
integral components of Management's efforts to maintain profitable financial
leverage. Restated for a 5% stock dividend in 1995, cash dividends declared
increased to approximately $.93 per share from approximately $.76 in 1994. Cash
dividends declared were equal to 36.8% and 34.6% of earnings in 1995 and 1994,
respectively. During 1995 and 1994, the Company purchased 35,900 and 40,000
shares of its common stock, respectively.
ASSET/LIABILITY MANAGEMENT
The asset/liability management ("ALM") efforts of the Company and the
Banks are intended to identify and evaluate opportunities to structure the
balance sheet in a manner that is consistent with Management's mission to
maintain profitable financial leverage within established risk parameters.
Accordingly, Management's evaluations of alternate strategies carefully
consider the likely impact on the Banks' risk profile as well as the
anticipated contributions to earnings.
Management employs simulation analyses to evaluate the potential changes
in the Banks' net interest income and market value of portfolio equity that
result from changes in interest rates. Such analyses further anticipate the
potential changes in the slope of the U.S. Treasury yield curve as well as
changes in prepayment rates on certain assets and premature withdrawals of
certifcates of deposit that will likely accompany changes in interest rates.
The Banks' competitive position within many of the markets served by the
branch networks may limit the ability to materially increase deposits without
adversely impacting the weighted-average cost of core deposits. Accordingly,
the Banks have relied on other borrowings, principally FHLB advances, to fund
the increase in Portfolio Loans and continue to employ pricing strategies that
are intended to enhance the value of core deposits. The use of such non-deposit
funds are structured to complement the Banks' existing interest-rate risk
profile and may further reduce the Banks' exposure to depositors' option to
withdraw funds prior to maturity.
Consistent with Management's intent to maintain profitable financial
leverage, the marginal cost of non-deposit funds is a principal consideration
in the Banks' decision to sell or retain real estate mortgage loans. Marginal
funding costs are further an integral component in pricing Portfolio Loans.
Based on Management's ongoing evaluations, the Banks continue to retain most
adjustable rate and balloon real estate mortgage loans and sell the majority of
fixed-rate loans.
<PAGE> 9
INDEPENDENT BANK CORPORATION - 1995
The Banks maintain diversified investment portfolios that include
securities issued by the U.S. Treasury and government sponsored agencies as well
as obligations of states and political subdivisions and mortgaged-backed
securities. The increase in securities available for sale is the result of a
transfer of securities with a book value of $52,601,000 that were previously
reported as held to maturity. Although there are no current plans to sell
securities available for sale, Management intends to further evaluate the Banks'
ALM needs and determine an optimum portfolio structure that will enhance the
Banks' earnings while providing for contingencies. A portion of the proceeds
from the potential sale of any securities available for sale may be used to fund
Portfolio Loans.
Securities available for sale are carried at fair value and unrealized
gains and losses, after consideration of applicable taxes, are recognized as a
separate component of shareholders' equity. At December 31, 1995, the fair
value of securities available for sale totaled $87,553,000 and net unrealized
gains were equal to $1,082,000. A year earlier, the fair value of securities
available for sale totaled $52,756,000 and net unrealized losses were
$3,212,000. The Banks sold securities with an aggregate market value of
$14,054,000 and $28,384,000 in 1995 and 1994, respectively. The Banks realized
net losses of $120,000 in 1995 and $174,000 in 1994 on such sales.
Management has the intent and the Banks have the ability to hold other
securities to maturity. The amortized cost of securities held to maturity
totaled $27,906,000 at December 31, 1995, and excludes consideration of
unrealized gains and losses of $1,157,000 and $32,000, respectively. At
December 31, 1994, the amortized cost of securities held to maturity was
$77,721,000. At that date, unrealized gains totaled $976,000 and unrealized
losses totaled $1,247,000.
<TABLE>
<CAPTION>
INTEREST RATE SENSITIVITY DECEMBER 31, 1995
DAYS YEARS
--------------------------------------- -----------------
0 - 30 31 - 90 91 - 180 181 - 365 1 - 5 5+ TOTAL
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
(dollars in thousands)
ASSETS
Loans and loans held for sale....... $68,561 $16,636 $29,891 $68,717 $153,102 $97,184 $434,091
Taxable securities.................. 8,559 2,377 3,432 13,698 39,108 26,563 93,737
Tax-exempt securities............... 31 47 231 1,536 17,219 10,368 29,432
------------------------------------------------------------------
Interest earning assets........... 77,151 19,060 33,554 83,951 209,429 134,115 557,260
--------------------------------------------------------
Non-interest earning assets......... 32,887
--------
Total Assets.................. $590,147
========
LIABILITIES AND SHAREHOLDERS' EQUITY
Demand, savings and NOW............. 40,425 13,393 9,956 19,339 85,290 93,101 $261,504
Time deposits....................... 12,118 16,666 24,725 36,307 45,600 14,704 150,120
Other borrowings.................... 21,294 15,000 5,000 33,000 50,000 124,294
------------------------------------------------------------------
Total deposits and other
borrowings...................... 73,837 45,059 39,681 88,646 180,890 107,805 535,918
========================================================
Shareholders' equity and other
liabilities....................... 54,229
Total liabilities and --------
shareholders' equity........ $590,147
========
RATE SENSITIVITY GAP AND RATIOS
Gap for period..................... $3,314 $(25,999) $(6,127) $(4,695) $28,539 $26,310
=======================================================
Cumulative gap..................... $3,314 $(22,685) $(28,812) $(33,507) $(4,968) $21,342
=======================================================
Ratio of rate-sensitive assets to
rate-sensitive liabilities for
period........................... 104.5% 42.3% 84.6% 94.7% 115.8% 124.4%
Cumulative ratio of rate-sensitive
assets to rate-sensitive
liabilities...................... 104.5 80.9 81.8 86.5 98.8 104.0
</TABLE>
<PAGE> 10
INDEPENDENT BANK CORPORATION - 1995
<TABLE>
<CAPTION>
SELECTED CONSOLIDATED FINANCIAL DATA YEAR ENDED DECEMBER 31,
1995 1994 1993(1) 1992(1) 1991(1)
- -------------------------------------------------------------------------------------------------------------
(dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS
Net interest income.......................... $28,082 $25,235 $22,065 $21,315 $18,637
Provision for loan losses.................... 636 473 657 1,225 1,013
Non-interest income.......................... 3,766 3,101 3,898 2,742 2,421
Non-interest expense......................... 21,702 19,503 17,535 15,703 14,323
-----------------------------------------------------------
Income before federal income tax expense
and extraordinary items................... 9,510 8,360 7,771 7,129 5,722
Federal income tax expense................... 2,700 2,329 2,165 2,020 1,619
-----------------------------------------------------------
Income before extraordinary items.......... 6,810 6,031 5,606 5,109 4,103
Extraordinary items(2)....................... 85
-----------------------------------------------------------
Net income.............................. $6,810 $6,031 $5,606 $5,109 $4,018
===========================================================
PER COMMON SHARE DATA(3)
Net income
Primary.................................... $2.50 $2.19 $2.05 $1.88 $1.60
Fully diluted.............................. 2.50 2.19 2.05 1.88 1.45
Cash dividends declared...................... 0.93 0.76 0.52 0.46 0.41
Book value................................... 17.39 14.83 14.25 12.68 11.26
SELECTED BALANCES
Assets....................................... $590,147 $516,211 $482,027 $403,125 $406,469
Loans and loans held for sale................ 434,091 342,658 288,643 261,634 275,144
Allowance for loan losses.................... 5,243 5,054 5,053 4,023 3,784
Deposits..................................... 411,624 409,471 423,620 358,874 364,431
Shareholders' equity......................... 47,025 40,311 39,049 34,467 30,327
Long-term debt............................... 2,750 1,287
SELECTED RATIOS
Tax equivalent net interest income
to average earning assets.................. 5.65% 5.88% 5.85% 5.88% 5.20%
Net income to
Average common equity(4)................... 15.59 15.22 15.21 15.88 13.56
Average assets............................. 1.25 1.25 1.33 1.26 1.00
Dividend payment ratio(5).................... 36.80 34.62 25.54 24.13 26.53
Average shareholders' equity to average
assets...................................... 8.04 8.22 8.72 7.94 6.82
Tier 1 leverage (tangible equity capital)
ratio....................................... 7.58 7.40 7.61 8.05 6.88
Non-performing loans to total loans........... 0.61 0.84 1.14 1.24 1.74
</TABLE>
(1) Restated to reflect an acquisition accounted for as a pooling of
interests. (See note 2 to consolidated financial statements.)
(2) The cost, net of related taxes, associated with the early retirement of
debt in 1991 is reported as an extraordinary item.
(3) Per share data has been adjusted to give retroactive effect to a 5% stock
dividend in 1995.
(4) For 1991, net income to average common equity has been computed by
dividing net income, after deducting dividends on preferred stock, by
average common equity.
(5) For 1991, common stock cash dividends as a percentage of net income
adjusted for preferred stock dividends.
<PAGE> 11
INDEPENDENT BANK CORPORATION - 1995
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
DECEMBER 31,
1995 1994
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and Cash Equivalent
Cash and due from banks.................................................................... $ 17,208,000 $ 22,869,000
Federal funds sold......................................................................... 850,000
--------------------------------
Total Cash and Cash Equivalents.......................................................... 17,208,000 23,719,000
--------------------------------
Securities available for sale................................................................ 87,553,000 52,756,000
Securities held to maturity (fair value of $29,031,000 at December 31, 1995;
$77,450,000 at December 31, 1994).......................................................... 27,906,000 77,721,000
Federal Home Loan Bank stock, at cost........................................................ 7,710,000 3,433,000
Loans held for sale.......................................................................... 16,047,000 5,933,000
Loans
Commercial and agricultural................................................................ 108,879,000 103,984,000
Real estate mortgage....................................................................... 225,900,000 166,794,000
Installment................................................................................ 83,265,000 65,947,000
--------------------------------
Total Loans.............................................................................. 418,044,000 336,725,000
Allowance for loan losses.................................................................. (5,243,000) (5,054,000)
--------------------------------
Net Loans................................................................................ 412,801,000 331,671,000
Property and equipment, net.................................................................. 9,931,000 9,493,000
Accrued income and other assets.............................................................. 10,991,000 11,485,000
--------------------------------
Total Assets......................................................................... $590,147,000 $516,211,000
================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Non-interest bearing....................................................................... $ 46,168,000 $ 48,641,000
Savings and NOW............................................................................ 215,336,000 227,137,000
Time....................................................................................... 150,120,000 133,693,000
--------------------------------
Total Deposits........................................................................... 411,624,000 409,471,000
Federal funds purchased.................................................................... 13,400,000 13,900,000
Other borrowings........................................................................... 110,894,000 47,741,000
Accrued expenses and other liabilities..................................................... 7,204,000 4,788,000
--------------------------------
Total Liabilities........................................................................ 543,122,000 475,900,000
Commitments and contingent liabilities --------------------------------
Shareholders' Equity
Preferred stock, no par value--200,000 shares authorized; none outstanding
Common stock, $1.00 par value--14,000,000 shares authorized; issued and outstanding:
2,704,038 shares at December 31, 1995 and 2,589,163 shares at December 31, 1994........ 2,704,000 2,589,000
Capital surplus.......................................................................... 19,924,000 16,932,000
Retained earnings........................................................................ 23,683,000 22,910,000
Net unrealized gain (loss) on securities available for sale, net of related tax effect... 714,000 (2,120,000)
---------------------------------
Total Shareholders' Equity............................................................. 47,025,000 40,311,000
---------------------------------
Total Liabilities and Shareholders' Equity......................................... $590,147,000 $516,211,000
=================================
</TABLE>
See notes to consolidated financial statements.
<PAGE> 12
INDEPENDENT BANK CORPORATION - 1995
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1995 1994 1993
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans.............. $37,861,000 $29,107,000 $26,128,000
Securities available for sale........... 2,692,000 2,853,000 1,232,000
Securities held to maturity.............
Taxable............................... 3,227,000 3,684,000 4,744,000
Tax-exempt............................ 1,781,000 1,716,000 1,731,000
Other investments....................... 421,000 460,000 535,000
---------------------------------------
Total Interest Income................. 45,982,000 37,820,000 34,370,000
---------------------------------------
INTEREST EXPENSE
Deposits................................ 12,470,000 11,092,000 12,027,000
Other borrowings........................ 5,430,000 1,493,000 278,000
---------------------------------------
Total Interest Expense................ 17,900,000 12,585,000 12,305,000
---------------------------------------
Net Interest Income................... 28,082,000 25,235,000 22,065,000
Provision for loan losses............... 636,000 473,000 657,000
---------------------------------------
Net Interest Income After Provision
for Loan Losses....................... 27,446,000 24,762,000 21,408,000
---------------------------------------
NON-INTEREST INCOME
Service charges on deposit accounts..... 1,919,000 1,892,000 1,589,000
Net gains (losses) on asset sales
Real estate mortgage loans............ 728,000 249,000 721,000
Securities............................ (120,000) (174,000) 637,000
Other income............................ 1,239,000 1,134,000 951,000
---------------------------------------
Total Non-interest Income............. 3,766,000 3,101,000 3,898,000
---------------------------------------
NON-INTEREST EXPENSE
Salaries and employee benefits.......... 12,163,000 10,562,000 9,316,000
Occupancy, net.......................... 1,548,000 1,392,000 1,237,000
Furniture and fixtures.................. 1,345,000 1,248,000 968,000
Other expenses.......................... 6,646,000 6,301,000 6,014,000
---------------------------------------
Total Non-interest Expense............ 21,702,000 19,503,000 17,535,000
---------------------------------------
Income Before Federal Income Tax...... 9,510,000 8,360,000 7,771,000
Federal income tax expense.............. 2,700,000 2,329,000 2,165,000
---------------------------------------
Net Income............................ $ 6,810,000 $6,031,000 $5,606,000
=======================================
Income per common share.................. $ 2.50 $ 2.19 $ 2.05
=======================================
Cash dividends declared per
common share............................ $ 0.93 $ 0.76 $ 0.52
=======================================
</TABLE>
See notes to consolidated financial statements.
<PAGE> 13
INDEPENDENT BANK CORPORATION - 1995
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1995 1994 1993
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Income $6,810,000 $6,031,000 $5,606,000
---------------------------------------
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH
FROM OPERATING ACTIVITIES
Proceeds from sales of loans held for sale................... 51,976,000 38,103,000 50,142,000
Disbursements for loans held for sale........................ (54,262,000) (37,411,000) (49,397,000)
Provision for loan losses.................................... 636,000 473,000 657,000
Deferred federal income tax expense (credit)................. (1,208,000) 474,000 (13,000)
Deferred loan fees........................................... 109,000 (179,000) (2,000)
Depreciation, amortization of intangible assets and premiums
and accretion of discounts on securities and loans......... 2,247,000 2,494,000 1,875,000
Net gains on sales of real estate mortgage loans............. (728,000) (249,000) (721,000)
Net (gains) losses on sales of securities.................... 120,000 174,000 (637,000)
Decrease in accrued income and other assets.............. 286,000 1,891,000 499,000
Increase (decrease) in accrued expenses and other
liabilities................................................. 2,587,000 373,000 (213,000)
---------------------------------------
Total Adjustments............................................ 1,763,000 6,143,000 2,190,000
---------------------------------------
Net Cash from Operating Activities............................ 8,573,000 12,174,000 7,796,000
---------------------------------------
CASH FLOW FROM INVESTING ACTIVITIES
Proceeds from sales of securities available for sale......... 14,054,000 28,384,000 34,341,000
Proceeds from maturities of securities held to maturity...... 13,920,000 25,094,000 9,589,000
Principal payments received on securities available
for sale................................................... 1,347,000 285,000
Principal payments received on securities held to maturity... 5,116,000 8,866,000 12,868,000
Purchases of securities available for sale................... (732,000) (34,658,000) (45,589,000)
Purchases of securities held to maturity..................... (19,423,000) (28,299,000) (30,389,000)
Portfolio loans made to customers, net of principal
payments received.......................................... (88,906,000) (54,751,000) 8,134,000
Acquisitions of banks, less cash received.................... 3,533,000
Acquisition of branch office, less cash received............. 13,949,000
Capital expenditures......................................... (1,642,000) (1,283,000) (2,105,000)
---------------------------------------
Net Cash from Investing Activities......................... (62,317,000) (56,362,000) (9,618,000)
---------------------------------------
CASH FLOW FROM FINANCING ACTIVITIES
Net increase (decrease) in total deposits................... (12,273,000) (14,149,000) 4,634,000
Net increase (decrease) in short-term borrowings............ (347,000) 16,252,000 (297,000)
Proceeds from Federal Home Loan Bank advances............... 104,000,000 44,000,000 6,000,000
Payments of Federal Home Loan Bank advances................. (41,000,000) (10,000,000)
Proceeds from issuance of long-term borrowings.............. 3,000,000
Retirement of debt.......................................... (2,750,000) (250,000)
Dividends paid.............................................. (2,392,000) (1,926,000) (1,380,000)
Proceeds from issuance of common stock...................... 138,000 16,000
Repurchase of common stock.................................. (893,000) (924,000)
---------------------------------------
Net Cash from Financing Activities........................ 47,233,000 30,519,000 11,707,000
---------------------------------------
Net Increase (Decrease) in Cash and Cash Equivalents...... (6,511,000) (13,669,000) 9,885,000
Cash and Cash Equivalents at Beginning of Period............ 23,719,000 37,388,000 27,503,000
---------------------------------------
Cash and Cash Equivalents at End of Period.......... $17,208,000 $23,719,000 $37,388,000
=======================================
Cash paid during the period for
Interest.................................................. $ 17,604,000 $ 12,696,000 $ 12,572,000
Income taxes.............................................. 3,110,000 2,366,000 2,466,000
Transfer of loans to other real estate...................... 555,000 254,000 556,000
Transfer of portfolio loans to held for sale................ 7,100,000
Transfer of securities held to maturity to available
for sale.................................................. 52,601,000 19,283,000
</TABLE>
See notes to consolidated financial statements.
<PAGE> 14
INDEPENDENT BANK CORPORATION - 1995
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
NET UNREALIZED
GAIN (LOSS) ON
SECURITIES TOTAL
COMMON CAPITAL RETAINED AVAILABLE SHAREHOLDERS'
STOCK SURPLUS EARNINGS FOR SALE EQUITY
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balances at January 1, 1993........................ $2,590,000 $17,084,000 $14,793,000 $ 0 $34,467,000
Net Income for 1993................................ 5,606,000 5,606,000
Cash dividends declared, $.52 per share............ (1,432,000) (1,432,000)
Issuance of 21,477 shares of common stock.......... 21,000 387,000 408,000
------------------------------------------------------------------------
Balances at December 31, 1993................... 2,611,000 17,471,000 18,967,000 0 39,049,000
Impact of change in accounting for securities,
net of $46,000 of related tax effect............ 90,000 90,000
Net Income for 1994................................ 6,031,000 6,031,000
Cash dividends declared, $.76 per share............ (2,088,000) (2,088,000)
Issuance of 18,356 shares of common stock.......... 18,000 345,000 363,000
Repurchase of 40,000 shares of
common stock.................................... (40,000) (884,000) (924,000)
Net change in unrealized gain (loss) on
securities available for sale, net of
$1,138,000 of related tax effect................ (2,210,000) (2,210,000)
------------------------------------------------------------------------
Balances at December 31, 1994................... 2,589,000 16,932,000 22,910,000 (2,120,000) 40,311,000
Net income for 1995................................ 6,810,000 6,810,000
Cash dividends declared, $.93 per share............ (2,506,000) (2,506,000)
5% stock dividend.................................. 129,000 3,386,000 (3,531,000) (16,000)
Issuance of 22,430 shares of common stock.......... 22,000 463,000 485,000
Repurchase of 35,900 shares of
common stock.................................... (36,000) (857,000) (893,000)
Transfer of securities held to maturity to
available for sale, net of $443,000 of
related tax effect.............................. 859,000 859,000
Net change in unrealized gain (loss) on
securities available for sale, net of
$1,017,000 of related tax effect................ 1,975,000 1,975,000
-------------------------------------------------------------------------
Balances at December 31, 1995............... $ 2,704,000 $19,924,000 $23,683,000 $ 714,000 $47,025,000
=========================================================================
</TABLE>
See notes to consolidated financial statements.
<PAGE> 15
INDEPENDENT BANK CORPORATION - 1995
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies and practices of Independent Bank
Corporation and subsidiaries conform with generally accepted accounting
principles and prevailing practices within the banking industry. The following
summaries describe the significant accounting and reporting policies that are
employed in the preparation of the consolidated financial statements.
The Banks transact business in the single industry segment of
commercial banking. The Banks' activities cover traditional phases of
commercial banking, including checking and savings accounts, commercial and
agricultural lending, direct and indirect consumer financing, mortgage lending
and deposit box services. The principal markets are the rural and suburban
communities across lower Michigan that are served by the Banks' branch
networks. Subject to established underwriting criteria, the Banks may also
participate in commercial lending transactions with certain non-affiliated
banks and purchase real estate mortgage loans from third-party originators. The
local economies of the communities served by the Banks are relatively stable
and reasonably diversified.
Management is required to make estimates and assumptions in the
preparation of the financial statements which affect the amounts reported.
Material estimates that are particularly susceptible to changes in the
near-term relate to the determination of the allowance for loan losses. While
Management uses relevant information to recognize losses on loans, future
provisions for related losses may be necessary based on changes in economic
conditions and customer circumstances.
PRINCIPLES OF CONSOLIDATION -- The consolidated financial statements
include the accounts of Independent Bank Corporation and its subsidiaries. The
income, expenses, assets and liabilities of the subsidiaries are included in
the respective accounts of the consolidated financial statements, after
elimination of all material intercompany accounts and transactions.
STATEMENTS OF CASH FLOWS -- For purposes of reporting cash flows, cash and
cash equivalents include cash on hand, amounts due from banks, and federal
funds sold. Generally, federal funds are sold for one-day periods. The Company
reports net cash flows for customer loan and deposit transactions.
LOANS HELD FOR SALE -- Loans designated as held for sale are carried at
the lower of aggregate amortized cost or market value. Lower of cost or market
value adjustments, as well as realized gains and losses, are recorded in
current earnings. The Company will adopt Statement of Financial Accounting
Standards No. 122, "Accounting for Mortgage Servicing Rights," ("SFAS #122") on
January 1, 1996. SFAS #122 will require the Banks to prospectively recognize
rights to service mortgage loans as separate assets. This statement will also
require the Banks to assess these mortgage servicing rights for impairment
based on the fair value of those rights. The adoption of SFAS #122 on a
prospective basis in the first quarter of 1996 is not expected to have a
significant effect on the consolidated financial statements.
SECURITIES -- The Company adopted Statement of Financial Accounting
Standards No. 115, "Accounting for Certain Investments in Debt and Equity
Securities," ("SFAS #115") effective January 1, 1994. Under SFAS #115, the
Company is required to classify its securities as trading, held to maturity or
available for sale.
Trading securities are bought and held principally for the purpose of
selling them in the near-term and are reported at fair value with realized and
unrealized gains and losses included in earnings. The Company does not have any
trading securities. Securities classified as held to maturity represent those
securities for which the Banks have the positive intent and ability to hold
until maturity and are reported at cost, adjusted for amortization of premiums
and accretion of discounts computed on the level yield method. Securities
available for sale represent those securities not classified as trading or held
to maturity and are reported at fair value with unrealized gains and losses,
net of applicable income taxes reported as a separate component of
shareholders' equity. Gains and losses realized on the sale of securities
available for sale are determined using the specific identification method and
are recognized on a trade-date basis. Premiums and discounts are recognized in
interest income computed on the level yield method.
The Company adopted Statement of Financial Accounting Standards No. 119,
"Disclosure About Derivative Financial Instruments and Fair Value of Financial
Instruments," ("SFAS #119") effective December 31, 1994. SFAS #119 requires
disclosure about off-balance sheet financial instruments.
LOAN REVENUE RECOGNITION -- Interest on loans is accrued based on the
principal amounts outstanding. The accrual of interest income is discontinued
when a loan becomes 90 days past due and the borrower's capacity to repay the
loan and collateral values appear insufficient. A non-accrual loan may be
restored to accrual status when interest and principal payments are current and
the loan appears otherwise collectible.
<PAGE> 16
INDEPENDENT BANK CORPORATION - 1995
Certain loan fees, net of direct loan origination costs, are deferred and
recognized as an adjustment of yield over the life of the related loan. Fees
received in connection with loan commitments are deferred until the loan is
advanced and are then recognized over the life of the loan as an adjustment of
yield. Fees on commitments that expire unused are recognized at expiration.
Fees received for a letter of credit are recognized as fee revenue over its
life.
ALLOWANCE FOR LOAN LOSSES -- Some loans may not be repaid in full.
Therefore, an allowance for loan losses is maintained at a level which
management has determined to be adequate to absorb inherent losses.
Management's assessment of the allowance is based on prior years' loss
experience, general economic conditions and trends, as well as the review of
specific loans. Increases in the allowance are recorded by a provision for loan
losses charged to expense and, although management periodically allocates
portions of the allowance to specific loans and loan portfolios, the entire
allowance is available for any charge-offs which occur. Collection efforts may
continue and future recoveries may occur after a loan is charged-off.
The Company has adopted Statement of Financial Accounting Standards No.
114, "Accounting by Creditors for Impairment of a Loan," ("SFAS #114"). SFAS
#114, which has been subsequently amended by SFAS #118, requires the Company to
measure its investment in certain impaired loans based on one of three methods:
the loan's observable market price, the fair value of the collateral or the
present value of expected future cash flows discounted at the loan's effective
interest rate. The adoption of this Statement in 1995 did not have a
significant effect on the allowance for loan losses.
PROPERTY AND EQUIPMENT -- Property and equipment is stated at cost less
accumulated depreciation and amortization. Depreciation and amortization is
computed using both straight-line and accelerated methods over the estimated
useful lives of the related assets.
OTHER REAL ESTATE -- Other real estate represents properties acquired
through foreclosure or by acceptance of a deed in lieu of foreclosure. Prior to
1995, loan collateral which had been in-substance foreclosed was included in
other real estate. A portion of these properties has been sold on land contract
or financed at below market terms. The carrying values of these properties are
periodically evaluated and are adjusted to the lower of cost or fair value
minus estimated costs to sell. Other real estate and repossessed assets
totaling $760,000 and $1,381,000 at December 31, 1995 and 1994, respectively,
are included in other assets.
INTANGIBLE ASSETS -- Goodwill, which represents the excess of the purchase
price over the fair value of net tangible assets acquired, is amortized on a
straight-line basis over the period of expected benefit, generally 12 to 20
years. Goodwill totaled $1,099,000 and $1,188,000 as of December 31, 1995 and
1994, respectively. Other intangible assets are amortized using both
straight-line and accelerated methods over 12 to 15 years. Other intangibles
amounted to $1,407,000 and $1,096,000 as of December 31, 1995 and 1994,
respectively.
INCOME TAXES -- Effective January 1, 1993, the Company adopted Statement
of Financial Accounting Standards No. 109, "Accounting for Income Taxes,"
("SFAS #109") with no material impact on the financial statements. SFAS #109
required that the Company employ the asset and liability method of accounting
for income taxes. The objective of this method is to establish deferred tax
assets and liabilities for the temporary differences between the financial
reporting basis and the tax basis of the Company's assets and liabilities at
enacted tax rates expected to be in effect when such amounts are realized or
settled. Under the asset and liability method, the effect of a change in tax
rates is recognized in income in the period that includes the enactment date.
The deferred tax asset is subject to a valuation allowance for that portion of
the asset for which it is more likely than not that it will not be realized.
The Company and its subsidiaries file a consolidated federal income tax
return. Intercompany tax liabilities are settled as if each subsidiary filed a
separate return.
COMMON STOCK -- At December 31, 1995, 44,178 shares of common stock were
reserved for issuance under the Incentive Share Grant Plan, 24,847 shares of
common stock were reserved for issuance under the dividend reinvestment plan
and 122,167 shares of common stock were reserved for issuance under stock
option plans.
EARNINGS PER SHARE -- Earnings per share is based on 2,725,617 average
shares and equivalents outstanding in 1995, 2,755,608 in 1994 and 2,741,320 in
1993.
RETIREMENT PLANS -- The Company maintains an employee stock ownership plan
as well as a 401(k) plan for substantially all full-time employees.
RECLASSIFICATION -- Certain amounts in the 1994 and 1993 financial
statements have been reclassified to conform with the 1995 presentation.
<PAGE> 17
INDEPENDENT BANK CORPORATION - 1995
NOTE 2 -- ACQUISITIONS
On March 7, 1994, KSB Financial, Inc., ("KSB") merged with the Company. As
a result, The Kingston State Bank became a subsidiary of the Company. The
Company issued 225,649 shares of common stock in exchange for all of the
outstanding common stock of KSB. The merger was accounted for as a pooling of
interests and, accordingly, the accompanying financial statements were restated
to include the accounts and operations of KSB for all periods prior to the
merger.
Separate results of operations of the combining entities as of December
31, follows:
<TABLE>
<CAPTION>
1994 1993
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net Interest Income After Provision For Loan Losses
Independent Bank Corporation.................................................... $24,427,000 $19,606,000
KSB Financial, Inc.............................................................. 335,000 1,802,000
------------------------
Total....................................................................... $24,762,000 $21,408,000
========================
Net Income
Independent Bank Corporation.................................................... $6,021,000 $5,376,000
KSB Financial, Inc.............................................................. 10,000 230,000
-----------------------
Total....................................................................... $6,031,000 $5,606,000
=======================
</TABLE>
In October 1993, the Company acquired American Home Bank ("American") and
Pioneer Bank ("Pioneer"). Cash consideration totaled $2,518,000 and $4,589,000
respectively. The transactions were accounted for as purchases and,
accordingly, the assets acquired and the liabilities assumed were recorded at
fair value. The Company's results of operations include revenues and expenses
relating to American and Pioneer since September 30, 1993.
The pro-forma information presented in the following table is based on
historical results of the Company, American and Pioneer. The information has
been combined to present the results of operations as if the acquisitions had
occurred at the beginning of the period presented. The following pro-forma
results for the year ended December 31 are not necessarily indicative of the
results which would have actually been attained if the acquisitions had been
consummated in the past or what may be attained in the future.
<TABLE>
<CAPTION>
1993
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C>
(Unaudited)
Total revenue................................................................. $42,700,000
Net income.................................................................... 5,700,000
Earnings per share............................................................ 2.08
</TABLE>
NOTE 3 -- PENDING ACQUISITION
On February 2, 1996, the Company entered into a definitive agreement to
merge with North Bank Corporation ("NBC"). As a result, North Bank will become
a subsidiary of the Company. Cash consideration is anticipated to approximate
$16,300,000. At December 31, 1995, NBC had total assets and loans of
$153,600,000 and $91,200,000 (unaudited), respectively. The transaction is
subject to approval by NBC shareholders and the Federal Reserve Board and will
be accounted for as a purchase. Accordingly, the assets acquired and the
liabilities assumed will be recorded at fair value. Goodwill is anticipated to
approximate $6,000,000.
NOTE 4 -- RESTRICTIONS ON CASH AND DUE FROM BANKS
The Banks' legal reserve requirements were satisfied by maintaining
non-interest earning vault cash balances of $2,661,000 in 1995 and $2,547,000
in 1994. The Banks do not maintain compensating balances with correspondent
banks.
<PAGE> 18
INDEPENDENT BANK CORPORATION - 1995
NOTE 5 -- SECURITIES
Securities available for sale consist of the following at December 31:
<TABLE>
<CAPTION>
AMORTIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1995
U.S. Treasury.................................................. $23,189,000 $ 188,000 $ 105,000 $23,272,000
U.S. Government agencies....................................... 6,557,000 79,000 13,000 6,623,000
Mortgage-backed securities..................................... 37,238,000 661,000 177,000 37,722,000
Obligations of states and political subdivisions............... 8,682,000 608,000 9,290,000
Other securities............................................... 10,805,000 2,000 161,000 10,646,000
------------------------------------------------------------
Total.................................................... $86,471,000 $1,538,000 $ 456,000 $87,553,000
============================================================
1994
U.S. Treasury.................................................. $36,099,000 $1,375,000 $34,724,000
Mortgage-backed securities..................................... 12,718,000 1,034,000 11,684,000
Other securities............................................... 7,151,000 803,000 6,348,000
------------------------------------------------------------
Total.................................................... $55,968,000 $ 0 $3,212,000 $52,756,000
============================================================
</TABLE>
Securities held to maturity consist of the following at December 31:
<TABLE>
<CAPTION>
AMORTIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1995
U.S. Government agencies....................................... $ 2,559,000 $ 70,000 $ 2,629,000
Mortgage-backed securities..................................... 4,487,000 13,000 $ 18,000 4,482,000
Obligations of states and political subdivisions............... 20,142,000 1,074,000 12,000 21,204,000
Other securities............................................... 718,000 2,000 716,000
------------------------------------------------------------
Total.................................................... $27,906,000 $1,157,000 $ 32,000 $29,031,000
============================================================
1994
U.S. Treasury.................................................. $ 5,738,000 $ 5,000 $ 223,000 $ 5,520,000
U.S. Government agencies....................................... 11,004,000 371,000 10,633,000
Mortgage-backed securities..................................... 26,545,000 136,000 376,000 26,305,000
Obligations of states and political subdivisions............... 27,240,000 835,000 163,000 27,912,000
Other securities............................................... 7,194,000 114,000 7,080,000
------------------------------------------------------------
Total.................................................... $77,721,000 $ 976,000 $1,247,000 $77,450,000
============================================================
</TABLE>
The amortized cost and approximate fair value of securities at December
31, 1995, by contractual maturity, follow. Actual maturities will differ from
contractual maturities because issuers may have the right to call or prepay
obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
AVAILABLE FOR SALE HELD TO MATURITY
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Maturing within one year......................................... $13,004,000 $12,939,000 $ 1,187,000 $ 1,189,000
Maturing after one year but within five years.................... 19,399,000 19,695,000 9,028,000 9,399,000
Maturing after five years but within ten years................... 9,922,000 10,446,000 10,607,000 11,229,000
Maturing after ten years......................................... 2,591,000 2,726,000
------------------------------------------------------------
42,325,000 43,080,000 23,413,000 24,543,000
Mortgage-backed securities....................................... 37,238,000 37,722,000 4,487,000 4,482,000
Other securities................................................. 6,908,000 6,751,000 6,000 6,000
------------------------------------------------------------
Total.................................................... $86,471,000 $87,553,000 $27,906,000 $29,031,000
============================================================
</TABLE>
<PAGE> 19
INDEPENDENT BANK CORPORATION - 1995
A summary of proceeds from the sale of securities available for sale and
realized gains and losses follows:
<TABLE>
<CAPTION>
REALIZED REALIZED
PROCEEDS GAINS LOSSES
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1995...................................................................... $ 14,054,000 $ 8,000 $128,000
1994...................................................................... 28,384,000 228,000 402,000
1993...................................................................... 34,341,000 658,000 21,000
</TABLE>
Securities with a book value of $20,816,000 and $10,948,000 at December
31, 1995 and 1994, respectively, were pledged to secure public deposits and for
other purposes as required by law.
There were no investment obligations of state and political subdivisions
that were payable from or secured by the same source of revenue or taxing
authority that exceeded 10% of consolidated shareholders' equity at December
31, 1995 or 1994.
During November 1995, the Financial Accounting Standards Board issued a
"Guide to Implementation of Statement #115 on Accounting for Certain Investment
in Debt and Equity Securities." This guide allowed for a one-time change in the
classification of securities pursuant to SFAS #115 as of the date of the
implementation guide, but no later than December 31, 1995. As a result, the
Banks made a transfer of $52,601,000 to securities available for sale.
NOTE 6 -- LOANS
An analysis of the allowance for loan losses for the years ended December 31
follows:
<TABLE>
<CAPTION>
1995 1994 1993
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of period............................................ $5,054,000 $5,053,000 $4,023,000
Allowance on loans acquired......................................... 756,000
Provision charged to operating expense.............................. 636,000 473,000 657,000
Recoveries credited to allowance.................................... 265,000 399,000 331,000
Loans charged against allowance..................................... (712,000) (871,000) (714,000)
---------------------------------------------
Balance at end of period.................................................. $5,243,000 $5,054,000 $5,053,000
=============================================
</TABLE>
Loans are presented net of deferred income of $1,434,000 at December 31,
1995, and $1,325,000 at December 31, 1994.
Loans on non-accrual status, 90 days or more past due and still accruing
interest, or restructured amounted to $2,560,000, $2,834,000 and $3,213,000 at
December 31, 1995, 1994 and 1993, respectively. If these loans had continued to
accrue interest in accordance with their original terms, approximately
$263,000, $259,000, and $261,000 of interest income would have been realized in
1995, 1994 and 1993, respectively. Interest income accrued on these loans was
approximately $64,000, $102,000 and $143,000 in 1995, 1994 and 1993,
respectively.
Impaired loans totaled approximately $3,200,000 at December 31, 1995. In
addition to certain non-performing loans, other than homogeneous residential
mortgage and installment loans, impaired loans include commercial and
agricultural loans totaling $1,800,000 that have been separately identified as
impaired. The Banks' average investment in impaired loans approximated
$2,300,000 in 1995. Cash receipts on impaired loans on non-accrual status are
generally applied to the principal balance. Interest income recognized on
impaired loans in 1995 was approximately $70,000. Certain impaired loans with a
balance of approximately $700,000 had specific allocations of the allowance for
loan losses calculated in accordance with SFAS #114 totaling approximately
$250,000 at December 31, 1995. As a result of the implementation of SFAS #114,
certain loans that had previously been identified as in-substance foreclosed
and classified as other real estate have been transferred to loans at December
31, 1995.
At December 31, 1995, 1994 and 1993, the Banks serviced loans totaling
approximately $124,000,000, $103,500,000 and $78,000,000, respectively, for the
benefit of third parties.
<PAGE> 20
INDEPENDENT BANK CORPORATION - 1995
NOTE 7 -- PROPERTY AND EQUIPMENT
A summary of property and equipment at December 31 follows:
<TABLE>
<CAPTION>
1995 1994
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Land.................................................................................... $ 1,662,000 $ 1,409,000
Buildings............................................................................... 9,554,000 8,956,000
Equipment............................................................................... 7,988,000 7,177,000
------------------------
19,204,000 17,542,000
Accumulated depreciation and amortization............................................... (9,273,000) (8,049,000)
------------------------
Property and equipment, net........................................................ $ 9,931,000 $ 9,493,000
========================
</TABLE>
NOTE 8 -- DEPOSITS
A summary of interest expense on deposits for the years ended December
31 follows:
<TABLE>
<CAPTION>
1995 1994 1993
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Savings and NOW......................................................................... $ 5,515,000 $ 4,819,000 $ 4,887,000
Time deposits under $100,000............................................................ 6,072,000 5,705,000 6,508,000
Time deposits of $100,000 or more....................................................... 883,000 568,000 632,000
-------------------------------------
Total............................................................................. $12,470,000 $11,092,000 $12,027,000
=====================================
</TABLE>
Aggregate time certificates of deposit and other time deposits in
denominations of $100,000 or more amounted to $19,497,000, $11,231,000, and
$14,124,000 at December 31, 1995, 1994 and 1993, respectively.
NOTE 9 -- OTHER BORROWINGS
A summary of other borrowings at December 31 follows:
<TABLE>
<CAPTION>
1995 1994
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Advances from Federal Home Loan Bank.................................................... $103,000,000 $40,000,000
U.S. Treasury demand notes.............................................................. 1,223,000 1,985,000
Repurchase agreements................................................................... 6,666,000 5,752,000
Other................................................................................... 5,000 4,000
-------------------------
Total............................................................................. $110,894,000 $47,741,000
=========================
</TABLE>
Advances from the Federal Home Loan Bank ("FHLB") at December 31, 1995 and
1994, are secured by the Banks' unencumbered qualifying mortgage loans as well
as U.S. Treasury and government agency securities equal to at least 170% of
outstanding advances. Maturities and weighted average interest rates are as
follows:
<TABLE>
<CAPTION>
1995 1994
AMOUNT RATE AMOUNT RATE
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Fixed rate advances
1995............................. $ 3,000,000 6.90%
1996............................. $ 27,000,000 5.61%
1997............................. 34,000,000 6.01
1998............................. 16,000,000 5.94
----------------------------------------
Total fixed rate advances...... 77,000,000 5.86 3,000,000 6.90
----------------------------------------
Variable rate advances
1995............................. 37,000,000 6.15
1996............................. 15,000,000 5.76
1997............................. 4,000,000 5.86
2000............................. 7,000,000 6.66
----------------------------------------
Total variable rate advances.. 26,000,000 6.02 37,000,000 6.15
----------------------------------------
Total advances............... $103,000,000 5.90% $40,000,000 6.21%
========================================
</TABLE>
Interest expense on advances amounted to $3,836,000, $761,000 and $55,000
for the years ending December 31, 1995, 1994 and 1993, respectively.
<PAGE> 21
INDEPENDENT BANK CORPORATION - 1995
As members of the FHLB system, the Banks must own FHLB stock equal to the
greater of 1.0% of the unpaid principal balances of residential mortgage loans,
0.3% of its total assets, or 5.0% of its outstanding advances. At December 31,
1995, the Banks are in compliance with the FHLB stock ownership requirements.
The Company also has a $3,000,000 revolving credit agreement secured by
the capital stock of one of the Banks. At December 31, 1995, no amounts were
outstanding on this revolving credit agreement.
NOTE 10 -- FEDERAL INCOME TAX
The composition of federal income tax expense for the years ended December 31
follows:
<TABLE>
<CAPTION>
1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current ................................................................... $ 3,908,000 $1,855,000 $2,178,000
Deferred .................................................................. (1,208,000) 474,000 (13,000)
---------------------------------------
Federal income tax expense ........................................... $ 2,700,000 $2,329,000 $2,165,000
=======================================
</TABLE>
A reconciliation of federal income tax expense to the amount computed by
applying the statutory federal income tax rate of 34% to income before federal
income tax for the years ended December 31 follows:
<TABLE>
<CAPTION>
1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory rate applied to income before federal income tax ................ $3,233,000 $2,842,000 $2,642,000
Tax-exempt interest income ................................................ (587,000) (586,000) (584,000)
Amortization of goodwill .................................................. 54,000 58,000 49,000
Other, net ............................................................... 15,000 58,000
---------------------------------------
Federal income tax expense .......................................... $2,700,000 $2,329,000 $2,165,000
=======================================
</TABLE>
The deferred federal income tax benefit of $1,208,000 in 1995, expense of
$474,000 in 1994, and benefit of $13,000 in 1993, resulted from the tax effects
of temporary differences. There was no impact for changes in tax laws and rates
or changes in the valuation allowance for deferred tax assets.
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31
follow:
<TABLE>
<CAPTION>
1995 1994
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets
Allowance for loan losses ............................................................. $ 961,000 $ 821,000
Deferred compensation ................................................................. 598,000 481,000
Deferred loan fees .................................................................... 486,000 458,000
Deferred credit life premiums ......................................................... 145,000 136,000
Mortgage servicing fees ............................................................... 112,000 128,000
Unrealized loss on securities available for sale ...................................... 1,092,000
Other ................................................................................. 443,000 205,000
------------------------
Gross deferred tax assets .......................................................... 2,745,000 3,321,000
------------------------
Deferred tax liabilities
Unrealized gain on securities available for sale ...................................... 368,000
Purchase premiums ..................................................................... 134,000 177,000
Securities and loans marked-to-market for tax purposes ................................ 622,000
Other ................................................................................. 27,000
------------------------
Gross deferred tax liabilities ..................................................... 502,000 826,000
------------------------
Net deferred tax assets ........................................................... $2,243,000 $2,495,000
========================
</TABLE>
The Company's aggregate income subject to federal income tax for the three
years ended December 31, 1995, totaled approximately $25,600,000. Consequently,
Management believes that at December 31, 1995, it is more likely than not that
the benefit of the gross deferred tax assets of $2,745,000 will be realized and
no valuation allowance is deemed necessary as of December 31, 1995.
<PAGE> 22
INDEPENDENT BANK CORPORATION - 1995
NOTE 11 -- EMPLOYEE BENEFIT PLANS
During 1992, the Company's shareholders approved the adoption of stock
option plans for certain employees of the Company and the Banks and for
non-employee directors of the Company. An aggregate of 131,250 shares of common
stock has been authorized for issuance under the plans. Options granted under
these plans are exercisable not earlier than one year after the date of grant,
at a price equal to the fair market value of the common stock on the date of
grant, and expire five years after the date of grant.
The following table summarizes outstanding grants and stock option transactions:
<TABLE>
<CAPTION>
NUMBER AVERAGE
OF EXERCISE
SHARES PRICE
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
Outstanding at December 31, 1992 .............................................. 21,000 $14.65
Granted ..................................................................... 21,000 19.23
Forfeited ................................................................... (1,050) 15.00
----------------
Outstanding at December 31, 1993 .............................................. 40,950 16.99
Granted ..................................................................... 22,050 19.05
Exercised ................................................................... (1,050) 15.00
----------------
Outstanding at December 31, 1994 .............................................. 61,950 17.76
Granted ..................................................................... 25,200 23.70
Exercised ................................................................... (8,033) 17.04
Forfeited ................................................................... (1,050) 23.33
----------------
Outstanding at December 31, 1995 .............................................. 78,067 $19.67
================
</TABLE>
The Company has a 401(k) and an employee stock ownership plan covering
substantially all full-time employees of the Company and the Banks. The Company
matches employee contributions to the 401(k) up to a maximum of 3% of
participating employees' eligible wages. Contributions to the employee stock
ownership plan are determined annually and require approval of the Company's
Board of Directors. For the years ended December 31, 1995, 1994 and 1993,
$704,000, $365,000 and $452,000 respectively, was expensed for these retirement
plans.
Officers of the Company and the Banks participate in various
performance-based compensation plans. The 1988 Incentive Share Grant Plan
provides that the Board of Directors, at its sole discretion, may award
restricted shares of common stock to the participants in the Management
Incentive Compensation Plan in lieu of cash bonuses. The market value of such
incentive shares at the date of grant must equal twice the amount of the cash
incentive otherwise payable. Shares of common stock issued pursuant to the
Incentive Share Grant Plan vest over four years. For the years ended December
31, 1995, 1994 and 1993, amounts expensed for all incentive plans totaled
$876,000, $633,000, and $784,000, respectively.
The Company also provides certain health care and life insurance programs
to substantially all full-time employees. These insurance programs are
available to retired employees at their expense.
Effective January 1, 1996, the Company will adopt Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation", ("SFAS
#123"). SFAS #123 encourages companies to adopt a fair value method of
accounting for stock compensation plans. Those companies not adopting a fair
value method will be required to make pro-forma disclosures of net income and
earnings per share as if they had adopted the fair value accounting method.
Management anticipates the Company will elect the pro-forma disclosure method.
NOTE 12 -- FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
In the normal course of business, the Banks enter into financial
instruments with off-balance sheet risk to meet the financing needs of
customers or to reduce exposure to fluctuations in interest rates. These
financial instruments may include commitments to extend credit, standby letters
of credit and interest rate swaps. There were no interest rate swaps in 1995,
1994 and 1993. Financial instruments involve varying degrees of credit and
interest rate risk in excess of amounts reflected in the consolidated balance
sheets. Exposure to credit risk in the event of non-performance by the
counterparties to the financial instruments for loan commitments to extend
credit and letters of credit is represented by the contractual amounts of those
instruments. Management does not, however, anticipate material losses as a
result of these financial instruments.
<PAGE> 23
INDEPENDENT BANK CORPORATION - 1995
<TABLE>
<CAPTION>
A summary of financial instruments with off-balance sheet risk at December 31 follows:
1995 1994
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Financial instruments whose risk is represented by contract amounts
Commitments to extend credit............................................... $50,821,000 $34,266,000
Standby letters of credit.................................................. 2,427,000 2,858,000
</TABLE>
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and generally require payment of a fee. Since many of the commitments are
expected to expire without being drawn upon, the commitment amounts do not
represent future cash requirements. Commitments are issued subject to similar
underwriting standards, including collateral requirements, as are generally
involved in the extension of credit facilities.
Standby letters of credit are written conditional commitments issued by
the Banks to guarantee the performance of a customer to a third party,
primarily public and private borrowing arrangements. Standby letters of credit
generally extend for periods of less than one year. The credit risk involved in
such transactions is essentially the same as that involved in extending loan
facilities and, accordingly, standby letters of credit are issued subject to
similar underwriting standards, including collateral requirements, as are
generally involved in the extension of credit facilities.
NOTE 13 -- RELATED PARTY TRANSACTIONS
- --------------------------------------------------------------------------------
Certain directors and executive officers of the Company and the Banks,
including companies in which they are officers or have significant ownership,
were loan customers of the Banks during 1995 and 1994.
A summary of loans to directors and executive officers whose borrowing
relationship exceeds $60,000, and to entities in which they own a 10% or more
voting interest for the years ended December 31 follows:
<TABLE>
<CAPTION>
1995 1994
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Balance at beginning of period............................................... $5,322,000 $4,765,000
New loans and advances..................................................... 3,265,000 7,145,000
Repayments................................................................. (3,900,000) (6,588,000)
-----------------------
Balance at end of period..................................................... $4,687,000 $5,322,000
=======================
<CAPTION>
NOTE 14 -- OTHER OPERATING EXPENSES
- ----------------------------------------------------------------------------------------------------------------
Other operating expenses for the years ended December 31, follow:
1995 1994 1993
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Loan and collection............................................ $1,030,000 $ 626,000 $724,000
Computer processing............................................ 818,000 786,000 674,000
Communications................................................. 791,000 728,000 614,000
Supplies....................................................... 561,000 498,000 423,000
State taxes.................................................... 537,000 496,000 435,000
Deposit insurance.............................................. 499,000 966,000 858,000
Legal and professional......................................... 307,000 406,000 394,000
Other.......................................................... 2,103,000 1,795,000 1,892,000
------------------------------------
Total..................................................... $6,646,000 $6,301,000 $6,014,000
====================================
</TABLE>
NOTE 15 -- UNDISTRIBUTED INCOME AND DIVIDEND LIMITATIONS OF SUBSIDIARIES
Capital guidelines adopted by Federal and State regulatory agencies and
restrictions imposed by law limit the amount of cash dividends the Banks can
pay to the Company. At December 31, 1995, using the most restrictive of these
conditions for each Bank, the aggregate cash dividends that the Banks can pay
the Company without prior approval is approximately $18,930,000. It is not the
intent of Management to have dividends paid in amounts which would reduce the
capital of the Banks to levels below those which are considered prudent by
management and in accordance with guidelines of regulatory authorities.
<PAGE> 24
INDEPENDENT BANK CORPORATION - 1995
NOTE 16 -- FAIR VALUES OF FINANCIAL INSTRUMENTS
- --------------------------------------------------------------------------------
Statement of Financial Accounting Standards No. 107, "Disclosures About
Fair Value of Financial Instruments" requires that the Company disclose
estimated fair values for its financial instruments. Many of the Company's
financial instruments lack an available trading market. Further, it is the
Company's general practice and intent to hold the majority of its financial
instruments to maturity. Significant estimates and assumptions were used to
determine the fair value of financial instruments. These estimates are
subjective in nature, involving uncertainties and matters of judgment, and
therefore, fair values cannot be determined with precision. Changes in
assumptions could significantly affect the estimates.
Estimated fair values have been determined using available data and an
estimation methodology that is considered suitable for each category of
financial instrument. For assets and liabilities with floating interest rates
which reprice frequently and without significant credit risk, it is presumed
that estimated fair values approximate the recorded book balances.
Financial instrument assets actively traded in a secondary market, such as
securities, have been valued using quoted market prices while recorded book
balances have been used for cash and due from banks and federal funds sold.
The fair value of loans is calculated by discounting estimated future cash
flows using estimated market discount rates that reflect credit and interest
rate risk inherent in the loan.
Financial instruments with stated maturities, such as certificates of
deposit, have been valued based on the discounted value of contractual cash
flows using a discount rate approximating current market rates for liabilities
with similar remaining maturities.
Financial instrument liabilities with no stated maturities, such as demand
deposits, savings, NOW and money market accounts, have a fair value equal to
the amount payable on demand.
The estimated fair values and recorded book balances at December 31
follow:
<TABLE>
<CAPTION>
1995 1994
ESTIMATED RECORDED ESTIMATED RECORDED
FAIR BOOK FAIR BOOK
VALUE BALANCE VALUE BALANCE
- -------------------------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C>
ASSETS
Cash and due from banks ............................ $ 17,200 $ 17,200 $ 22,900 $ 22,900
Federal funds sold ................................. 900 900
Securities available for sale ...................... 87,600 87,600 52,800 52,800
Securities held to maturity ........................ 29,000 27,900 77,500 77,700
Net loans and loans held for sale .................. 432,000 428,800 330,700 337,600
LIABILITIES
Deposits with no stated maturities ................. $261,500 $261,500 $275,800 $275,800
Deposits with stated maturities .................... 150,300 150,100 132,500 133,700
Other borrowings ................................... 124,400 124,300 61,600 61,600
</TABLE>
The fair values for commitments to extend credit and standby letters of
credit are estimated to approximate their aggregate book balance.
Fair value estimates are made at a specific point in time, based on
relevant market information and information about the financial instrument.
These estimates do not reflect any premium or discount that could result from
offering for sale the entire holdings of a particular financial instrument.
Fair value estimates are based on existing on and off-balance sheet
financial instruments without attempting to estimate the value of anticipated
future business, the value of future earnings attributable to off-balance sheet
activities and the value of assets and liabilities that are not considered
financial instruments.
Fair value estimates for deposit accounts do not include the value of the
substantial core deposit intangible asset resulting from the low-cost funding
provided by the deposit liabilities compared to the cost of borrowing funds in
the market.
<PAGE> 25
INDEPENDENT BANK CORPORATION - 1995
NOTE 17 -- INDEPENDENT BANK CORPORATION (PARENT COMPANY ONLY)
FINANCIAL INFORMATION
Presented below are condensed financial statements for the parent company.
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF FINANCIAL CONDITION DECEMBER 31,
1995 1994
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks.......................................... $ 2,761,000 $ 1,865,000
Investment in subsidiaries....................................... 44,212,000 38,058,000
Other assets..................................................... 1,713,000 1,667,000
------------------------
Total Assets................................................. $48,686,000 $41,590,000
========================
LIABILITIES AND SHAREHOLDERS' EQUITY
Other liabilities................................................ $ 1,661,000 $ 1,279,000
Shareholders' equity............................................. 47,025,000 40,311,000
------------------------
Total Liabilities and Shareholders' Equity................... $48,686,000 $41,590,000
========================
</TABLE>
CONDENSED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1995 1994 1993
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING INCOME
Dividends from subsidiaries...................................... $4,500,000 $5,560,000 $5,426,000
Management fees from subsidiaries and other income............... 4,248,000 4,028,000 3,362,000
----------------------------------
Total Operating Income......................................... 8,748,000 9,588,000 8,788,000
----------------------------------
OPERATING EXPENSES
Interest expense................................................. 120,000 34,000
Administrative and other expenses................................ 5,226,000 4,849,000 4,387,000
----------------------------------
Total Operating Expenses....................................... 5,226,000 4,969,000 4,421,000
----------------------------------
Income Before Federal Income Tax and Undistributed Net Income
of Subsidiaries.............................................. 3,522,000 4,619,000 4,367,000
Federal income tax credit......................................... 320,000 310,000 313,000
----------------------------------
Income Before Equity in Undistributed Net Income
of Subsidiaries.............................................. 3,842,000 4,929,000 4,680,000
Equity in undistributed net income of subsidiaries................ 2,968,000 1,102,000 926,000
----------------------------------
Net Income................................................. $6,810,000 $6,031,000 $5,606,000
==================================
</TABLE>
<PAGE> 26
INDEPENDENT BANK CORPORATION - 1995
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
1995 1994 1993
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Income ........................................................ $6,810,000 $6,031,000 $5,606,000
-------------------------------------
ADJUSTMENTS TO RECONCILE NET INCOME
TO NET CASH FROM OPERATING ACTIVITIES
Depreciation, amortization of intangible assets and premiums,
and accretion of discounts on securities and loans............. 297,000 286,000 215,000
(Increase) decrease in other assets.............................. (604,000) 547,000 (332,000)
Increase in other liabilities.................................... 599,000 298,000 560,000
Equity in undistributed net income of subsidiaries............... (2,968,000) (1,102,000) (926,000)
-------------------------------------
Total Adjustments.............................................. (2,676,000) 29,000 (483,000)
-------------------------------------
Net Cash from Operating Activities............................. 4,134,000 6,060,000 5,123,000
-------------------------------------
CASH FLOW FROM INVESTING ACTIVITIES
Purchase of securities available for sale........................ (241,000) (233,000)
Capital expenditures............................................. (127,000) (142,000) (594,000)
Investment in subsidiaries....................................... (7,214,000)
Proceeds from sale of property and equipment..................... 36,000 13,000
-------------------------------------
Net Cash from Investing Activities............................. (91,000) (383,000) (8,028,000)
-------------------------------------
CASH FLOW FROM FINANCING ACTIVITIES
Proceeds from issuance of long-term borrowings................... 3,000,000
Repayment of debt................................................ (2,750,000) (250,000)
Dividends paid................................................... (2,392,000) (1,926,000) (1,380,000)
Proceeds from issuance of common stock........................... 138,000 16,000
Repurchase of common stock....................................... (893,000) (924,000)
-------------------------------------
Net Cash from Financing Activities............................. (3,147,000) (5,584,000) 1,370,000
-------------------------------------
Net Increase (Decrease) in Cash and Cash Equivalents........... 896,000 93,000 (1,535,000)
Cash and Cash Equivalents at Beginning of Period................... 1,865,000 1,772,000 3,307,000
-------------------------------------
Cash and Cash Equivalents at End of Period................. $2,761,000 $1,865,000 $1,772,000
=====================================
</TABLE>
<PAGE> 27
INDEPENDENT BANK CORPORATION - 1995
INDEPENDENT AUDITOR'S REPORT
BOARD OF DIRECTORS AND SHAREHOLDERS
INDEPENDENT BANK CORPORATION
IONIA, MICHIGAN
We have audited the accompanying consolidated statements of financial
condition of Independent Bank Corporation and subsidiaries as of December 31,
1995 and 1994, and the related consolidated statements of operations,
shareholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 1995. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express
our opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Independent
Bank Corporation and subsidiaries as of December 31, 1995 and 1994, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1995, in conformity with generally
accepted accounting principles.
As discussed in note 1 to the consolidated financial statements, the
Company changed its method of accounting for income taxes in 1993 to adopt the
provisions of Financial Accounting Standards Board's Statement of Financial
Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes." As
discussed in note 1, the Company changed its method of accounting for
investments to adopt the provisions of Financial Accounting Standards Board's
SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities" at January 1, 1994. As discussed in note 1, the Company changed its
method of accounting for impaired loans in 1995 to adopt the provisions of
Financial Accounting Standards Board's SFAS No. 114, "Accounting by Creditors
for Impairment of a Loan", as amended by SFAS No. 118, "Accounting by Creditors
for Impairment of a Loan - Income Recognition and Disclosures."
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Lansing, Michigan
February 1, 1996
<PAGE> 28
INDEPENDENT BANK CORPORATION - 1995
QUARTERLY SUMMARY
<TABLE>
<CAPTION>
REPORTED SALE PRICES OF COMMON SHARES CASH DIVIDENDS
1995 1994 DECLARED
---------------------------------------------------------------------------------
HIGH LOW CLOSE HIGH LOW CLOSE 1995 1994
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
First quarter............... $23.75 $22.50 $23.75 $19.00 $17.50 $18.50 $.23 $.19
Second quarter.............. 25.25 22.75 25.00 22.00 18.00 21.25 .23 .19
Third quarter............... 28.75 24.25 27.50 22.25 20.25 22.00 .23 .19
Fourth quarter.............. 28.50 26.50 26.75 23.75 21.50 22.50 .24 .19
</TABLE>
The Company has approximately 1,900 holders of record of its common stock.
The common stock trades on the Nasdaq stock market under the symbol "IBCP". The
prices shown above are supplied by Nasdaq and reflect the interdealer prices
and may not include retail markups, markdowns or commissions. There may have
been transactions or quotations at higher or lower prices of which the Company
is not aware.
In addition to the provisions of the Michigan Business Corporations Act,
the Company's ability to pay dividends is limited by its ability to obtain
funds from the Banks and by regulatory capital guidelines applicable to the
Company. (See note 15 to the Consolidated Financial Statements.)
QUARTERLY FINANCIAL DATA
A summary of selected quarterly results of operations for the years ended
December 31 follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH JUNE SEPTEMBER DECEMBER
31, 30, 30, 31,
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1995
Interest income.......................... $10,412,000 $11,181,000 $11,941,000 $12,448,000
Net interest income...................... 6,523,000 6,942,000 7,188,000 7,429,000
Provision for loan losses................ 159,000 159,000 159,000 159,000
Net income before income tax expense..... 2,161,000 2,266,000 2,508,000 2,575,000
Net income............................... 1,556,000 1,636,000 1,795,000 1,823,000
Net income per common share............... .57 .60 .66 .67
1994
Interest income.......................... $ 9,018,000 $ 9,233,000 $ 9,540,000 $10,029,000
Net interest income...................... 5,888,000 6,244,000 6,464,000 6,639,000
Provision for loan losses................ 126,000 126,000 108,000 113,000
Net income before income tax expense..... 1,862,000 2,051,000 2,207,000 2,240,000
Net income............................... 1,376,000 1,468,000 1,577,000 1,610,000
Net income per common share............... .50 .53 .57 .59
</TABLE>
<PAGE> 29
INDEPENDENT BANK CORPORATION - 1995
SHAREHOLDER INFORMATION
HOW TO ORDER FORM 10-K
Shareholders may obtain, without charge, a copy of Form 10-K, the 1995
Annual Report to the Securities and Exchange Commission, by writing to William
R. Kohls, Chief Financial Officer, Independent Bank Corporation, P.O. Box 491,
Ionia, Michigan 48846.
NOTICE OF ANNUAL MEETING
The Company's Annual Meeting of Shareholders will be held at 3:00 p.m. on
April 16, 1996, in the Ionia Theater located at 205 West Main Street, Ionia,
Michigan, 48846.
TRANSFER AGENT AND REGISTRAR
State Street Bank & Trust Company, (P.O. Box 8200, Boston, Massachusetts
02266-8200, 800/426-5523) serves as transfer agent and registrar of the
Company's common stock.
DIVIDEND REINVESTMENT
The Company maintains an Automatic Dividend Reinvestment and Stock
Purchase Plan which provides an opportunity for shareholders to reinvest cash
dividends into the Company's common stock. Optional cash purchases are also
permitted. A prospectus is available by writing to the Company's Chief
Financial Officer.
MARKET MAKERS
Registered market makers at December 31, 1995 follow:
Burns, Pauli & Co., Inc. Howe, Barnes Investments, Inc.
The Chicago Corporation Robert W. Baird & Co., Inc.
First of Michigan Corporation Roney & Company
Herzog, Heine, Geduld, Inc.
EXECUTIVE OFFICERS AND DIRECTORS
EXECUTIVE OFFICERS
Charles C. Van Loan, President and Chief Executive Officer, Independent
Bank Corporation
Jeffrey A. Bratsburg, President and Chief Executive Officer, Independent
Bank West Michigan
Ronald L. Long, President and Chief Executive Officer, Independent Bank
East Michigan
Michael M. Magee, President and Chief Executive Officer, Independent Bank
Edward B. Swanson, President and Chief Executive Officer, Independent Bank
South Michigan
William R. Kohls, Executive Vice President and Chief Financial Officer
DIRECTORS
William F. Ehinger, President, Grabill Kitchens and Interiors,
Manufacturers Representative, Rockford
Thomas F. Kohn, Chief Executive Officer, Belco Industries, Inc.,
Manufacturer, Belding
Robert J. Leppink, President, Leppink's Inc., Retail Grocer, Belding
Rex P. O'Connor, Attorney, Ionia
Charles A. Palmer, Professor of Law, Cooley Law School, Lansing
Charles C. Van Loan, President and Chief Executive Officer, Independent
Bank Corporation, Ionia
Arch V. Wright, Jr., President, Charlevoix Development Company, Real
Estate Development, Charlevoix
<PAGE> 1
EXHIBIT 21
INDEPENDENT BANK CORPORATION
Subsidiries of the Registrant
State of Incorporation
----------------------
<TABLE>
<S> <C>
Independent Bank
Ionia, Michigan Michigan
Independent Bank West Michigan
Rockford, Michigan Michigan
Independent Bank South Michigan
Leslie, Michigan Michigan
Independent Bank East Michigan
Caro, Michigan Michigan
IBC Financial Services, Inc.
(a subsidiary of Independent Bank)
Ionia, Michigan Michigan
</TABLE>
<PAGE> 1
(on KPMG Peat Marwick LLP letterhead)
EXHIBIT 23
Consent of Independent Certified Public Accountants
The Board of Directors
Independent Bank Corporation:
We consent to incorporation by reference in registration statements (No.
33-80088) on Form S-3 and (No. 33-62086 and 33-62090) on Forms S-8
of Independent Bank Corporation of our report dated February 1, 1996,
relating to the consolidated statements of financial condition of Independent
Bank Corporation and subsidiaries as of December 31, 1995 and 1994, and the
related consolidated statements of operations, shareholders' equity, and cash
flows for each of the years in the three-year period ended December 31, 1995,
which report is incorporated by reference in the December 31, 1995, annual
report on Form 10-K of Independent Bank Corporation.
/s/ KPMG Peat Marwick LLP
Lansing, Michigan
March 22, 1996
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<CASH> 17,208
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 87,553
<INVESTMENTS-CARRYING> 27,906
<INVESTMENTS-MARKET> 29,031
<LOANS> 418,044
<ALLOWANCE> 5,243
<TOTAL-ASSETS> 590,147
<DEPOSITS> 411,624
<SHORT-TERM> 124,294
<LIABILITIES-OTHER> 7,204
<LONG-TERM> 0
0
0
<COMMON> 2,704
<OTHER-SE> 44,321
<TOTAL-LIABILITIES-AND-EQUITY> 590,147
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<INTEREST-INVEST> 8,121
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<INTEREST-TOTAL> 45,982
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<INCOME-PRETAX> 9,510
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<LOANS-NON> 1,886
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</TABLE>
