<PAGE> 1
Filed Pursuant To Rule 424(b)(1)
Registration Statement 333-14507
PROSPECTUS
600,000 PREFERRED SECURITIES
IBC CAPITAL FINANCE
9.25% CUMULATIVE TRUST PREFERRED SECURITIES
(LIQUIDATION AMOUNT $25 PER PREFERRED SECURITY)
FULLY AND UNCONDITIONALLY GUARANTEED, AS DESCRIBED HEREIN, BY
INDEPENDENT BANK LOGO
------------------------
$15,000,000 9.25% SUBORDINATED DEBENTURES
OF
INDEPENDENT BANK CORPORATION
------------------------
The 9.25% Cumulative Trust Preferred Securities ("Preferred Securities")
offered hereby represent beneficial interests in IBC Capital Finance, a trust
created under the laws of the State of Delaware ("IBC Capital"). Independent
Bank Corporation, a Michigan corporation ("Company") will be the owner of all
the beneficial interests represented by common securities of IBC Capital
("Common Securities"). State Street Bank and Trust Company is the Property
Trustee of IBC Capital. IBC Capital exists for the purpose of issuing the
Preferred Securities and investing the proceeds thereof in an equivalent amount
of 9.25% Subordinated Debentures ("Subordinated Debentures"), to be issued by
the Company. The Subordinated Debentures will mature on December 31, 2026, which
date may be (1) shortened to a date not earlier than December 31, 2001, or (2)
extended to a date not later than December 31, 2045, in each case if certain
conditions are met (including, in the case of shortening the Stated Maturity (as
defined herein), the Company having received prior approval of the Board of
(continued on next page)
------------------------
SEE "RISK FACTORS" COMMENCING ON PAGE 9 FOR INFORMATION THAT SHOULD BE
CONSIDERED BY PROSPECTIVE INVESTORS.
------------------------
THE SECURITIES OFFERED BY THIS PROSPECTUS ARE NOT SAVINGS OR DEPOSIT ACCOUNTS
OR OTHER OBLIGATIONS OF A BANK AND ARE NOT INSURED BY THE BANK INSURANCE
FUND OR THE SAVINGS ASSOCIATION INSURANCE FUND OF THE FEDERAL DEPOSIT
INSURANCE CORPORATION, OR ANY OTHER GOVERNMENTAL AGENCY AND
INVOLVE INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC COMMISSION(1) IBC CAPITAL(2)(3)
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------
Per Preferred Security................. $25.00 (2) $25.00
- ------------------------------------------------------------------------------------------------------
Total(4)............................... $15,000,000 (2) $15,000,000
- ------------------------------------------------------------------------------------------------------
</TABLE>
(1) IBC Capital and the Company have each agreed to indemnify the Underwriter
against certain liabilities, including liabilities under the Securities Act
of 1933, as amended. See "Underwriting."
(2) In view of the fact that the proceeds of the sale of the Preferred
Securities will be invested in the Subordinated Debentures, the Company has
agreed to pay the Underwriter as compensation ("Underwriter's Compensation")
for its arranging the investment therein of such proceeds, $1.00 per
Preferred Security, or $600,000 in the aggregate, ($690,000 if the over-
allotment option is exercised in full). See "Underwriting."
(3) Expenses of the offering are payable by the Company and are estimated to be
$340,000.
(4) IBC Capital has granted the Underwriter an option exercisable within thirty
(30) days from the date of this Prospectus to purchase up to 90,000
additional Preferred Securities on the same terms and conditions set forth
above to cover over-allotments, if any. If all such additional Preferred
Securities are purchased, the total Price to Public and Proceeds to IBC
Capital will be $17,250,000 and $17,250,000 respectively. See
"Underwriting."
------------------------
The Preferred Securities are offered by the Underwriter subject to receipt
and acceptance by it, prior sale and the Underwriter's right to reject any order
in whole or in part and to withdraw, cancel or modify the offer without notice.
It is expected that delivery of the Preferred Securities will be made in St.
Louis, Missouri on or about December 18, 1996.
STIFEL, NICOLAUS & COMPANY
INCORPORATED
December 13, 1996
<PAGE> 2
(continued from previous page)
Governors of the Federal Reserve System ("Federal Reserve") to do so if then
required under applicable capital guidelines or policies of the Federal
Reserve). The Preferred Securities will have a preference under certain
circumstances with respect to cash distributions and amounts payable on
liquidation, redemption or otherwise over the Common Securities. See
"Description of Preferred Securities -- Subordination of Common Securities."
Holders of Preferred Securities will be entitled to receive preferential
cumulative cash distributions accruing from the date of original issuance and
payable quarterly in arrears on the last day of March, June, September and
December of each year, commencing March 31, 1997, at the annual rate of 9.25% of
the Liquidation Amount of $25 per Preferred Securities ("Distributions"). The
Company has the right to defer payment of interest on the Subordinated
Debentures at any time or from time to time for a period not to exceed 20
consecutive quarters with respect to each deferral period (each, an "Extension
Period"), provided that no Extension Period may extend beyond the Stated
Maturity of the Subordinated Debentures. Upon the termination of any such
Extension Period and the payment of all amounts then due, the Company may elect
to begin a new Extension Period subject to the requirements set forth herein. If
interest payments on the Subordinated Debentures are so deferred, Distributions
on the Preferred Securities will also be deferred, and the Company will not be
permitted, subject to certain exceptions described herein, to declare or pay any
cash distributions with respect to its capital stock or debt securities that
rank pari passu with or junior to the Subordinated Debentures. During an
Extension Period, interest on the Subordinated Debentures will continue to
accrue (and the amount of Distributions to which holders of the Preferred
Securities are entitled will accumulate) at the rate of 9.25% per annum,
compounded quarterly, and holders of the Preferred Securities will be required
to accrue interest income for United States federal income tax purposes. See
"Description of Subordinated Debentures -- Option to Extend Interest Payment
Period," and "Certain Federal Income Tax Consequences -- Potential Extension of
Interest Payment Period and Original Issue Discount."
The Company has, through the Guarantee, Trust Agreement, Subordinated
Debentures, Indenture and the Expense Agreement (each as defined herein), taken
together, fully, irrevocably and unconditionally guaranteed all of IBC Capital's
obligations under the Preferred Securities. See "Relationship Among the
Preferred Securities, the Subordinated Debentures and the Guarantee -- Full and
Unconditional Guarantee." The Guarantee of the Company guarantees the payment of
Distributions and payments on liquidation or redemption of the Preferred
Securities, but only in each case to the extent of funds held by IBC Capital, as
described herein. See "Description of Guarantee." If the Company does not make
interest payments on the Subordinated Debentures held by IBC Capital, IBC
Capital will have insufficient funds to pay Distributions on the Preferred
Securities. The Guarantee does not cover payments of Distributions when IBC
Capital does not have sufficient funds to pay such Distributions. The
obligations of the Company under the Guarantee and the Preferred Securities are
subordinate and junior in right of payment to all Senior Debt, Subordinated Debt
and, under certain circumstances, Additional Senior Obligations (each as defined
in "Description of Subordinated Debentures -- Subordination") of the Company.
The Preferred Securities are subject to mandatory redemption, in whole or
in part, upon repayment of the Subordinated Debentures at maturity or their
earlier redemption. Subject to Federal Reserve approval, if then required, the
Subordinated Debentures are redeemable prior to maturity at the option of the
Company (1) on or after December 31, 2001, in whole at any time or in part from
time to time, or (2) at any time, in whole (but not in part), upon the
occurrence and during the continuance of a Tax Event or an Investment Company
Event (as defined herein), in each case at a redemption price equal to the
accrued and unpaid interest on the Subordinated Debentures so redeemed to the
date fixed for redemption, plus 100% of the principal amount thereof. See
"Description of Preferred Securities -- Redemption or Exchange."
The Company will have the right at any time to terminate the Preferred
Securities and cause the Subordinated Debentures to be distributed to holders of
Preferred Securities in liquidation of IBC Capital, subject to the Company
having received prior approval of the Federal Reserve to do so if then required
under applicable capital guidelines or policies of the Federal Reserve. See
"Description of Preferred Securities -- Redemption or Exchange." The
Subordinated Debentures are unsecured and subordinated to all Senior Debt,
Subordinated Debt and, under certain circumstances, Additional Senior
Obligations.
In the event of the termination of IBC Capital, after satisfaction of
liabilities to creditors of IBC Capital as required by applicable law, the
holders of Preferred Securities will be entitled to receive a Liquidation Amount
of $25 per Preferred Security, plus accumulated and unpaid Distributions thereon
to the date of payment, which may be in the form of a distribution of such
amount of a Subordinated Debenture, subject to certain exceptions. See
"Description of Preferred Securities -- Liquidation Distribution Upon
Termination."
The Preferred Securities have been approved for quotation on the Nasdaq
National Market under the symbol "IBCPP."
<PAGE> 3
[INDEPENDENT BANK LOGO]
[map]
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE PREFERRED
SECURITIES OFFERED HEREBY AT LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE PREVAIL IN
THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY
TIME.
3
<PAGE> 4
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and consolidated financial statements and notes thereto appearing
elsewhere in this Prospectus or incorporated by reference herein. Unless
otherwise indicated, all information in this Prospectus is based on the
assumption that the Underwriter will not exercise its over-allotment option.
THE COMPANY
The Company is a bank holding company with four wholly owned subsidiary
banks (the "Banks") engaged in the business of retail and commercial banking in
portions of Michigan's lower peninsula. Collectively, the Banks serve over 45
communities, which are principally rural and suburban in nature, through their
four main offices and a total of 45 branches and five loan production offices.
Over the past five years, the Company has experienced significant growth in
its assets while at the same time retaining a net interest margin that has
exceeded 5% of average earning assets. During this time period, the Company's
average annual return on equity exceeded 15%. Since December 31, 1990, total
assets have increased by 119% to $793.2 million at September 30, 1996. Earnings
per share have grown by a compound annual rate of 14.6% to $2.38 for the year
ended December 31, 1995, from $1.38 in 1991.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
-------------------- --------------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
-------- -------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
Assets....................... $793,152 $574,988 $590,147 $516,211 $482,027 $403,125 $406,469
Net income................... 5,819 4,987 6,810 6,031 5,606 5,109 4,018
Net income per share......... 2.02 1.74 2.38 2.09 1.95 1.78 1.38
Return on equity............. 15.78% 15.60% 15.59% 15.22% 15.21% 15.88% 13.56%
Net interest margin.......... 5.45 5.69 5.65 5.88 5.85 5.88 5.20
</TABLE>
THE COMPANY'S APPROACH TO COMMUNITY BANKING
The Company attributes its past success to the consistent application of
community banking practices in predominantly rural and suburban markets. The
Company's operating philosophy seeks to preserve those elements of traditional
community banking which management believes create a competitive advantage in
the markets in which it operates. Accordingly, the Banks emphasize personal
service and customer recognition, prompt response to customer needs,
convenience, continuity of personnel and management, and commitment to and
participation in the community.
DECENTRALIZED MANAGEMENT. The Company vests management of the Banks with
the authority to make local pricing and credit decisions to better anticipate
customer needs, respond to customer demands, and identify profitable
opportunities within their respective markets. While management of each of the
Banks is granted the authority to make decisions for its local operations, it is
also held accountable for its performance.
CORPORATE ADMINISTRATIVE AND SUPPORT SERVICES. To complement the Company's
decentralized management structure and preserve its community banking practices
within an expanding franchise, the Company's corporate service departments
provide a variety of services to each of the Banks. The Company believes that
this partnership between the Banks' management and Company personnel allows the
management of each of the Banks to focus on sales and customer service while
providing the Company with internal controls, and the ability to provide
consistent service quality and attain operating efficiencies.
4
<PAGE> 5
BUSINESS STRATEGY
The ability to profitably deploy the capital generated by the Company's
results of operations or otherwise maintain financial leverage is critical to
the Company's mission to create value for its shareholders. Much of the
Company's recent growth has resulted from acquisitions. The Company will
continue to consider opportunities for expansion through selective acquisitions
in markets where management believes its community banking approach creates a
competitive advantage. As part of this strategy, the Company has agreed to
acquire eight branch facilities from First of America Bank -- Michigan, National
Association, which had approximately $121.5 million in deposits and $21.5
million in loans, as of September 30, 1996. See "Recent Developments."
In the absence of suitable acquisition candidates, the Company will
continue to rely upon the Banks' ability to profitably fund loan growth with
nondeposit funding sources, including advances from the Federal Home Loan Bank,
as well as traditional deposit based funding sources. The cost of such
nondeposit funds is a principal consideration in the Banks' loan and deposit
pricing strategies.
The Company intends to continue to focus on the management of its capital
resources. The Company's dividend policies and share repurchase plan have been
integral components of management's efforts to maintain profitable financial
leverage.
IBC CAPITAL FINANCE
IBC Capital Finance ("IBC Capital") is a statutory business trust formed
under Delaware law pursuant to (i) the Trust Agreement executed by the Company,
as Depositor, State Street Bank and Trust Company, as Property Trustee,
Wilmington Trust Company, as Delaware Trustee, and the Administrative Trustees
named therein ("Trust Agreement"), and (ii) the filing of a certificate of trust
with the Delaware Secretary of State on November 7, 1996. IBC Capital's business
and affairs are conducted by its Property Trustee, Delaware Trustee, and three
individual Administrative Trustees who are employees or officers of or
affiliated with the Company. IBC Capital exists for the exclusive purposes of
(i) issuing and selling the Preferred Securities and Common Securities, (ii)
using the proceeds from the sale of Preferred Securities and Common Securities
to acquire Subordinated Debentures issued by the Company and (iii) engaging in
only those other activities necessary, advisable or incidental thereto (such as
registering the transfer of the Preferred Securities). Accordingly, the
Subordinated Debentures will be the sole assets of IBC Capital, and payments
under the Subordinated Debentures will be the sole revenue of IBC Capital. All
of the Common Securities will be owned by the Company. The Common Securities
will rank pari passu, and payments will be made thereon pro rata, with the
Preferred Securities, except that upon the occurrence and during the continuance
of an Event of Default under the Trust Agreement resulting from an Event of
Default under the Indenture, the rights of the Company as holder of the Common
Securities to payment in respect of Distributions and payments upon liquidation,
redemption or otherwise will be subordinated to the rights of the holders of the
Preferred Securities. See "Description of Preferred Securities -- Subordination
of Common Securities." The Company will acquire Common Securities in an
aggregate liquidation amount equal to 3% of the total capital of IBC Capital.
IBC Capital has a term of 55 years, but may terminate earlier as provided in the
Trust Agreement. The principal executive office of IBC Capital is 230 West Main
Street, Ionia, Michigan 48846, Attention: Secretary, and its telephone number is
(616) 527-9450.
5
<PAGE> 6
PREFERRED SECURITIES OFFERING
Securities Offered............ 600,000 Preferred Securities. The Preferred
Securities represent undivided beneficial
interests in IBC Capital's assets, which will
consist solely of the Subordinated Debentures
and payments thereunder. IBC Capital has
granted the Underwriter an option, exercisable
within 30 days after the date of this
Prospectus, to purchase up to an additional
90,000 Preferred Securities at the initial
offering price, solely to cover
over-allotments, if any.
Distributions................. The distributions payable on each Preferred
Security will be fixed at a rate per annum of
9.25% of the Liquidation Amount of $25 per
Preferred Security, will be cumulative, will
accrue from December 18, 1996, the date of
issuance of the Preferred Securities, and will
be payable quarterly in arrears, on March 31,
June 30, September 30, and December 31 of each
year, commencing March 31, 1997. See
"Description of Preferred Securities --
Distributions."
Option to Extend Interest
Payment Period................ The Company has the right, at any time, to
defer payments of interest on the Subordinated
Debentures for a period not exceeding 20
consecutive quarters; provided, that no
Extension Period may extend beyond the Stated
Maturity of the Subordinated Debentures. As a
consequence of the Company's extension of the
interest payment period, quarterly
Distributions on the Preferred Securities would
be deferred (though such Distributions would
continue to accrue with interest thereon
compounded quarterly, since interest would
continue to accrue and compound on the
Subordinated Debentures) during any such
Extension Period. During an Extension Period,
the Company will be prohibited, subject to
certain exceptions described herein, from
declaring or paying any cash distributions with
respect to its capital stock or debt securities
that rank pari passu with or junior to the
Subordinated Debentures. Upon the termination
of any Extension Period and the payment of all
amounts then due, the Company may commence a
new Extension Period, subject to the foregoing
requirements. See "Description of Subordinated
Debentures -- Option to Extend Interest Payment
Period."
Should an Extension Period occur, Preferred
Security holders will continue to recognize
interest income for United States federal
income tax purposes. See "Certain Federal
Income Tax Consequences -- Potential Extension
of Interest Payment Period and Original Issue
Discount."
Redemption.................... The Preferred Securities may be redeemed, in
whole or in part, upon repayment of the
Subordinated Debentures at maturity or their
earlier redemption. Subject to Federal Reserve
approval, if then required under applicable
capital guidelines or policies of the Federal
Reserve, the Subordinated Debentures are
redeemable prior to maturity at the option of
the Company (1) on or after December 31, 2001,
in whole at any time or in part from time to
time, or (2) at any time, in whole (but not in
part), upon the occurrence and during the
continuance of a Tax Event or an
6
<PAGE> 7
Investment Company Event, in each case at the
redemption price equal to 100% of the principal
amount of the Subordinated Debenture, together
with any accrued but unpaid interest to the
date fixed for redemption. See "Description of
Subordinated Debentures -- Redemption or
Exchange."
Distribution of Subordinated
Debentures.................. The Company has the right at any time to
terminate the Preferred Securities and cause
the Subordinated Debentures to be distributed
to holders of Preferred Securities in
liquidation of IBC Capital, subject to the
Company having received prior approval of the
Federal Reserve to do so if then required under
applicable capital guidelines or policies of
the Federal Reserve. See "Description of
Preferred Securities -- Redemption or
Exchange."
Guarantee..................... Under the terms of its Guarantee, the Company
has guaranteed the payment of Distributions and
payments on liquidation or redemption of the
Preferred Securities, but only in each case to
the extent of funds held by IBC Capital, as
described herein. The Company has, through the
Guarantee, Trust Agreement, Subordinated
Debentures, Indenture and Expense Agreement,
taken together, fully, irrevocably and
unconditionally guaranteed all of IBC Capital's
obligations under the Preferred Securities. The
obligations of the Company under the Guarantee
and the Preferred Securities are subordinate
and junior in right of payment to all Senior
Debt and Subordinated Debt and, under certain
circumstances, Additional Senior Obligations.
See "Description of Guarantee."
Voting Rights................. Generally, the holders of the Preferred
Securities will not have any voting rights. See
"Description of Preferred Securities -- Voting
Rights; Amendment of Trust Agreement."
Use of Proceeds............... The proceeds from the sale of the Preferred
Securities offered hereby will be used by IBC
Capital to purchase the Subordinated Debentures
issued by the Company. The net proceeds to the
Company from the sale of the Subordinated
Debentures will be used to increase its capital
to support recent and pending acquisitions and
for other general corporate purposes. See
"Recent Developments" and "Use of Proceeds."
Nasdaq National Market
Symbol........................ IBCPP
7
<PAGE> 8
SUMMARY CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
---------------------- -------------------------------------------------------------
1996 1995 1995 1994 1993(1) 1992(1) 1991(1)
--------- --------- --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
SUMMARY RESULTS OF OPERATIONS
Interest income......................... $ 42,598 $ 33,534 $ 45,982 $ 37,820 $ 34,370 $ 36,465 $ 39,175
Interest expense........................ 17,548 12,881 17,900 12,585 12,305 15,150 20,538
------- ------- ------- ------- ------- ------- -------
Net interest income................... 25,050 20,653 28,082 25,235 22,065 21,315 18,637
Provision for loan losses............... 942 477 636 473 657 1,225 1,013
------- ------- ------- ------- ------- ------- -------
Net interest income after provision for
loan losses........................... 24,108 20,176 27,446 24,762 21,408 20,090 17,624
Net gains on sale of securities and real
estate mortgage loans................. 1,121 295 608 75 1,358 324 48
Other noninterest income................ 2,860 2,361 3,158 3,026 2,540 2,418 2,373
Noninterest expense..................... 19,804 15,897 21,702 19,503 17,535 15,703 14,323
------- ------- ------- ------- ------- ------- -------
Income before federal income tax
expense and extraordinary item...... 8,285 6,935 9,510 8,360 7,771 7,129 5,722
Federal income tax expense.............. 2,466 1,948 2,700 2,329 2,165 2,020 1,619
------- ------- ------- ------- ------- ------- -------
Income before extraordinary item...... 5,819 4,987 6,810 6,031 5,606 5,109 4,103
Extraordinary item(2)................... 0 0 0 0 0 0 85
------- ------- ------- ------- ------- ------- -------
Net income........................ $ 5,819 $ 4,987 $ 6,810 $ 6,031 $ 5,606 $ 5,109 $ 4,018
======= ======= ======= ======= ======= ======= =======
PER SHARE DATA(3)
Net income
Primary............................... $ 2.02 $ 1.74 $ 2.38 $ 2.09 $ 1.95 $ 1.78 $ 1.52
Fully diluted......................... 2.02 1.74 2.38 2.09 1.95 1.78 1.38
Cash dividends declared................. 0.74 0.66 0.89 0.72 0.50 0.44 0.39
Book value(4)........................... 17.73 15.81 16.56 14.12 13.57 12.08 10.72
Dividend payment ratio(5)............... 36.52% 37.32% 36.80% 34.62% 25.54% 24.13% 26.53%
Weighted average shares outstanding..... 2,878,174 2,859,794 2,861,898 2,890,368 2,878,386 2,865,902 2,980,657
SELECTED BALANCES(4)
Assets.................................. $793,152 $574,988 $590,147 $516,211 $482,027 $403,125 $406,469
Securities(6)........................... 149,361 116,307 115,459 130,477 136,147 99,798 93,008
Loans and loans held for sale........... 575,807 417,059 434,091 342,658 288,643 261,634 275,144
Allowance for loan losses............... 6,720 5,249 5,243 5,054 5,053 4,023 3,784
Deposits................................ 541,781 408,526 411,624 409,471 423,620 358,874 364,431
Shareholders' equity.................... 50,733 44,906 47,025 40,311 39,049 34,467 30,327
Long-term debt.......................... 7,500 0 0 0 2,750 0 1,287
PERFORMANCE RATIOS(7)
Net interest margin..................... 5.45% 5.69% 5.65% 5.88% 5.85% 5.88% 5.20%
Net income to
Average common equity(8).............. 15.78 15.60 15.59 15.22 15.21 15.88 13.56
Average assets........................ 1.16 1.26 1.25 1.25 1.33 1.26 1.00
Efficiency ratio(9)..................... 66.39 66.24 66.22 66.55 65.27 63.06 65.80
ASSET QUALITY RATIOS(10)
Allowance for loan losses to loans(4)... 1.19% 1.27% 1.25% 1.50% 1.79% 1.58% 1.38%
Nonperforming loans to loans(4)......... 0.61 0.78 0.61 0.84 1.14 1.24 1.74
Allowance for loan losses to
nonperforming loans(4)................ 194.73 164.08 204.80 178.33 157.27 126.75 78.90
Nonperforming assets to total
loans(4).............................. 0.78 0.99 0.79 1.25 2.08 1.99 2.17
Net loan losses to average loans(7)..... 0.11 0.10 0.12 0.16 0.15 0.37 0.30
CAPITAL RATIOS
Average shareholders' equity to average
assets................................ 7.32% 8.04% 8.04% 8.22% 8.72% 7.94% 6.82%
Tier 1 risk-based capital ratio(4)...... 8.18 11.22 11.49 11.90 13.86 14.03 11.90
Total risk-based capital ratio(4)....... 9.44 12.48 12.75 13.03 15.13 15.29 12.56
Leverage ratio(4)....................... 5.23 7.42 7.58 7.40 7.61 8.05 6.88
RATIO OF EARNINGS TO FIXED CHARGES(11)
Including interest on deposits.......... 1.47x 1.54x 1.53x 1.66x 1.63x 1.47x 1.28x
Excluding interest on deposits.......... 2.39 2.88 2.75 6.60 28.95 25.25 10.23
</TABLE>
- -------------------------
(1) Restated to reflect an acquisition accounted for as a pooling of interests.
See Note 2 to the Company's 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 5% stock
dividends in 1996 and 1995.
(4) At period end.
(5) For 1991, Common Stock cash dividends as a percentage of net income
adjusted for preferred stock dividends.
(6) Includes securities available for sale.
(7) Ratios for the nine-month periods are annualized.
(8) For 1991, net income to average common equity has been computed by dividing
net income, after deducting dividends on preferred stock then outstanding,
by average common equity.
(9) Efficiency ratio equals noninterest expense divided by the sum of tax
equivalent net interest income, net gains on the sale of securities and
loans and other noninterest income.
(10) Loans exclude loans held for sale.
(11) Earnings consist of income before federal income tax plus interest expense.
Fixed charges consist of interest expense. The Company does not currently
have any preferred stock outstanding.
8
<PAGE> 9
RISK FACTORS
Prospective investors should carefully consider, together with the other
information contained and incorporated by reference in this Prospectus, the
following risk factors in evaluating the Company and its business and IBC
Capital before purchasing the Preferred Securities offered hereby. In
particular, prospective investors should note that this Prospectus contains
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995 and that actual results could differ materially
from those contemplated by such statements. The considerations listed below
represent certain important factors the Company believes could cause such
results to differ. These considerations are not intended to represent a complete
list of the general or specific risks that may affect the Company and IBC
Capital. It should be recognized that other risks may be significant, presently
or in the future, and the risks set forth below may affect the Company and IBC
Capital to a greater extent than indicated.
RISK FACTORS RELATING TO THE PREFERRED SECURITIES
RANKING OF SUBORDINATED OBLIGATIONS UNDER THE GUARANTEE AND THE SUBORDINATED
DEBENTURES
The obligations of the Company under the Guarantee issued by the Company
for the benefit of the holders of Preferred Securities and under the
Subordinated Debentures are unsecured and rank subordinate and junior in right
of payment to all Senior Debt and Subordinated Debt of the Company and, in
certain circumstances relating to the dissolution, winding-up, liquidation or
reorganization of the Company, to all Additional Senior Obligations of the
Company. At September 30, 1996, the aggregate outstanding Senior Debt,
Subordinated Debt and Additional Senior Obligations of the Company was
approximately $750 million. Because the Company is a holding company, the right
of the Company to participate in any distribution of assets of any of the Banks
upon such Bank's liquidation or reorganization or otherwise (and thus the
ability of holders of the Preferred Securities to benefit indirectly from such
distribution) is subject to the prior claims of creditors of that Bank, except
to the extent that the Company may itself be recognized as a creditor of that
Bank. Accordingly, the Subordinated Debentures will be effectively subordinated
to all existing and future liabilities of the Banks, and holders of Subordinated
Debentures and Preferred Securities should look only to the assets of the
Company for payments on the Subordinated Debentures. Neither the Indenture, the
Guarantee nor the Trust Agreement places any limitation on the amount of secured
or unsecured debt, including Senior Debt, Subordinated Debt and Additional
Senior Obligations, that may be incurred by the Company. See "Description of
Guarantee -- Status of the Guarantee" and "Description of Subordinated
Debentures -- Subordination."
The ability of IBC Capital to pay amounts due on the Preferred Securities
is solely dependent upon the Company making payments on the Subordinated
Debentures as and when required.
OPTION TO EXTEND INTEREST PAYMENT PERIOD; TAX CONSEQUENCES
So long as no Event of Default under the Indenture has occurred and is
continuing, the Company has the right under the Indenture to defer the payment
of interest on the Subordinated Debentures at any time or from time to time for
a period not exceeding 20 consecutive quarters with respect to each Extension
Period, provided that no Extension Period may extend beyond the Stated Maturity
of the Subordinated Debentures. As a consequence of any such deferral, quarterly
Distributions on the Preferred Securities by IBC Capital will be deferred (and
the amount of Distributions to which holders of the Preferred Securities are
entitled will accumulate additional Distributions thereon at the rate of 9.25%
per annum, compounded quarterly from the relevant payment date for such
Distributions) during any such Extension Period. During any such Extension
Period, the Company may not, and may not permit any subsidiary of the Company to
(i) declare or pay any dividends or distributions on, or redeem, purchase,
acquire, or make a liquidation payment with respect to, any of the Company's
capital stock, or (ii) make any payment of principal, interest or premium, if
any, on or repay, repurchase or redeem any debt securities of the Company that
rank pari passu with or junior in interest to the Subordinated Debentures or
make any guarantee payments with respect to any guarantee by the Company of the
debt securities of any subsidiary of the Company if such guarantee ranks pari
passu with or junior in interest to the Subordinated Debentures (other than (a)
dividends or distributions in Common
9
<PAGE> 10
Stock, (b) any declaration of a dividend in connection with the implementation
of a shareholders' rights plan, or the issuance of stock under any such plan in
the future, or the redemption or repurchase of any such rights pursuant thereto,
(c) payments under the Guarantee and (d) purchases of Common Stock related to
the rights under any of the Company's benefit plans for its directors, officers
or employees). Prior to the termination of any such Extension Period, the
Company may further defer the payment of interest, provided that no Extension
Period may exceed 20 consecutive quarters or extend beyond the Stated Maturity
of the Subordinated Debentures. Upon the termination of any Extension Period and
the payment of all interest then accrued and unpaid (together with interest
thereon at the annual rate of 9.25% compounded quarterly, to the extent
permitted by applicable law), the Company may elect to begin a new Extension
Period subject to the above requirements. There is no limitation on the number
of times that the Company may elect to begin an Extension Period. See
"Description of Preferred Securities -- General" and "Description of
Subordinated Debentures -- Option to Extend Interest Payment Period."
Should an Extension Period occur, a holder of Preferred Securities will be
required to accrue and recognize income (in the form of original issue discount)
in respect of its pro rata share of the interest accruing on the Subordinated
Debentures held by IBC Capital for United States federal income tax purposes. As
a result, a holder of Preferred Securities will include such income in gross
income for United States federal income tax purposes in advance of the receipt
of cash, and will not receive the cash related to such income from IBC Capital
if the holder disposes of the Preferred Securities prior to the record date for
the payment of the related Distributions. See "Certain Federal Income Tax
Consequences -- Potential Extension of Interest Payment Period and Original
Issue Discount."
The Company has no current intention of exercising its right to defer
payments of interest by extending the interest payment period on the
Subordinated Debentures. However, should the Company elect to exercise such
right in the future, the market price of the Preferred Securities is likely to
be adversely affected. A holder that disposes of its Preferred Securities during
an Extension Period, therefore, might not receive the same return on its
investment as a holder that continues to hold its Preferred Securities. In
addition, as a result of the existence of the Company's right to defer interest
payments, the market price of the Preferred Securities may be more volatile than
the market prices of other securities on which original issue discount accrues
that are not subject to such optional deferrals.
TAX EVENT OR INVESTMENT COMPANY EVENT -- REDEMPTION
Upon the occurrence and during the continuance of a Tax Event or Investment
Company Event (whether occurring before or after December 31, 2001) the Company
has the right to redeem the Subordinated Debentures in whole (but not in part)
within 90 days following the occurrence of such Tax Event or Investment Company
Event and therefore cause a mandatory redemption of the Preferred Securities.
The exercise of such right is subject to the Company having received prior
approval of the Federal Reserve to do so if then required under applicable
guidelines or policies of the Federal Reserve.
A "Tax Event" means the receipt by IBC Capital of an opinion of counsel
experienced in such matters to the effect that, as a result of any amendment to,
or change (including any announced prospective change) in the laws (or any
regulations thereunder) of the United States or any political subdivision or
taxing authority thereof or therein, or as a result of any official
administrative pronouncement or judicial decision interpreting or applying such
laws or regulations, which amendment or change is effective or such
pronouncement or decision is announced on or after the date of issuance of the
Preferred Securities under the Trust Agreement, there is more than an
insubstantial risk that (i) IBC Capital is, or will be within 90 days of the
date of such opinion, subject to United States federal income tax with respect
to income received or accrued on the Subordinated Debentures, (ii) interest
payable by the Company on the Subordinated Debentures is not, or within 90 days
of such opinion, will not be, deductible by the Company, in whole or in part,
for United States federal income tax purposes, or (iii) IBC Capital is, or will
be within 90 days of the date of the opinion, subject to more than a de minimis
amount of other taxes, duties or other governmental charges.
An "Investment Company Event" means the receipt by IBC Capital of an
opinion of counsel experienced in such matters to the effect that, as a result
of the occurrence of a change in law or regulation or a change in
10
<PAGE> 11
interpretation or application of law or regulation by any legislative body,
court, governmental agency or regulatory authority, IBC Capital is or will be
considered an "investment company" that is required to be registered under the
Investment Company Act, which change becomes effective on or after the date of
original issuance of the Preferred Securities.
See "Risk Factors -- Possible Tax Law Changes Affecting the Preferred
Securities" for a discussion of certain legislative proposals that, if adopted,
could give rise to a Tax Event, which may permit the Company to cause a
redemption of the Preferred Securities prior to December 31, 2001.
EXCHANGE OF PREFERRED SECURITIES FOR SUBORDINATED DEBENTURES
The Company will have the right at any time to terminate IBC Capital and
cause the Subordinated Debentures to be distributed to the holders of the
Preferred Securities in liquidation of IBC Capital. The exercise of such right
is subject to the Company having received prior approval of the Federal Reserve
if then required under applicable capital guidelines or policies of the Federal
Reserve. See "Description of Preferred Securities -- Redemption or Exchange."
SHORTENING OF STATED MATURITY OF SUBORDINATED DEBENTURES
The Company will have the right at any time to shorten the maturity of the
Subordinated Debentures to a date not earlier than December 31, 2001. The
exercise of such right is subject to the Company having received prior approval
of the Federal Reserve if then required under applicable capital guidelines or
policies of the Federal Reserve.
EXTENSION OF STATED MATURITY OF SUBORDINATED DEBENTURES
The Company will also have the right to extend the maturity of the
Subordinated Debentures whether or not IBC Capital is terminated and the
Subordinated Debentures are distributed to holders of the Preferred Securities
to a date no later than the 49th anniversary of the initial issuance of the
Preferred Securities, provided that the Company can extend the maturity only if
at the time such election is made and at the time of such extension (i) the
Company is not in bankruptcy, otherwise insolvent or in liquidation, (ii) the
Company is not in default in the payment of any interest or principal on the
Subordinated Debentures, and (iii) IBC Capital is not in arrears on payments of
Distributions on the Preferred Securities and no deferred Distributions are
accumulated.
RIGHTS UNDER THE GUARANTEE
The Guarantee will be qualified as an indenture under the Trust Indenture
Act of 1939, as amended (the "Trust Indenture Act"). State Street Bank and Trust
Company ("State Street") will act as the indenture trustee under the Guarantee
(the "Guarantee Trustee") for the purposes of compliance with the Trust
Indenture Act and will hold the Guarantee for the benefit of the holders of the
Preferred Securities. State Street will also act as Debenture Trustee for the
Subordinated Debentures and as Property Trustee; Wilmington Trust Company will
act as Delaware Trustee under the Trust Agreement. The Guarantee guarantees to
the holders of the Preferred Securities the following payments, to the extent
not paid by IBC Capital: (i) any accumulated and unpaid Distributions required
to be paid on the Preferred Securities, to the extent that IBC Capital has funds
on hand available therefor at such time, (ii) the redemption price with respect
to any Preferred Securities called for redemption, to the extent that IBC
Capital has funds on hand available therefor at such time, and (iii) upon a
voluntary or involuntary dissolution, winding-up or liquidation of IBC Capital
(unless the Subordinated Debentures are distributed to holders of the Preferred
Securities), the lesser of (a) the aggregate of the Liquidation Amount and all
accumulated and unpaid Distributions to the date of payment to the extent that
IBC Capital has funds on hand available therefor at such time and (b) the amount
of assets of IBC Capital remaining available for distribution to holders of the
Preferred Securities. The holders of not less than a majority in aggregate
Liquidation Amount of the Preferred Securities have the right to direct the
time, method and place of conducting any proceeding for any remedy available to
the Guarantee Trustee in respect of the Guarantee or to direct the exercise of
any trust power conferred upon the Guarantee
11
<PAGE> 12
Trustee under the Guarantee. Any holder of the Preferred Securities may
institute a legal proceeding directly against the Company to enforce its rights
under the Guarantee without first instituting a legal proceeding against IBC
Capital, the Guarantee Trustee or any other person or entity. If the Company
were to default on its obligation to pay amounts payable under the Subordinated
Debentures, IBC Capital would lack funds for the payment of Distributions or
amounts payable on redemption of the Preferred Securities or otherwise, and, in
such event, holders of Preferred Securities would not be able to rely upon the
Guarantee for such amounts. Instead, in the event a Debenture Event of Default
shall have occurred and be continuing and such event is attributable to the
failure of the Company to pay interest on or principal of the Subordinated
Debentures on the payment date on which such payment is due and payable, then a
holder of Preferred Securities may institute a legal proceeding directly against
the Company for enforcement of payment to such holder of the principal of or
interest on such Subordinated Debentures having a principal amount equal to the
aggregate Liquidation Amount of the Preferred Securities of such holder (a
"Direct Action"). In connection with such Direct Action, the Company will have a
right of set-off under the Indenture to the extent of any payment made by the
Company to such holder of Preferred Securities in the Direct Action. Except as
described herein, holders of Preferred Securities will not be able to exercise
directly any other remedy available to the holders of the Subordinated
Debentures or assert directly any other rights in respect of the Subordinated
Debentures. See "Description of Subordinated Debentures -- Enforcement of
Certain Rights by Holders of Preferred Securities" and "-- Debenture Events of
Default" and "Description of Guarantee." The Trust Agreement provides that each
holder of Preferred Securities by acceptance thereof agrees to the provisions of
the Guarantee and the Indenture.
LIMITED VOTING RIGHTS
Holders of Preferred Securities will generally have limited voting rights
relating only to the modification of the Preferred Securities and the exercise
of IBC Capital's rights as holder of Subordinated Debentures and the Guarantee.
Holders of Preferred Securities will not be entitled to vote to appoint, remove
or replace the Property Trustee or the Delaware Trustee, and such voting rights
are vested exclusively in the holder of the Common Securities except upon the
occurrence of certain events described herein. The Property Trustee, the
Administrative Trustees and the Company may amend the Trust Agreement without
the consent of holders of Preferred Securities to ensure that IBC Capital will
be classified for United States federal income tax purposes as a grantor trust
even if such action adversely affects the interests of such holders. See
"Description of Preferred Securities -- Voting Rights; Amendment of Trust
Agreement" and "-- Removal of IBC Capital Trustees."
POSSIBLE TAX LAW CHANGES AFFECTING THE PREFERRED SECURITIES
On March 19, 1996, the Revenue Reconciliation Bill of 1996 (the "Bill") was
released which would, among other things, generally deny interest deductions for
interest on an instrument issued by a company that has a maximum weighted
average maturity of more than 40 years. The Bill would also generally deny
interest deductions for interest on an instrument, issued by a company, that has
a maximum term of more than 20 years and that is not shown as indebtedness on
the separate balance sheet of the issuer or, where the instrument is issued to a
related party (other than a corporation), where the holder or some other related
party issues a related instrument that is not shown as indebtedness on the
issuer's consolidated balance sheet. If either provision were to apply to the
Subordinated Debentures, the Company would be unable to deduct interest on the
Subordinated Debentures. However, on March 29, 1996, the Chairmen of the Senate
Finance and House Ways and Means Committees issued a joint statement to the
effect that it was their intention that the effective date of the President's
legislative proposals, if adopted, will be no earlier than the date of
appropriate Congressional action. Under current law, the Company will be able to
deduct interest on the Subordinated Debentures. There can be no assurance,
however, that current or future legislative proposals or final legislation will
not affect the ability of the Company to deduct interest on the Subordinated
Debentures. Such a change could give rise to a Tax Event, which may permit the
Company, upon approval of the Federal Reserve if then required under applicable
capital guidelines or policies of the Federal Reserve, to cause a redemption of
the Preferred Securities before, as well as after December 31, 2001. See
"Description of
12
<PAGE> 13
Subordinated Debentures -- Redemption" and "Description of Preferred
Securities--Redemption or Exchange -- Tax Event Redemption." See also "Certain
Federal Income Tax Consequences -- Effect of Proposed Changes in Tax Laws."
MARKET PRICES
There can be no assurance as to the market prices for Preferred Securities
or Subordinated Debentures that may be distributed in exchange for Preferred
Securities if a liquidation of IBC Capital occurs. Accordingly, the Preferred
Securities that an investor may purchase, whether pursuant to the offer made
hereby or in the secondary market, or the Subordinated Debentures that a holder
of Preferred Securities may receive on liquidation of IBC Capital, may trade at
a discount to the price that the investor paid to purchase the Preferred
Securities offered hereby. In addition, there can be no assurance that the
Company will not exercise its option to change the maturity of the Subordinated
Debentures as permitted by the terms thereof and of the Indenture. Because
holders of Preferred Securities may receive Subordinated Debentures on
liquidation of IBC Capital, prospective purchasers of Preferred Securities are
also making an investment decision with regard to the Subordinated Debentures
and should carefully review all the information regarding the Subordinated
Debentures contained herein. See "Description of Subordinated Debentures."
TRADING CHARACTERISTICS OF PREFERRED SECURITIES
The Preferred Securities may trade at prices that do not fully reflect the
value of accrued but unpaid interest with respect to the underlying Subordinated
Debentures. A holder of Preferred Securities that disposes of its Preferred
Securities between record dates for payments of Distributions (and consequently
does not receive a Distribution from IBC Capital for the period prior to such
disposition) will nevertheless be required to include accrued but unpaid
interest on the Subordinated Debentures through the date of disposition in
income as ordinary income and to add such amount to its adjusted tax basis in
the Preferred Securities disposed of. Such holder will recognize a capital loss
to the extent the selling price (which may not fully reflect the value of
accrued but unpaid interest) is less than its adjusted tax basis (which will
include accrued but unpaid interest). Subject to certain limited exceptions,
capital losses cannot be applied to offset ordinary income for United States
federal income tax purposes. See "Certain Federal Income Tax Consequences."
LACK OF MARKET FOR THE PREFERRED SECURITIES
There is no current market for the Preferred Securities. Although the
Preferred Securities have been approved for quotation on the Nasdaq National
Market, there can be no assurance that an active public market will develop or
be maintained for the Preferred Securities. Stifel, Nicolaus & Company,
Incorporated has informed the Company that it presently intends to make a market
in the Preferred Securities, but no assurance can be given as to the liquidity
of the Preferred Securities in the market. See "Market for the Preferred
Securities" and "Underwriting."
RISK FACTORS RELATING TO THE COMPANY
NO ASSURANCE OF SUCCESSFUL INTEGRATION OF BRANCHES
Based on September 30, 1996 financial information, the acquisition of the
eight branches from First of America Bank -- Michigan, National Association
("FOA Branches") by Independent Bank East Michigan ("IBEM"), a subsidiary of the
Company, would increase the assets of IBEM by approximately 107% to $239.4
million. See "Recent Developments." Although the Company has successfully
integrated other acquired banks and branch facilities into its operations in the
recent past without adversely affecting the profitability of such operations,
IBEM's ability to integrate the FOA Branches into its current operations without
adversely affecting the level of profitability of IBEM or the Company as a whole
cannot be assured.
13
<PAGE> 14
IMPACT OF INTEREST RATE CHANGES
The Company's results of operations are derived from the operations of the
Banks and are principally dependent on net interest income, calculated as the
difference between interest earned on loans and investments and the interest
expense paid on deposits and other borrowings. Like other banks and financial
institutions, the Company's interest income and interest expense are affected by
general economic conditions and by the policies of regulatory authorities,
including the monetary policies of the Federal Reserve. While management has
taken measures intended to manage the risks of operating in a changing interest
rate environment, there can be no assurance that such measures will be effective
in avoiding undue interest rate risk. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Asset/Liability Management."
CREDIT RISKS
As a financial institution, the Company is exposed to the risk that
customers to whom the Banks have made loans will be unable to repay those loans
according to their terms and that collateral securing such loans (if any) may
not be sufficient in value to assure repayment. Credit losses could have a
material adverse effect on the Company's operating results.
REGULATORY RISK
The banking industry is heavily regulated. These regulations are primarily
intended to protect depositors and the Federal Deposit Insurance Corporation
("FDIC"), not shareholders or other creditors. Regulations affecting the
financial institutions industry are undergoing continuous change, and the
ultimate effect of such changes cannot be predicted. Regulations and laws
affecting the Company and the Banks may be modified at any time, and new
legislation affecting financial institutions may be proposed and enacted. There
is no assurance that such modifications or new laws will not materially and
adversely affect the business, condition or operations of the Company and the
Banks. See "Supervision and Regulation."
COMPETITION
The banking business is highly competitive. The Banks compete with other
commercial banks, savings and loan associations, credit unions, mortgage banking
companies, securities brokerage companies, insurance companies, and money market
mutual funds. Many of these competitors have substantially greater resources
than the Company and the Banks and offer certain services that the Company and
the Banks do not currently provide. Such competitors may also have greater
lending limits than the Banks. The number of competitors may increase as a
result of the easing of restrictions on interstate banking effected under the
Riegle-Neal Interstate Banking and Efficiency Act of 1994. In addition, non-bank
competitors are generally not subject to the extensive regulations applicable to
the Company and the Banks. See "Supervision and Regulation."
EXPOSURE TO LOCAL ECONOMIC CONDITIONS
The success of the Company and the Banks is dependent to a certain extent
upon the general economic conditions of the state of Michigan and the geographic
markets served by the Banks. No assurance can be given that favorable economic
conditions will continue to exist in such markets.
PREFERRED SECURITIES ARE NOT INSURED
The Preferred Securities are not insured by the Bank Insurance Fund ("BIF")
or the Savings Association Insurance Fund ("SAIF") of the FDIC or by any other
governmental agency.
14
<PAGE> 15
RECENT DEVELOPMENTS
The discussion of recent developments contains forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995.
Actual results could differ materially from those projected in such
forward-looking statements as a result of, among other things, the factors set
forth in the section entitled "Risk Factors."
Effective September 18, 1996, Independent Bank East Michigan ("IBEM"), a
subsidiary of the Company, agreed to acquire eight branch banking facilities
from First of America Bank -- Michigan, National Association ("FOA Branches").
The FOA Branches are located in the thumb region of eastern Michigan, in the
counties of Huron and Tuscola. Two of the FOA Branches are located in the City
of Bad Axe and one each in the townships or communities of Caseville, Elkton,
Kinde, Ubly, Sebewaing, and Gagetown. As of September 30, 1996, the FOA Branches
had approximately $121.5 million of deposits and $21.5 million of loans. The
acquisition, which is subject to regulatory approval, is expected to be
consummated in December 1996, and will be supported by proceeds from this
offering. See "Use of Proceeds." The real and personal property of the FOA
Branches are being acquired at net book value, and IBEM will pay a loan premium
of 1% on the loans to be acquired and a deposit premium of 6.875% on the
deposits to be assumed. The Company anticipates amortizing the core deposit
premium on a straight line basis over 12 years.
The acquisition of the FOA Branches allows the Company to continue to
expand its branch banking network and further leverage the managerial resources
of the Company and IBEM. The FOA Branches are located in markets similar to
those historically served by the Banks and are contiguous to the communities
that are currently served by IBEM. The acquisition of the FOA Branches will
assist in establishing IBEM as a prominent provider of banking services in the
thumb region of eastern Michigan.
The following pro forma financial information reflects the impact of the
issuance of the Preferred Securities by IBC Capital (and the related issuance of
the Subordinated Debentures by the Company) and the purchase of the FOA Branches
as if they were acquired by IBEM as of September 30, 1996. This pro forma
information is presented for informational purposes only as the purchase of the
FOA Branches is not considered the acquisition of a business.
<TABLE>
<CAPTION>
PRO FORMA
COMPANY FOA BRANCHES ADJUSTMENTS COMBINED
-------- ------------ ----------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
ASSETS
Cash & due from banks......................... $ 26,601 $ 98,954 $ (93,454)(1)(2) $ 32,101
Securities.................................... 159,559 0 85,644(1) 245,203
Loans and loans held for sale (net of
allowance for loan losses).................. 569,087 21,546 215(2) 590,848
Intangible assets............................. 9,737 0 8,355(2) 18,092
Other assets.................................. 28,168 1,581 29,749
-------- -------- -------- --------
TOTAL ASSETS........................... $793,152 $122,081 $ 760 $ 915,993
======== ======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Noninterest bearing......................... $ 68,685 $ 10,470 $ 79,155
Savings and NOW............................. 263,841 53,398 317,239
Time........................................ 209,255 57,613 266,868
-------- -------- --------
TOTAL DEPOSITS......................... 541,781 121,481 663,262
Other borrowings.............................. 190,959 0 $ (13,300)(1) 177,659
Other liabilities............................. 9,679 600 10,279
-------- -------- -------- --------
TOTAL LIABILITIES...................... 742,419 122,081 (13,300) 851,200
Guaranteed Preferred Beneficial Interests in
Company's Subordinated Debentures........... 15,000(1) 15,000
Shareholders' equity.......................... 50,733 0 (940)(3) 49,793
-------- -------- -------- --------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY.............................. $793,152 $122,081 $ 760 $ 915,993
======== ======== ======== ========
</TABLE>
- -------------------------
(1) To reflect the anticipated deployment of the cash proceeds from the FOA
Branches and the issuance of the Preferred Securities.
(2) To reflect fair value adjustments relating to assets purchased and
liabilities assumed.
(3) To reflect the costs related to the issuance of the Preferred Securities.
15
<PAGE> 16
USE OF PROCEEDS
All of the proceeds from the sale of Preferred Securities will be invested
by IBC Capital in the Subordinated Debentures. The net proceeds to the Company
from the sale of Subordinated Debentures are estimated to be $15,000,000
($17,250,000 if the Underwriter's over-allotment option is exercised in full).
The Company will use the proceeds to increase the capital base of IBEM in
contemplation of the pending acquisition of the FOA Branches. If the acquisition
of the FOA Branches is consummated prior to the completion of this offering, the
proceeds will be used to repay the short-term debt that would be incurred to
initially increase the capital base of IBEM. The Company has received a
commitment for that short-term financing. See "Capitalization." In addition, the
proceeds from the offering will assist the Company in maintaining a Tier 1
capital leverage ratio of approximately 5.2% following the pending acquisition
of the FOA Branches and the recent acquisition of North Bank Corporation, and
may be used for other general corporate purposes. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Financial
Condition -- Capital Resources." Other than the pending acquisition of the FOA
Branches, the Company has no current or contemplated agreements or
understandings for any acquisitions. The Preferred Securities are expected to
qualify as Tier 1 capital.
On October 21, 1996, the Federal Reserve approved the use of certain
cumulative preferred stock instruments such as the Preferred Securities as Tier
1 capital for bank holding companies such as the Company. The Company has
elected to issue the Preferred Securities because the Company expects the
Preferred Securities to qualify as Tier 1 capital and the Distributions payable
on the Preferred Securities to be a tax deductible expense of the Company.
MARKET FOR THE PREFERRED SECURITIES
The Preferred Securities have been approved for quotation on the Nasdaq
National Market under the symbol IBCPP. Stifel, Nicolaus & Company, Incorporated
has informed the Company that it presently intends to make a market in the
Preferred Securities. There can be no assurance, however, that an active and
liquid trading market will develop or, if developed, that such a market will
continue. The offering price and distribution rate have been determined by
negotiations among representatives of the Company and the Underwriter, and the
offering price of the Preferred Securities may not be indicative of the market
price following the offering. See "Underwriting."
ACCOUNTING TREATMENT
For financial reporting purposes, IBC Capital will be treated as a
subsidiary of the Company and, accordingly, the accounts of IBC Capital will be
included in the consolidated financial statements of the Company. The Preferred
Securities will be presented as a separate line item in the consolidated balance
sheet of the Company under the caption "Guaranteed Preferred Beneficial
Interests in Company's Subordinated Debentures," and appropriate disclosures
about the Preferred Securities, the Guarantee and the Subordinated Debentures
will be included in the notes to consolidated financial statements. For
financial reporting purposes, the Company will record Distributions payable on
the Preferred Securities as an expense in the consolidated statements of
operations.
All future reports of the Company filed under the Securities Exchange Act
of 1934, as amended, will (a) present the securities issued by IBC Capital on
the balance sheet as a separate line item entitled "Guaranteed Preferred
Beneficial Interests in Company's Subordinated Debentures", (b) include in a
footnote to the financial statement disclosure that the sole assets of IBC
Capital are the Subordinated Debentures (including the outstanding principal
amount, interest rate and maturity date of such Subordinated Debentures), and
(c) include, in an audited footnote to the financial statements, disclosure that
the Company owns all of the Common Securities of IBC Capital, the sole assets of
IBC Capital are the Subordinated Debentures, and the back-up obligations, in the
aggregate, constitute a full and unconditional guarantee by the Company of IBC
Capital's obligations under the Preferred Securities.
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<PAGE> 17
CAPITALIZATION
The following table sets forth (i) the consolidated capitalization of the
Company at September 30, 1996, and (ii) the consolidated capitalization of the
Company on an as adjusted basis giving effect to the issuance of the Preferred
Securities hereby offered by IBC Capital and receipt by the Company of the net
proceeds from the corresponding sale of the Subordinated Debentures to IBC
Capital, as if the sale of the Preferred Securities had been consummated on
September 30, 1996, and assuming the Underwriter's over-allotment option was not
exercised.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
----------------------
ACTUAL AS ADJUSTED
------- -----------
(IN THOUSANDS)
<S> <C> <C>
LONG-TERM DEBT
Total long-term debt.................................................. $ 7,500 $ 7,500
Guaranteed Preferred Beneficial Interests in Company's Subordinated
Debentures............................................................ 0 15,000(1)
SHAREHOLDERS' EQUITY
Preferred Stock, no par value; 200,000 shares authorized, none issued
and outstanding....................................................... 0 0
Common Stock, par value $1.00 per share; 14,000,000 shares authorized,
2,861,399 shares issued and outstanding............................... 2,861 2,861
Capital surplus......................................................... 24,256 23,316(2)
Retained earnings....................................................... 23,447 23,447
Net unrealized gain on securities available for sale, net of related tax
effect................................................................ 169 169
------- -------
Total shareholders' equity......................................... 50,733 49,793
------- -------
Total capitalization............................................... $58,233 $72,293
======= =======
</TABLE>
- -------------------------
(1) Preferred Securities representing beneficial interests in an aggregate
principal amount of $15,000,000 of the 9.25% Subordinated Debentures of the
Company. The Subordinated Debentures will mature on December 31, 2026, which
date may be, if certain conditions are met (a) shortened to a date not
earlier than December 31, 2001, or (b) extended to a date not later than
December 31, 2045.
(2) Expenses in the amount of $940,000 relating to the issuance of the Preferred
Securities have been netted against capital surplus.
The following table sets forth the consolidated capital ratios of the
Company (i) at September 30, 1996, (ii) as adjusted giving effect to the
issuance of the Preferred Securities hereby offered by IBC Capital and receipt
by the Company of the net proceeds from the corresponding sale of the
Subordinated Debentures to IBC Capital (assuming the Underwriter's
over-allotment option was not exercised), and (iii) pro forma as adjusted giving
effect to (ii) and to the acquisition of the FOA Branches, as if both
transactions had been consummated on September 30, 1996. See "Recent
Developments."
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
---------------------------------------
PRO FORMA
ACTUAL AS ADJUSTED AS ADJUSTED
------ ----------- --------------
<S> <C> <C> <C>
CAPITAL RATIOS
Shareholders' equity to total assets......................... 6.40% 6.28% 5.44%
Leverage ratio(1)(2)......................................... 5.43 7.20 5.31
Risk-based capital ratios(2)
Tier 1 capital to risk-weighted assets..................... 8.18 11.05 8.72
Total risk-based capital to risk-weighted assets........... 9.44 12.30 9.96
</TABLE>
- -------------------------
(1) The leverage ratio is Tier 1 capital divided by the difference between
quarterly average total assets less intangibles. See "Supervision and
Regulation -- The Banks."
(2) The capital ratios, as adjusted, are computed including the total estimated
net proceeds from the sale of the Preferred Securities, in a manner
consistent with Federal Reserve guidelines.
17
<PAGE> 18
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data set forth below, insofar as it
relates to the five years ended December 31, 1995, are derived from the audited
consolidated financial statements of the Company. The data for the nine-month
periods ended September 30, 1995 and 1996, have been derived from unaudited
interim financial statements; however, in the opinion of the Company, such
unaudited interim statements include all adjustments (consisting of normal
recurring accruals) necessary to fairly present the data for such periods. The
results of operations for the nine-month period ended September 30, 1996, are
not necessarily indicative of results to be achieved for the full year. Such
data are qualified by reference to the consolidated financial statements
included elsewhere in this Prospectus or incorporated by reference and should be
read in conjunction with such financial statements and related notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
---------------------- -----------------------------------
1996 1995 1995 1994 1993(1)
--------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
SUMMARY RESULTS OF OPERATIONS
Interest income..................................................... $ 42,598 $ 33,534 $ 45,982 $ 37,820 $ 34,370
Interest expense.................................................... 17,548 12,881 17,900 12,585 12,305
-------- -------- -------- -------- --------
Net interest income............................................... 25,050 20,653 28,082 25,235 22,065
Provision for loan losses........................................... 942 477 636 473 657
-------- -------- -------- -------- --------
Net interest income after provision for loan losses............... 24,108 20,176 27,446 24,762 21,408
Net gains on sale of securities and real estate mortgage loans...... 1,121 295 608 75 1,358
Other noninterest income............................................ 2,860 2,361 3,158 3,026 2,540
Noninterest expense................................................. 19,804 15,897 21,702 19,503 17,535
-------- -------- -------- -------- --------
Income before federal income tax expense and extraordinary item... 8,285 6,935 9,510 8,360 7,771
Federal income tax expense.......................................... 2,466 1,948 2,700 2,329 2,165
-------- -------- -------- -------- --------
Income before extraordinary item.................................. 5,819 4,987 6,810 6,031 5,606
Extraordinary item(2)............................................... 0 0 0 0 0
-------- -------- -------- -------- --------
Net income...................................................... $ 5,819 $ 4,987 $ 6,810 $ 6,031 $ 5,606
======== ======== ======== ======== ========
PER SHARE DATA(3)
Net income
Primary........................................................... $ 2.02 $ 1.74 $ 2.38 $ 2.09 $ 1.95
Fully diluted..................................................... 2.02 1.74 2.38 2.09 1.95
Cash dividends declared............................................. 0.74 0.66 0.89 0.72 0.50
Book value(4)....................................................... 17.73 15.81 16.56 14.12 13.57
Dividend payment ratio(5)........................................... 36.52% 37.32% 36.80% 34.62% 25.54%
Weighted average shares outstanding................................. 2,878,174 2,859,794 2,861,898 2,890,368 2,878,386
SELECTED BALANCES(4)
Assets.............................................................. $793,152 $574,988 $590,147 $516,211 $482,027
Securities(6)....................................................... 149,361 116,307 115,459 130,477 136,147
Loans and loans held for sale....................................... 575,807 417,059 434,091 342,658 288,643
Allowance for loan losses........................................... 6,720 5,249 5,243 5,054 5,053
Deposits............................................................ 541,781 408,526 411,624 409,471 423,620
Shareholders' equity................................................ 50,733 44,906 47,025 40,311 39,049
Long-term debt...................................................... 7,500 0 0 0 2,750
PERFORMANCE RATIOS(7)
Net interest margin................................................. 5.45% 5.69% 5.65% 5.88% 5.85%
Return on average equity(8)......................................... 15.78 15.60 15.59 15.22 15.21
Return on average assets............................................ 1.16 1.26 1.25 1.25 1.33
Efficiency ratio(9)................................................. 66.39 66.24 66.22 66.55 65.27
ASSET QUALITY RATIOS(10)
Allowance for loan losses to loans(4)............................... 1.19% 1.27% 1.25% 1.50% 1.79%
Nonperforming loans to loans(4)..................................... 0.61 0.78 0.61 0.84 1.14
Allowance for loan losses to nonperforming loans(4)................. 194.73 164.08 204.80 178.33 157.27
Nonperforming assets to total loans(4).............................. 0.78 0.99 0.79 1.25 2.08
Net loan losses to average loans(7)................................. 0.11 0.10 0.12 0.16 0.15
CAPITAL RATIOS
Average equity to average assets.................................... 7.32% 8.04% 8.04% 8.22% 8.72%
Tier 1 risk-based capital ratio(4).................................. 8.18 11.22 11.49 11.90 13.86
Total risk-based capital ratio(4)................................... 9.44 12.48 12.75 13.03 15.13
Leverage ratio(4)................................................... 5.23 7.42 7.58 7.40 7.61
RATIO OF EARNINGS TO FIXED CHARGES(11)
Including interest on deposits...................................... 1.47x 1.54x 1.53x 1.66x 1.63x
Excluding interest on deposits...................................... 2.39 2.88 2.75 6.60 28.95
<CAPTION>
1992(1) 1991(1)
--------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C>
SUMMARY RESULTS OF OPERATIONS
Interest income..................................................... $ 36,465 $ 39,175
Interest expense.................................................... 15,150 20,538
-------- --------
Net interest income............................................... 21,315 18,637
Provision for loan losses........................................... 1,225 1,013
-------- --------
Net interest income after provision for loan losses............... 20,090 17,624
Net gains on sale of securities and real estate mortgage loans...... 324 48
Other noninterest income............................................ 2,418 2,373
Noninterest expense................................................. 15,703 14,323
-------- --------
Income before federal income tax expense and extraordinary item... 7,129 5,722
Federal income tax expense.......................................... 2,020 1,619
-------- --------
Income before extraordinary item.................................. 5,109 4,103
Extraordinary item(2)............................................... 0 85
-------- --------
Net income...................................................... $ 5,109 $ 4,018
======== ========
PER SHARE DATA(3)
Net income
Primary........................................................... $ 1.78 $ 1.52
Fully diluted..................................................... 1.78 1.38
Cash dividends declared............................................. 0.44 0.39
Book value(4)....................................................... 12.08 10.72
Dividend payment ratio(5)........................................... 24.13% 26.53%
Weighted average shares outstanding................................. 2,865,902 2,980,657
SELECTED BALANCES(4)
Assets.............................................................. $403,125 $406,469
Securities(6)....................................................... 99,798 93,008
Loans and loans held for sale....................................... 261,634 275,144
Allowance for loan losses........................................... 4,023 3,784
Deposits............................................................ 358,874 364,431
Shareholders' equity................................................ 34,467 30,327
Long-term debt...................................................... 0 1,287
PERFORMANCE RATIOS(7)
Net interest margin................................................. 5.88% 5.20%
Return on average equity(8)......................................... 15.88 13.56
Return on average assets............................................ 1.26 1.00
Efficiency ratio(9)................................................. 63.06 65.80
ASSET QUALITY RATIOS(10)
Allowance for loan losses to loans(4)............................... 1.58% 1.38%
Nonperforming loans to loans(4)..................................... 1.24 1.74
Allowance for loan losses to nonperforming loans(4)................. 126.75 78.90
Nonperforming assets to total loans(4).............................. 1.99 2.17
Net loan losses to average loans(7)................................. 0.37 0.30
CAPITAL RATIOS
Average equity to average assets.................................... 7.94% 6.82%
Tier 1 risk-based capital ratio(4).................................. 14.03 11.90
Total risk-based capital ratio(4)................................... 15.29 12.56
Leverage ratio(4)................................................... 8.05 6.88
RATIO OF EARNINGS TO FIXED CHARGES(11)
Including interest on deposits...................................... 1.47x 1.28x
Excluding interest on deposits...................................... 25.25 10.23
</TABLE>
- -------------------------
(1) Restated to reflect an acquisition accounted for as a pooling of interests.
See Note 2 to the Company's 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 5% stock
dividends in 1996 and 1995.
(4) At period end.
(5) For 1991, Common Stock cash dividends as a percentage of net income
adjusted for preferred stock dividends.
(6) Includes securities available for sale.
(7) Ratios for the nine-month periods are annualized.
(8) For 1991, net income to average common equity has been computed by dividing
net income, after deducting dividends on preferred stock then outstanding,
by average common equity.
(9) Efficiency ratio equals noninterest expense divided by the sum of tax
equivalent net interest income, net gains on the sale of securities and
loans and other noninterest income.
(10) Loans exclude loans held for sale.
(11) Earnings consist of income before federal income tax plus interest expense.
Fixed charges consist of interest expense. The Company does not currently
have any preferred stock outstanding.
18
<PAGE> 19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Management's discussion and analysis of financial condition and results of
operations contains forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. Actual results could differ materially
from those projected in such forward-looking statements as a result of, among
other things, the factors set forth in the section entitled "Risk Factors."
The following presents management's discussion and analysis of the
Company's consolidated financial condition and results of operations as of the
dates and for the periods indicated. This discussion should be read in
conjunction with the Company's Consolidated Financial Statements and the
accompanying notes, and other financial data appearing elsewhere in this
Prospectus.
OVERVIEW
Over the past five years, the Company has experienced a significant growth
in its assets while at the same time retaining a net interest margin that has
exceeded 5% of average earning assets. Since December 31, 1990, total assets
have increased by 119% to $793.2 million at September 30, 1996. During this same
time period, the Company's average return on equity exceeded 15%. Earnings per
share have grown by a compounded annual rate of 14.6% to $2.38 for the year
ended December 31, 1995, from $1.38 for the year ended December 31, 1991.
Earnings per share for the nine months ended September 30, 1996 totaled $2.02,
an increase of 16.1% from earnings of $1.74 per share for the first nine months
of 1995.
Acquisitions of other banks and bank branches accounted for approximately
59% of the $430.7 million increase in total assets from December 31, 1990, to
September 30, 1996. Effective May 31, 1996, the Company acquired North Bank
Corporation ("NBC") in exchange for cash consideration totaling $15.8 million.
On the effective date of that transaction ("NBC Acquisition"), NBC's assets and
shareholders' equity totaled $152.0 million and $9.5 million, respectively, and
the Company recorded goodwill totaling $7.5 million.
On March 7, 1994, the Company acquired KSB Financial, Inc. ("KSB") in
exchange for shares of the Company's Common Stock having an aggregate value of
$4.4 million. The transaction ("KSB Acquisition") was accounted for as a pooling
of interests and, at the effective date of the transaction, KSB's assets and
shareholders' equity totaled $37.2 million and $2.8 million, respectively.
During 1993, the Company acquired American Home Bank and Pioneer Bank ("1993
Acquisitions") in exchange for cash consideration totaling $7.1 million. On the
effective date of these transactions, aggregate assets and shareholders' equity
totaled $66.7 million and $6.6 million, respectively, and the Company recorded
goodwill totaling approximately $500,000.
The Banks' ability to originate and fund rate-sensitive loans with other
borrowings has also provided an opportunity to profitably deploy the capital
generated by the retention of earnings ("Alternate Loan Funding Strategy").
Other borrowings and federal funds purchased totaled $191.0 million at September
30, 1996, compared to $14.1 million at December 31, 1993. The use of non-deposit
sources of funds is structured to complement the Banks' interest-rate risk
profile, and the cost of such borrowings is a principal consideration in the
Banks' loan and deposit pricing.
RESULTS OF OPERATIONS
SUMMARY. Net income increased by 16.7% to $5.8 million during the nine
months ended September 30, 1996, from $5.0 million during the comparable period
of 1995. Earnings per share during those periods were equal to $2.02 and $1.74
in 1996 and 1995, respectively. During 1995, net income increased by 12.9% to a
record $6.8 million or $2.38 per share. A year earlier, net income increased by
7.6% to $6.0 million, equal to $2.09 per share, from $5.6 million or $1.95 per
share in 1993.
The increases in net income principally reflect increases in average
earning assets that resulted from the acquisition of banks as well as the
successful implementation of the Alternate Loan Funding Strategy. Average
earning assets grew by 61.6% to $634.1 million during the first nine-month
period of 1996 from
19
<PAGE> 20
$392.4 million for the year ended December 31, 1993. Over that same period, the
Company's annualized net interest income increased by 51.6% to $33.5 million in
1996 from $22.1 million in 1993. In addition to an increase in the absolute
level of average earning assets since 1993, the mix of average earning assets
has shifted toward higher yielding loans from other earning assets. During the
nine months ended September 30, 1996, loans comprised 76.6% of total average
earning assets, up from 66.1% for the year ended December 31, 1993.
As a result of the Banks' ability to generate loans, principally single
family residential real estate mortgage loans, average earning assets increased
by 26.5% to $634.1 million during the nine-month period in 1996, from $501.3
million during the comparable period in 1995, and by 15.1% to $513.4 million
during 1995, from $446.0 million in 1994. During those respective periods, net
interest income increased by 21.3% and 11.3%. The recent NBC Acquisition also
contributed to the increase in average earning assets and net interest income
during 1996.
KEY PERFORMANCE RATIOS
<TABLE>
<CAPTION>
NINE MONTHS
ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
-------------- -----------------------
1996 1995 1995 1994 1993
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Return on
Average assets......................................... 1.16% 1.26% 1.25% 1.25% 1.33%
Average common equity.................................. 15.78 15.60 15.59 15.22 15.21
Income per common share(1)............................... $2.02 $1.74 $2.38 $2.09 $1.95
</TABLE>
- -------------------------
(1) Adjusted to give retroactive effect to 5% stock dividends in 1996 and 1995.
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 within management's established risk parameters.
As a result of the NBC Acquisition and the Alternate Loan Funding Strategy, the
Company's leverage ratio (average assets divided by average equity) increased to
13.66 during the nine months ended September 30, 1996. During 1995, the leverage
ratio was equal to 12.44, compared to 12.16 and 11.47 in 1994 and 1993,
respectively.
NET INTEREST INCOME. Tax equivalent net interest income increased by 21.1%
to $25.9 million during the nine months ended September 30, 1996, from $21.3
million during the comparable period a year earlier. The increase principally
reflects the $132.9 million increase in average earning assets generated by the
Alternate Loan Funding Strategy and the NBC Acquisition. Tax equivalent net
interest income as a percent of average earning assets declined to 5.45% during
the nine months ended September 30, 1996, from 5.69% during the comparable
period in 1995. Management attributes a portion of the 24 basis point decline to
the cost of non-deposit funds that were used to implement the Alternate Loan
Funding Strategy. The interest paid on unsecured borrowings that were used to
fund the NBC Acquisition offset a portion of the increase in tax equivalent net
interest income.
20
<PAGE> 21
The following table sets forth the average balance, the interest earned or
paid thereon and the effective interest rate for each major category of
interest-earning assets and interest-bearing liabilities for the nine months
ended September 30, 1996 and 1995.
AVERAGE BALANCES AND TAX EQUIVALENT RATES
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
------------------------------------------------------------------------------
1996 1995
------------------------------------- -------------------------------------
AVERAGE AVERAGE
BALANCE INTEREST YIELD/COST(3) BALANCE INTEREST YIELD/COST(3)
-------- -------- ------------- -------- -------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Loans -- all domestic(1)(2).... $485,407 $ 35,367 9.73% $369,777 $ 27,225 9.84%
Taxable securities............. 98,326 4,873 6.62 95,985 4,572 6.37
Tax-exempt securities(2)....... 37,618 2,522 8.96 30,315 2,163 9.54
Other investments.............. 12,777 636 6.65 5,197 264 6.79
-------- ------- -------- -------
Interest earning assets...... 634,128 43,398 9.14 501,274 34,224 9.13
------- -------
Cash and due from banks........ 19,792 15,944
Other assets, net.............. 18,913 14,046
-------- --------
Total assets.............. $672,833 $531,355
======== ========
LIABILITIES
Savings and NOW................ $242,641 4,484 2.47 $219,985 4,227 2.57
Time deposits.................. 178,671 7,114 5.32 138,871 4,966 4.78
Long-term debt................. 4,518 241 7.13 0 0 --
Other borrowings............... 133,447 5,709 5.72 80,178 3,688 6.15
-------- ------- -------- -------
Interest bearing
liabilities............... 559,277 17,548 4.19 439,034 12,881 3.92
------- -------
Demand deposits................ 56,687 44,022
Other liabilities.............. 7,603 5,559
Shareholders' equity........... 49,266 42,740
-------- --------
Total liabilities and
shareholders' equity.... $672,833 $531,355
======== ========
Net interest income....... $ 25,850 $ 21,343
======= =======
Net interest income as a
percent of earning
assets.................. 5.45% 5.69%
==== ====
</TABLE>
- -------------------------
(1) Interest on loans includes net origination fees totaling $2.4 million and
$2.0 million for the nine-month periods in 1996 and 1995, 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
nine-month periods.
(3) Interest income and expense for the nine-month periods have been annualized.
21
<PAGE> 22
Tax equivalent net interest income increased by 10.7% to $29.0 million
during 1995 and by 14.1% to $26.2 million in 1994. Such increases reflect
double-digit percentage increases in average earning assets during those
periods. Average earning assets increased by 15.1% to $513.4 million during
1995, and by 13.6% to $446.0 million during 1994. The Alternate Loan Funding
Strategy accounted for approximately 90% of the $67.4 million increase in
average earning assets during 1995, while the 1993 Acquisitions accounted for
approximately 70% of the $53.5 million increase in average earning assets for
the prior year.
The following table sets forth the average balance, the interest earned or
paid thereon and the effective interest rate for each major category of
interest-earning assets and interest-bearing liabilities for the years ended
December 31, 1995, 1994 and 1993.
AVERAGE BALANCES AND TAX EQUIVALENT RATES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------------------------
1995 1994 1993
---------------------------- ---------------------------- ----------------------------
AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST BALANCE INTEREST COST BALANCE INTEREST COST
-------- -------- ------ -------- -------- ------ -------- -------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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.............. 0 0 -- 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 $2.7 million, $2.6
million, and $2.2 million 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.
22
<PAGE> 23
Tax equivalent net interest income was equal to 5.65% of average earning
assets during 1995 compared to 5.88% and 5.85% in 1994 and 1993, respectively.
Management attributes the 23 basis point decline during 1995 to the average cost
of other borrowings utilized to fund its Alternate Loan Funding Strategy. In
view of the respective contributions to net income and the Company's return on
average equity, management believes that its Alternate Loan Funding Strategy is
consistent with its goal to profitably deploy capital.
The following table sets forth certain information regarding changes in
interest income and interest expense of the Company for the periods indicated.
For each category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to: (i) changes in volume
(changes in volume multiplied by the prior period's rate); and (ii) changes in
rates (changes in rate multiplied by the prior period's volume).
CHANGE IN TAX EQUIVALENT NET INTEREST INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
NINE MONTHS ENDED ---------------------------------------------------------------
SEPTEMBER 30,
1996 COMPARED TO 1995 1995 COMPARED TO 1994 1994 COMPARED TO 1993
--------------------------- ----------------------------- -----------------------------
VOLUME RATE NET VOLUME RATE NET VOLUME RATE NET
------ ----- ------ ------ ------- ------ ------ ------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Increase (decrease) in
interest income(1)
Loans -- all domestic........ $8,428 $(286) $8,142 $8,627 $ 91 $8,718 $3,506 $ (571) $2,935
Taxable securities........... 113 188 301 (991) 373 (618) 1,255 (694) 561
Tax-exempt securities(2)..... 496 (137) 359 165 (108) 57 85 11 96
Other investments............ 377 (5) 372 (303) 264 (39) (111) 36 (75)
------ ----- ------ ------ ------- ------ ------ ------- ------
Total interest income.... 9,414 (240) 9,174 7,498 620 8,118 4,735 (1,218) 3,517
------ ----- ------ ------ ------- ------ ------ ------- ------
Increase (decrease) in
interest expense
Savings and NOW.............. 423 (166) 257 95 601 696 688 (756) (68)
Time deposits................ 1,539 609 2,148 (382) 1,064 682 (24) (843) (867)
Long-term debt............... 241 0 241 (120) 0 (120) 91 1 92
Other borrowings............. 2,295 (274) 2,021 3,594 463 4,057 930 193 1,123
------ ----- ------ ------ ------- ------ ------ ------- ------
Total interest expense... 4,498 169 4,667 3,187 2,128 5,315 1,685 (1,405) 280
------ ----- ------ ------ ------- ------ ------ ------- ------
Net interest income...... $4,916 $(409) $4,507 $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 to 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.
The following table sets forth the composition of average interest-earning
assets and interest-bearing liabilities as a percent of average total
interest-earning assets for each of the periods indicated.
COMPOSITION OF AVERAGE EARNING ASSETS AND INTEREST PAYING LIABILITIES
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
----------------- ----------------------------
1996 1995 1995 1994 1993
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
As a percent of average earning assets
Loans -- all domestic.................................................. 76.55% 73.77% 74.53% 66.14% 66.08%
Other earning assets................................................... 23.45 26.23 25.47 33.86 33.92
------ ------ ------ ------ ------
Average earning assets............................................. 100.00% 100.00% 100.00% 100.00% 100.00%
====== ====== ====== ====== ======
Savings and NOW........................................................ 38.26% 43.89% 42.41% 47.89% 47.25%
Time deposits.......................................................... 28.18 27.70 27.52 33.64 38.36
Other borrowings and long-term debt.................................... 21.76 16.00 17.35 6.88 2.17
------ ------ ------ ------ ------
Average interest bearing liabilities............................... 88.20% 87.59% 87.28% 88.41% 87.78%
====== ====== ====== ====== ======
Earning asset ratio..................................................... 94.25% 94.34% 94.44% 92.56% 92.85%
Free-funds ratio(1)..................................................... 11.80 12.41 12.72 11.59 12.22
</TABLE>
- -------------------------
(1) Represents the percentage of average earning assets that are funded by
non-interest bearing liabilities and capital.
23
<PAGE> 24
Increases in loans as a percent of average earning assets has had a
favorable impact on tax equivalent net interest income as a percent of average
earning assets. For the first nine months of 1996 and 1995, loans were equal to
approximately 76.6% and 73.8% of average earning assets, respectively. Loans
were equal to approximately 74.5% of average earning assets in 1995 and 66.1% in
both 1994 and 1993. Management expects that the consummation of the pending
acquisition of the FOA Branches will initially reduce loans as a percent of
average earning assets and will have a corresponding negative impact on the
Company's tax equivalent net interest income as a percent of average earning
assets. Over time, management expects to reinvest the assets into loans
following consummation of the transaction.
PROVISION FOR LOAN LOSSES. In addition to a subjective analysis of general
and local economic conditions, management's assessment of the allowance for loan
losses is based upon the amount and composition of loan balances, a systematic
review of specific credits and historical loss experience, as well as the
absolute level of nonperforming and impaired loans.
The provision for loan losses totaled $942,000 during the nine months ended
September 30, 1996. The increase from $477,000 during the comparable period in
1995 resulted from the application of management's allocation methodology (as
described above) to the loans associated with the NBC Acquisition and the
increase in loans, excluding loans held for sale ("Portfolio Loans").
The provision for loan losses totaled $636,000 in 1995, compared to
$473,000 in 1994 and $657,000 in 1993. Increases in the provision during 1995
principally reflect the increase in Portfolio Loans. The decrease in the
provision during 1994 reflects a subsequent decline in substandard assets that
had been acquired as a result of the 1993 Acquisitions and the KSB Acquisition
in 1994, and the corresponding increase in the unallocated portion of the
allowance for loan losses.
NONINTEREST INCOME. Noninterest income increased by 49.9% during the nine
months ended September 30, 1996, from $2.7 million during the comparable period
in 1995. The increase reflects increases in net gains on the sale of real estate
mortgage loans, as well as increases in service charges on deposit accounts and
other income.
Noninterest income totaled $3.8 million in 1995 compared to $3.1 million
and $3.9 million in 1994 and 1993, respectively. The increase in net gains on
real estate mortgage loans accounted for approximately 72% of the $665,000
increase in noninterest income during 1995. A year earlier, a decline in net
gains on the sale of such loans and net losses on the sale of securities
available for sale accounted for the $797,000 decrease in noninterest income.
The following table sets forth the principal components of noninterest
income for each of the periods indicated.
NONINTEREST INCOME
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
---------------- --------------------------
1996 1995 1995 1994 1993
------ ------ ------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Service charges on deposit accounts................. $1,641 $1,439 $1,919 $1,892 $1,589
Net gains (losses) on asset sales
Real estate mortgage loans........................ 1,251 405 728 249 721
Securities........................................ (130) (110) (120) (174) 637
Real estate mortgage loan servicing................. 299 273 371 335 217
PrimeVest commission................................ 82 55 73 120 139
Other............................................... 838 594 795 679 595
------ ------ ------ ------ ------
Total noninterest income....................... $3,981 $2,656 $3,766 $3,101 $3,898
====== ====== ====== ====== ======
</TABLE>
Service charges on deposit accounts, the largest component of noninterest
income, totaled $1.6 million and $1.4 million during the nine months ended
September 30, 1996 and 1995, respectively. The $202,000 increase in service
charges reflects the NBC Acquisition. During 1995, such service charges totaled
$1.9 million, essentially unchanged from 1994. The $303,000 increase to $1.9
million in 1994 from $1.6 million in 1993, principally reflects the impact of
the 1993 Acquisitions.
24
<PAGE> 25
Net gains on the sale of real estate mortgage loans totaled $1.3 million
and $405,000 during the nine months ended September 30, 1996 and 1995,
respectively. Such gains totaled $728,000 in 1995, compared to $249,000 in 1994
and $721,000 in 1993.
Although the majority of the 209% increase in net gains on the sale of real
estate loans during 1996 reflects favorable economic conditions and an increase
in loans sold, management attributes 45% of the increase to the impact of
Statement of Financial Accounting Standards No. 122, "Accounting for Mortgage
Servicing Rights" ("SFAS #122"), and the increased sale of related servicing
rights. See "Statements of Financial Accounting Standards."
In addition to an increase in loans sold, the 192% increase during 1995
reflects an increase in net gains as a percent of real estate mortgage loans
sold. The overall decline in net gains during 1994 reflects the combined effects
of a decrease in loans sold as well as a decrease in net gains as a percent of
loans sold.
The following table sets forth certain information with respect to the
origination and sale of real estate mortgage loans, including the net gains
recognized on the sale of such loans.
NET GAINS ON THE SALE OF REAL ESTATE MORTGAGE LOANS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
--------------------- --------------------------------
1996 1995 1995 1994 1993
-------- -------- -------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Real estate mortgage loan
originations......................... $166,100 $118,100 $163,500 $97,800 $80,200
Real estate mortgage loan sales........ 80,000 33,400 52,000 38,100 50,100
Real estate mortgage loan servicing
rights sold.......................... 28,800 11,900 19,700 1,500 500
Net gains on the sale of real estate
mortgage loans....................... 1,251 405 728 249 721
Net gains as a percent of real estate
mortgage loan sales.................. 1.56% 1.21% 1.40% 0.65% 1.44%
</TABLE>
Consistent with management's desire to maintain profitable leverage, the
Banks continue to retain rate-sensitive real estate mortgage loans and sell the
majority of fixed-rate obligations. See "Financial Condition -- Asset/Liability
Management." 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 maintain customer relationships, the Banks have historically retained
servicing rights on real estate mortgage loans sold. During the nine months
ended 1996 and the year ended 1995, however, the Banks sold the related
servicing rights on $28.8 million and $19.7 million, respectively, 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 Company realized net losses of $130,000 and $110,000 on the sale of
securities available for sale during the nine months ended September 30, 1996
and 1995, respectively. The Company also realized net losses of $120,000 in 1995
and $174,000 in 1994 compared to net gains of $637,000 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 "Financial Condition -- Asset/Liability Management."
NONINTEREST EXPENSE. Noninterest expense totaled $19.8 million and $15.9
million during the nine months ended September 30, 1996 and 1995, respectively.
Noninterest expense totaled $21.7 million in 1995 compared to $19.5 million in
1994 and $17.5 million in 1993. Salaries and benefits are the largest component
of noninterest expense and account for the majority of the increase in total
noninterest expense. A reduction in FDIC insurance assessments, however, limited
the increase in total noninterest expense.
25
<PAGE> 26
The following table sets forth the principal components of noninterest
expense for each of the periods indicated.
NONINTEREST EXPENSE
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
------------------ -----------------------------
1996 1995 1995 1994 1993
------- ------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Salaries....................................... $ 7,450 $ 5,887 $ 8,005 $ 7,817 $ 6,593
Performance-based compensation and benefits.... 2,280 1,703 2,351 1,052 1,182
Other benefits................................. 1,674 1,313 1,807 1,693 1,541
------- ------- ------- ------- -------
Total salaries and benefits............... 11,404 8,903 12,163 10,562 9,316
Occupancy, net................................. 1,458 1,135 1,548 1,392 1,237
Furniture and fixtures......................... 1,337 975 1,345 1,248 968
Loan and collection............................ 396 748 1,030 626 724
Deposit insurance.............................. 92 454 499 966 858
Other.......................................... 5,117 3,682 5,117 4,709 4,432
------- ------- ------- ------- -------
Total noninterest expense................. $19,804 $15,897 $21,702 $19,503 $17,535
======= ======= ======= ======= =======
</TABLE>
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. Including commissions relating to the
origination of real estate mortgage loans, aggregate performance-based
compensation accounts for approximately 23% of the $2.5 million increase in
salaries and benefits during the nine months ended September 30, 1996, and
approximately 81% of the $1.6 million increase during 1995.
The NBC Acquisition and the 1993 Acquisitions also had a substantive impact
on salaries and benefits as well as total noninterest expense. Management
estimates that the NBC Acquisition accounted for 33% and 45% of the increase in
salaries and benefits and total noninterest expense, respectively, during the
nine months ended September 30, 1996. During 1994, all of the increase in
salaries and benefits and 90% of the increase in total noninterest expense can
be attributed to the 1993 Acquisitions.
Costs associated with new branch facilities, a write down of other real
estate as well as the introduction of the "EZ Money" check card and related ATM
conversions have also contributed to the increases in total noninterest expense
during the nine months ended September 30, 1996. Costs associated with the new
loan production offices or otherwise relating to the origination of real estate
mortgage loans contributed to the increase in occupancy, furniture and fixtures
and other noninterest expense during 1995. Environmental remediation costs
associated with two foreclosed properties also contributed approximately
$200,000 to the increase in noninterest expense. These 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 Company has provided for all remaining remediation costs as estimated by
environmental engineers.
FINANCIAL CONDITION
SUMMARY. The Banks have committed significant resources to loan origination
efforts, including two new loan production offices during the second quarter of
1995. Portfolio Loans totaled $565.4 million at September 30, 1996, compared to
$418.0 million and $336.7 million at December 31, 1995 and 1994, respectively.
Excluding the impact of the NBC Acquisition, rate-sensitive real estate mortgage
loans accounted for approximately 67% and 72% of the increase in Portfolio Loans
during the first nine months of 1996 and for all of 1995, respectively.
26
<PAGE> 27
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 nondeposit funds, principally advances from the FHLB, complements the
Banks' core deposits and may further assist the Banks' efforts to manage their
exposure to changes in interest rates. See "-- Asset/Liability Management." Such
advances totaled $131.0 million at September 30, 1996, compared to $103.0
million and $40.0 million at December 31, 1995 and 1994, respectively.
SECURITIES. The Banks maintain diversified securities portfolios that
include obligations of the U.S. Treasury and government-sponsored agencies as
well as securities issued by states and political subdivisions and
mortgage-backed securities. Securities available for sale are carried at fair
value and unrealized gains and losses, after consideration of applicable federal
income taxes, are recognized as a separate component of shareholders' equity.
Management has the intent and the Banks have the ability to hold other
securities to maturity. These securities are carried at amortized cost without
adjustment for unrealized gains or losses. Although there are no current plans
to sell securities, management continues to evaluate the Banks' asset/liability
management needs and attempts to maintain a portfolio structure that will
improve earnings while maintaining sufficient liquidity and cash flow to fund
loans.
The following tables set forth the book value of securities at the
specified dates and certain information with respect to the securities
portfolios, including gross unrealized gains and losses.
SECURITIES
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, ------------------------------
1996 1995 1994 1993
------------- ------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
AVAILABLE FOR SALE
U.S. Treasury....................................... $ 22,433 $23,272 $34,724 $ 30,330
U.S. Government agencies............................ 21,205 6,623 0 0
States and political subdivisions................... 18,669 9,290 0 0
Mortgage-backed securities.......................... 56,487 37,722 11,684 0
Other securities.................................... 3,693 10,646 6,348 0
-------- ------- ------- --------
Total.......................................... $ 122,487 $87,553 $52,756 $ 30,330
======== ======= ======= ========
HELD TO MATURITY
U.S. Treasury....................................... $ 0 $ 0 $ 5,738 $ 29,385
U.S. Government agencies............................ 1,485 2,559 11,004 6,601
States and political subdivisions................... 20,137 20,142 27,240 27,241
Mortgage-backed securities.......................... 3,865 4,487 26,545 35,295
Other Securities.................................... 1,387 718 7,194 7,295
-------- ------- ------- --------
Total.......................................... $ 26,874 $27,906 $77,721 $105,817
======== ======= ======= ========
</TABLE>
<TABLE>
<CAPTION>
UNREALIZED
AMORTIZED ---------------- FAIR
COST GAINS LOSSES VALUE
--------- ------ ------ --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
SECURITIES AVAILABLE FOR SALE
September 30, 1996...................................... $ 122,231 $ 980 $ 724 $122,487
December 31, 1995....................................... 86,471 1,538 456 87,553
December 31, 1994....................................... 55,968 0 3,212 52,756
December 31, 1993....................................... 30,330 120 0 30,450
SECURITIES HELD TO MATURITY
September 30, 1996...................................... $ 26,874 $ 891 $ 67 $ 27,698
December 31, 1995....................................... 27,906 1,157 32 29,031
December 31, 1994....................................... 77,721 976 1,247 77,450
December 31, 1993....................................... 105,817 4,386 472 109,731
</TABLE>
27
<PAGE> 28
The following table sets forth certain information with respect to the
proceeds from the sale of securities available for sale, including related
realized gains and losses.
PROCEEDS FROM THE SALE OF SECURITIES AVAILABLE FOR SALE
<TABLE>
<CAPTION>
REALIZED
---------------
PROCEEDS GAINS LOSSES
-------- ----- ------
(IN THOUSANDS)
<S> <C> <C> <C>
NINE MONTHS ENDED
September 30, 1996................................................... $ 15,907 $ 44 $174
September 30, 1995................................................... 13,152 7 117
YEAR ENDED
December 31, 1995.................................................... $ 14,054 $ 8 $128
December 31, 1994.................................................... 28,384 228 402
December 31, 1993.................................................... 34,341 658 21
</TABLE>
LOAN PORTFOLIOS. Management believes that 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.
Management believes that its decentralized structure provides the Banks
with important advantages in serving the needs of its principal lending markets.
Although the management and 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 these underwriting
standards and provide internal controls that are consistent with the needs of a
decentralized management structure. The Company's centralized credit services,
which include credit analysis and commercial loan review, also provide economies
of scale. The centralization of retail loan services further provides for
consistent service quality and facilitates compliance with applicable consumer
protection laws and regulations.
The following table sets forth the principal components of Portfolio Loans
at the dates indicated.
LOAN PORTFOLIO COMPOSITION
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------
SEPTEMBER 30, 1996 1995 1994
------------------- ------------------- -------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
-------- ------- -------- ------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Real estate
Residential first mortgages........ $263,224 46.6% $211,690 50.6% $158,432 47.1%
Residential home equity............ 31,528 5.6 19,733 4.7 17,704 5.3
Construction and land
development..................... 46,350 8.2 29,328 7.0 27,289 8.1
Other.............................. 84,428 14.9 56,675 13.6 44,982 13.4
Consumer............................. 92,137 16.3 64,821 15.5 49,075 14.6
Commercial........................... 31,534 5.6 23,403 5.6 23,388 6.9
Agricultural......................... 16,217 2.8 12,394 3.0 15,855 4.6
-------- ----- -------- ----- -------- -----
Total loans..................... $565,418 100.0% $418,044 100.0% $336,725 100.0%
======== ===== ======== ===== ======== =====
</TABLE>
28
<PAGE> 29
The following table sets forth the principal components of nonperforming
assets at the dates indicated.
NONPERFORMING ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, --------------------------
1996 1995 1994 1993
------------- ------ ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Non-accrual loans....................................... $ 2,089 $1,886 $2,052 $1,707
Loans 90 days or more past due and still accruing
interest.............................................. 1,159 427 254 408
Restructured loans...................................... 203 247 528 1,098
------ ------ ------ ------
Total nonperforming loans.......................... 3,451 2,560 2,834 3,213
Other real estate....................................... 956 760 1,381 2,647
------ ------ ------ ------
Total nonperforming assets......................... $ 4,407 $3,320 $4,215 $5,860
====== ====== ====== ======
As a percent of total loans
Nonperforming loans................................... 0.61% 0.61% 0.84% 1.14%
Nonperforming assets.................................. 0.78 0.79 1.25 2.08
</TABLE>
The increases in nonperforming loans and assets during 1996 were the result
of the NBC Acquisition. In the absence of that transaction, nonperforming loans
would have declined to $2.5 million, equal to 0.52% of Portfolio Loans at
September 30, 1996, and nonperforming assets would have declined to $3.3 million
or 0.68% of Portfolio Loans.
The consistent decline in nonperforming loans and assets during 1995 and
1994 largely reflects a decrease in substandard assets originally acquired in
connection with the KSB Acquisition in 1994, as well as the 1993 Acquisitions.
Nonperforming assets associated with these acquisitions totaled $1.4 million,
$2.3 million, and $2.0 million at December 31, 1995, 1994, and 1993,
respectively.
Impaired loans totaled approximately $2.2 million at September 30, 1996. In
addition to certain nonperforming loans, such impaired loans include commercial
and agricultural loans totaling $800,000 that have been separately identified as
impaired. Certain impaired loans with a balance of approximately $1.0 million at
September 30, 1996, had specific allocations of the allowance for loan losses
totaling approximately $125,000. The Company's average investment in impaired
loans was approximately $2.5 million during the nine-month period ended
September 30, 1996, and interest income recognized on impaired loans during that
period totaled approximately $110,000.
29
<PAGE> 30
The following table sets forth an analysis of the changes in the allowance
for loan losses at each of the dates indicated.
ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, --------------------------------------------------------
1996 1995 1994 1993(1) 1992(1) 1991(1)
------------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Loans outstanding at the end of the
period
(net of unearned fees).............. $ 575,807 $434,091 $342,658 $288,643 $261,634 $275,144
======== ======== ======== ======== ======== ========
Average loans outstanding for the
period
(net of unearned fees).............. $ 485,407 $382,644 $294,968 $259,334 $267,801 $260,594
======== ======== ======== ======== ======== ========
Balance of allowance for loan losses
at beginning of period.............. $ 5,243 $ 5,054 $ 5,053 $ 4,023 $ 3,784 $ 3,541
-------- -------- -------- -------- -------- --------
Loans charged-off
Real estate......................... 6 24 14 38 69 51
Commercial and agricultural......... 58 113 311 306 566 421
Installment......................... 601 575 546 370 581 613
-------- -------- -------- -------- -------- --------
Total loans charged-off........... 665 712 871 714 1,216 1,085
-------- -------- -------- -------- -------- --------
Recoveries of loans previously
charged-off.........................
Real estate......................... 8 28 6 11 26 3
Commercial and agricultural......... 82 115 151 156 91 123
Installment......................... 180 122 242 164 113 189
-------- -------- -------- -------- -------- --------
Total recoveries.................. 270 265 399 331 230 315
-------- -------- -------- -------- -------- --------
Net loans charged-off............. 395 447 472 383 986 770
Additions to allowance charged to
operating expense................... 942 636 473 657 1,225 1,013
Allowance on loans acquired........... 930 0 0 756 0 0
-------- -------- -------- -------- -------- --------
Balance at end of period.............. $ 6,720 $ 5,243 $ 5,054 $ 5,053 $ 4,023 $ 3,784
======== ======== ======== ======== ======== ========
Net loans charged-off as a percent
of average loans outstanding for
the period(2)....................... 0.11% 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 period.......................... 1.17 1.21 1.48 1.75 1.54 1.38
Allowance for loan losses as a percent
of nonperforming assets............. 194.73 204.80 178.33 157.27 126.75 78.90
</TABLE>
- -------------------------
(1) Restated to reflect an acquisition accounted for as a pooling of interests.
See Note 2 to Consolidated Financial Statements.
(2) September 30, 1996 information is annualized.
The allowance for loan losses is maintained at a level that management
considers appropriate, based upon its assessment of relevant circumstances, by
charges to the associated provision for loan losses. See "-- Provision for Loan
Losses." In performing its assessment, management allocates a portion of the
allowance to specific loans and loan portfolios. Although the allowance for loan
losses has declined as a percent of Portfolio Loans, the unallocated portion of
the allowance increased to 57.3% of the total allowance at September 30, 1996,
from 41.5% at December 31, 1993.
The following table sets forth management's allocation of the allowance for
loan losses to specific loans and loan portfolios for each of the periods
indicated.
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, --------------------------
1996 1995 1994 1993
------------- ------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Commercial and agricultural............................. $ 1,761 $1,612 $1,655 $2,222
Real estate mortgage.................................... 229 162 177 270
Installment............................................. 879 597 474 464
Unallocated............................................. 3,851 2,872 2,748 2,097
------ ------ ------ ------
Total.............................................. $ 6,720 $5,243 $5,054 $5,053
====== ====== ====== ======
</TABLE>
30
<PAGE> 31
Loans charged against the allowance for loan losses, net of recoveries
("Net Losses"), were $395,000 during the nine months ended September 30, 1996,
compared to $282,000 during the comparable period of 1995. The NBC Acquisition
accounted for $90,000 of the $113,000 increase in Net Losses during 1996. Net
Losses in 1995 were $447,000 compared to $472,000 and $383,000 in 1994 and 1993,
respectively. Management estimates that Net Losses relating to loans that were
acquired as a result of the 1993 Acquisitions and the KSB Acquisition in 1994
were $50,000 in 1995, $130,000 in 1994, and $60,000 in 1993.
DEPOSITS AND BORROWINGS. Deposits totaled $541.8 million at September 30,
1996, compared to $411.6 million at December 31, 1995. The NBC Acquisition
accounted for the majority of the $130.2 million increase in deposits.
Notwithstanding the purchase of a branch facility with deposits totaling $14.4
million during 1995, total deposits at December 31, 1995 increased only slightly
from $409.5 million one year earlier.
The following table sets forth average deposit balances and the weighted
average rates paid thereon for the dates indicated.
AVERAGE DEPOSITS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
SEPTEMBER 30, --------------------------------------------------------
1996 1995 1994 1993
---------------- ---------------- ---------------- ----------------
AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE RATE BALANCE RATE BALANCE RATE BALANCE RATE
-------- ---- -------- ---- -------- ---- -------- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Noninterest bearing demand.......... $ 56,687 $ 46,539 $ 41,910 $ 37,426
Savings and NOW..................... 242,641 2.47% 217,721 2.53% 213,590 2.26% 185,419 2.64%
Time deposits....................... 178,671 5.32 141,292 4.92 150,036 4.18 150,536 4.74
-------- -------- -------- --------
Total........................... $477,999 3.24% $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 September 30, 1996.
TIME DEPOSITS OVER $100,000
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Three months or less................................. $ 12,779
Over three through six months........................ 2,718
Over six months through one year..................... 2,245
Over one year........................................ 7,751
-------
Total........................................... $ 25,493
=======
</TABLE>
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 borrowed funds, principally advances from the FHLB,
to fund loans as part of its Alternate Loan Funding Strategy, while utilizing
pricing strategies that are intended to reduce the weighted-average cost of core
deposits. The use of non-deposit funds is structured to complement the Banks'
existing interest rate risk profile and may further reduce the Banks' exposure
to depositors' options to withdraw funds prior to maturity.
The Company utilizes federal funds purchased and other borrowings,
including FHLB advances, to fund a portion of its earning assets. During the
nine months ended September 30, 1996, such other borrowings funded approximately
21.8% of average earning assets compared to 17.4% and 6.9% during the years
ended December 31, 1995 and 1994, respectively.
FHLB advances are secured by the Banks' unencumbered qualifying real estate
mortgage loans as well as certain securities equal to 170% of outstanding
advances. To increase its aggregate borrowing capacity, management may elect to
secure FHLB advances by pledging specific collateral representing 105% to 125%
of outstanding advances. Management believes brokered certificates of deposit to
be a viable alternative to further diversify the Banks' funding sources.
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<PAGE> 32
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. During periods when management believes there has been an absence
of suitable acquisition candidates, the Company's Alternate Loan Funding
Strategy has made important contributions to the Company's net income and return
on average equity. In view of the franchise value associated with core deposits
and other customer relationships, management believes that its approach to
acquisitions has also provided value to the Company's shareholders.
The following table sets forth the Company's capital ratios at the dates
indicated.
CAPITAL RATIOS
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, --------------
1996 1995 1994
------------- ----- -----
<S> <C> <C> <C>
Shareholders' equity to total assets...................................... 6.40% 7.97% 7.81%
Leverage ratio............................................................ 5.23 7.58 7.40
Tier 1 capital to risk-weighted assets.................................... 8.18 11.49 11.90
Total risk-based capital to risk-weighted assets.......................... 9.44 12.75 13.03
</TABLE>
The Company's dividend policies and its share repurchase plan have been
integral components of management's efforts to maintain profitable financial
leverage. Cash dividends declared were equal to 36.5% of earnings for the first
nine months of 1996, 36.8% and 34.6% for the years ended December 31, 1995 and
1994, respectively. Although there are no current plans to repurchase shares of
its capital stock, the Company purchased 35,900 and 40,000 shares of its Common
Stock during 1995 and 1994, respectively.
Shareholders' equity totaled $50.7 million at September 30, 1996, compared
to $47.0 million and $40.3 million at December 31, 1995 and 1994, respectively.
The increase in shareholders' equity reflects the retention of earnings as well
as the value of shares of Common Stock that have been issued pursuant to the
Incentive Share Grant Plan and the Company's various stock option plans.
As a result of the NBC Acquisition, shareholders' equity declined to 6.40%
of total assets at September 30, 1996, compared to 7.97% and 7.81% at December
31, 1995, and 1994, respectively. In the absence of that transaction, however,
shareholders' equity would have been largely unchanged from December 31, 1995.
ASSET/LIABILITY MANAGEMENT. The asset/liability management efforts of the
Company and the Banks are intended to identify and evaluate opportunities to
structure the balance sheet in a manner that is consistent with management's
mission to maintain profitable financial leverage within established risk
parameters. Accordingly, management's 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 certificates of
deposit that will likely accompany changes in interest rates.
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 also an integral component in pricing Portfolio Loans.
Management's ongoing evaluations have determined that the retention of 15- and
30-year fixed-rate real estate mortgage loans is not consistent with its goal to
profitably deploy capital or the Banks' asset/liability management needs.
Accordingly, the majority of such loans are sold to mitigate exposure to changes
in interest rates. Adjustable-rate and balloon real estate mortgage loans may,
however, be profitably funded with FHLB advances and the retention of such loans
is a principal focus of the Alternate Loan Funding Strategy. See "Results of
Operations--Noninterest Income."
32
<PAGE> 33
The following table sets forth the anticipated maturity or repricing,
including estimated prepayments, of interest-earning assets and interest-bearing
liabilities at September 30, 1996.
INTEREST RATE SENSITIVITY
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
----------------------------------------------------------------
DAYS
------------------------------------------ YEARS
91 -- 181 -- -------------------
0 -- 30 31 -- 90 180 365 1 -- 5 5+ TOTAL
-------- -------- -------- --------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Loans and loans held for sale........... $102,929 $ 44,398 $ 52,012 $ 79,531 $212,672 $ 84,265 $575,807
Taxable securities...................... 12,312 7,593 5,475 6,680 46,436 42,257 120,753
Tax-exempt securities................... 799 15 294 1,714 16,570 19,414 38,806
-------- -------- -------- --------- -------- -------- --------
Interest earning assets............... 116,040 52,006 57,781 87,925 275,678 145,936 735,366
-------- -------- -------- --------- -------- --------
Noninterest earning assets.............. 57,786
--------
Total Assets........................ $793,152
========
LIABILITIES AND SHAREHOLDERS' EQUITY
Demand, savings and NOW................. 42,892 12,235 17,987 29,291 104,521 125,600 $332,526
Time deposits........................... 20,083 26,933 32,435 45,095 79,458 5,251 209,255
Other borrowings........................ 54,458 70,501 3,000 31,000 32,000 0 190,959
-------- -------- -------- --------- -------- -------- --------
Total deposits and other
borrowings........................ 117,433 109,669 53,422 105,386 215,979 130,851 732,740
-------- -------- -------- --------- -------- --------
Other liabilities and shareholders'
equity.............................. 60,412
--------
Total Liabilities and
Shareholders' Equity.............. $793,152
========
RATE SENSITIVITY GAP AND RATIOS
Gap for period........................ $ (1,393) $(57,663) $ 4,359 $(17,461) $ 59,699 $ 15,085
======== ======== ======== ========= ======== ========
Cumulative gap........................ $ (1,393) $(59,056) $(54,697) $(72,158) $(12,459) $ 2,626
======== ======== ======== ========= ======== ========
Ratio of rate-sensitive assets to
rate-sensitive liabilities for
period.............................. 98.8% 47.4% 108.2% 83.4% 127.6% 111.5%
Cumulative ratio of rate-sensitive
assets to rate-sensitive
liabilities......................... 98.8 74.0 80.5 81.3 97.9 100.4
</TABLE>
STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS
The Company adopted SFAS #122 effective January 1, 1996. SFAS #122 requires
the Banks to recognize as separate assets the rights to service mortgage loans
for others that have been acquired through either a purchase or origination of a
loan. The fair value of capitalized originated mortgage servicing rights has
been determined based on market value quotes for similar servicing. These
mortgage servicing rights are amortized in proportion to and over the period of
estimated net loan servicing income. SFAS #122 also requires the Banks to assess
these mortgage servicing rights for impairment based on the fair value of those
rights. For purposes of measuring impairment, the risk characteristics used by
the Banks include the underlying loans' interest rates, term of loan and loan
types.
The Banks capitalized approximately $258,000 of originated servicing rights
during the nine months ended September 30, 1996, of which approximately $34,000
has been amortized.
The Company also adopted Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation," ("SFAS #123"), effective January
1, 1996. SFAS #123 encourages companies to adopt a fair value method of
accounting for stock compensation plans. Those companies not adopting a fair
value method are required to make pro-forma disclosures of net income and
earnings per share, on an annual basis, as if they had adopted the fair value
accounting method. Management has elected the pro-forma disclosure method and
will do so on an annual basis.
33
<PAGE> 34
BUSINESS
This section contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. Actual results could differ
materially from those projected in such forward-looking statements as a result
of, among other things, the factors set forth in the section entitled "Risk
Factors."
GENERAL
The Company is a bank holding company with four wholly owned subsidiary
banks engaged in the business of retail and commercial banking in portions of
Michigan's lower peninsula. IBC Capital, a wholly owned subsidiary of the
Company, exists for the purpose of issuing the Preferred Securities and has no
independent operations. Headquartered in Ionia, Michigan, the Company was formed
in 1973 as the parent company of Independent Bank. Each of the Banks is a state
chartered Michigan banking corporation, the business of each of which is
described in more detail below.
Collectively, the Banks serve over 45 communities through their four main
offices and a total of 45 branches and five loan production offices. Management
attributes the Company's success to its consistent application of community
banking practices in predominantly rural and suburban markets. The Company's
decentralized management structure, which empowers and encourages local decision
making, represents the core of the Company's community banking philosophy. This
autonomy allows local bank management to better anticipate and respond to
customer demands and thereby enhances and improves customer service and
convenience, the principal means by which the Banks compete in the delivery of
financial services.
The Company's 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, and each of the nine-month
periods ended September 30, 1995 and 1996 are as follows:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED YEARS ENDED DECEMBER
SEPTEMBER 30, 31,
-------------- -----------------------
1996 1995 1995 1994 1993
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Interest and fees on loans............................... 76.4% 75.6% 76.1% 71.1% 68.3%
Other interest income.................................... 15.1 17.0 16.3 21.3 21.5
Non-interest income...................................... 8.5 7.4 7.6 7.6 10.2
----- ----- ----- ----- -----
100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== =====
</TABLE>
RECENT GROWTH
Much of the Company's recent growth has resulted from acquisitions. Since
1993, the Company has acquired four Michigan banks, two branch facilities and
established five real estate mortgage loan production offices. As a result, the
Company's assets have grown to approximately $793.2 million at September 30,
1996, from $403.1 million at December 31, 1992.
In October 1993, the Company acquired American Home Bank ("American") and
Pioneer Bank ("Pioneer"), with assets of approximately $32 million and $35
million, respectively. The purchase price of $2.5 million for American
approximated its then book value, while the purchase price of $4.5 million for
Pioneer represented a premium of approximately 15% to Pioneer's book value. In
March 1994, the Company increased its assets by approximately $37.2 million by
acquiring KSB and its wholly owned subsidiary The Kingston State Bank
("Kingston"). In connection with this acquisition, the Company issued shares of
its Common Stock with a market value of approximately $4.4 million, representing
a premium of roughly 55% to KSB's book value. American, Pioneer and Kingston
have been consolidated to form IBEM. Effective May 31, 1996, the Company
acquired NBC, with assets of approximately $152.0 million, for cash in the
amount of $15.8 million. This represented a premium of approximately 66% to
NBC's book value. North Bank, NBC's wholly-owned subsidiary bank, was
consolidated with Independent Bank on August 12, 1996.
34
<PAGE> 35
THE COMPANY'S APPROACH TO COMMUNITY BANKING
The Company's operating philosophy preserves those elements of traditional
community banking which management believes create a competitive advantage in
the markets in which it operates. Among these are a high level of personal
service and customer recognition, prompt response to customer needs,
convenience, continuity of personnel and management, and commitment to and
participation in the community. Management attributes the Company's success in
preserving its community banking practices in the face of its recent growth to
three primary characteristics; (1) decentralized bank management, (2)
corporate-wide administrative and technical support, and (3) experienced Company
and Bank management.
DECENTRALIZED MANAGEMENT. The Company believes that vesting management and
the boards of the Banks with the authority to make local decisions allows the
Banks to better anticipate customer needs, respond to customer demands, and
identify profitable opportunities within their respective markets. To provide
the flexibility to effectively pursue these opportunities, the Company's
decentralized management structure vests pricing and credit decisions in the
management of the respective Banks. While management of each of the Banks is
granted the authority to make decisions for its local operations, it is also
held accountable for its performance.
CORPORATE ADMINISTRATIVE AND SUPPORT SERVICES. To complement the
decentralized management structure of the Company and establish consistent
service and quality and attain operating efficiencies, the Company's corporate
service departments provide a variety of services to each of the Banks. These
services include data processing, accounting and audit services, purchasing and
risk management, commercial loan credit analysis, servicing and review, consumer
loan servicing, real estate mortgage loan underwriting, servicing and secondary
market operations, asset/liability management and marketing services. The
Company believes that this partnership between the Banks' management and Company
personnel allows the management of each of the Banks to focus on sales and
marketing and at the same time provides the Company with the internal controls
that are consistent with the needs of a decentralized organization. Further,
this combination of decentralized management and centralized services provides
economies of scale that permit the Company to attract and retain talented
managers that possess specific expertise in areas that the Banks could not
achieve on an individual basis.
MANAGEMENT EXPERIENCE AND COMPENSATION. The Company's growth and
profitability is also attributable to management's experience in providing
community banking services. The Banks' four presidents, along with the Company's
two executive officers, have been employed by the Company, on average, for over
10 years. Set forth below is a list of the Company's executive officers and Bank
presidents, their respective ages and financial industry experience.
<TABLE>
<CAPTION>
YEARS OF FINANCIAL
NAME (AGE) POSITION WITH COMPANY INDUSTRY EXPERIENCE
- --------------------------------- ------------------------------------------ -------------------
<S> <C> <C>
Charles C. Van Loan (48)......... President, Chief Executive Officer and
Director 19
William R. Kohls (39)............ Executive Vice President and
Chief Financial Officer 17
Jeffrey A. Bratsburg (53)........ President and Chief Executive Officer --
Independent Bank West Michigan 25
Edward B. Swanson (43)........... President and Chief Executive Officer --
Independent Bank South Michigan 21
Michael M. Magee, Jr. (40)....... President and Chief Executive Officer --
Independent Bank 21
Ronald L. Long (37).............. President and Chief Executive Officer --
Independent Bank East Michigan 15
</TABLE>
The Company's growth has allowed it to recruit and retain experienced
individuals, and the recent acquisitions have added experienced community
bankers to its franchise. The Company's compensation policies and practices are
central to the maintenance of its decentralized management structure, and are
intended to promote and support local Bank autonomy while at the same time
enhancing overall Company performance. As an example, individual bonuses are
currently based on the performance of the Bank the employee works for, as well
as the overall performance of the Company. The Company believes that this
35
<PAGE> 36
combination promotes individual bank performance and at the same time helps to
ensure that results are to the ultimate benefit of the Company's shareholders.
In addition to cash incentive plans, the Company maintains a variety of
equity-based plans to provide incentives for superior performance and to align
the interests of its executive officers and managers 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. As a result of these policies and
practices, every full-time employee, subject to certain employment conditions,
has an equity interest in the Company. Collectively, the Company's directors and
executive officers and Bank presidents own approximately 12.7% of the Company's
Common Stock, and as such have a vested interest in the Company's future success
and growth.
BUSINESS STRATEGY
The Company intends to supplement its internal growth with selective
acquisitions, while at the same time managing its capital resources. One of the
principal challenges confronting the Company, in light of its recent growth, is
the preservation of its decentralized management structure, which represents the
core of its community banking foundation.
INTERNAL GROWTH. Management believes that the stable and diversified
economies of the suburban and rural communities served by the Banks' offices, as
well as nearby communities and metropolitan areas, provide attractive markets
for the Company's traditional commercial banking services. Although the
financial services industry continues to be highly competitive, in view of the
limited competition within many of the Banks' principal markets, the Company's
community banking philosophy emphasizes a high level of service and convenience
as the principal means of competition.
The markets served by the Banks provide attractive opportunities for
maintaining favorable net interest margins; however, the predominantly rural and
suburban nature of these markets presents certain challenges to the Company's
ability to grow. In the face of this challenge, the Banks have utilized various
strategies, based upon the particular attributes of their respective markets, to
provide asset growth and profitably deploy capital. In the absence of meaningful
deposit growth within those markets, the Banks have increasingly relied on
advances from the FHLB to fund the increase in assets. The Company intends to
encourage the Banks to continue to operate autonomously to provide the
flexibility that may be necessary to take advantage of opportunities in their
respective markets.
The Company's corporate service departments develop various expertise to
assist the Banks and Bank management. In addition, the Banks share certain
expertise and experiences with one another. This sharing of expertise and
general coordination among the Company and the Banks is accomplished through a
network of holding company committees. The Company intends to continue to
promote the development of expertise and coordination among the Banks in order
to foster the Banks' growth in their respective markets.
ACQUISITION STRATEGY. The Company will continue to consider opportunities
for expansion through selective acquisitions in markets where management
believes its community banking approach creates a competitive advantage. In
order to capitalize upon its existing banking network, the Company will continue
to focus primarily on acquisitions in contiguous markets; however, the Company
may consider expansion into noncontiguous markets in instances where management
believes that opportunities exist to enhance shareholder value and allow for
effective application of its community banking practices. Management believes
that, given its relative size, the Company can sustain meaningful growth through
acquisitions in markets that are attractive to the Company but may not be of
sufficient size to interest its larger competitors.
CAPITAL MANAGEMENT. The Company intends to continue to focus on managing
its capital to provide an attractive return on its shareholders' investment. The
Company's dividend policies and share repurchase plan have been integral
components of management's efforts to maintain profitable financial leverage
within management's established risk parameters. Cash dividends declared were
equal to 36.5% of earnings for the first nine months of 1996, and were 36.8% and
34.6% of earnings in 1995 and 1994, respectively. Since January 1, 1994, the
Company repurchased approximately 75,900 shares of its Common Stock. The Company
may rely upon these capital management practices, in the absence of profitable
growth opportunities, as part of its goal of achieving an attractive return on
its shareholders' investment.
36
<PAGE> 37
THE BANKS
The following table depicts the Company's and the Banks' loan portfolios as
of September 30, 1996:
<TABLE>
<CAPTION>
CONSOLIDATED % OF TOTAL
---------------------- ----------------------------
AMOUNT % OF TOTAL IB IBWM IBSM IBEM
-------- ---------- ---- ---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Real Estate
Residential first mortgages................. $263,224 46.6% 15.7% 15.7% 9.0% 6.2%
Residential home equity mortgages........... 31,528 5.6 1.7 2.6 1.0 0.3
Construction and land development........... 46,350 8.2 2.4 3.2 2.0 0.6
Other....................................... 84,428 14.9 6.3 3.4 2.8 2.4
Consumer...................................... 92,137 16.3 9.5 3.0 1.4 2.4
Commercial.................................... 31,534 5.6 3.7 1.3 0.5 0.1
Agricultural.................................. 16,217 2.8 0.2 0.1 0.2 2.3
-------- ----- ---- ---- ---- ----
Total loans.............................. $565,418 100.0% 39.5% 29.3% 16.9% 14.3%
======== ===== ==== ==== ==== ====
</TABLE>
The Banks' activities cover traditional phases of retail and 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. Most of the Banks' offices
provide full service lobby and drive-in services in the communities which they
serve. Automated teller machines are also provided at most locations.
Principally located in rural and suburban communities, the Banks face
limited competition within certain of their primary markets. In general,
however, the financial services industry is 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. The
market share information appearing below is derived from the June 30, 1995
deposit balances made available by the federal banking regulatory agencies.
As of September 30, 1996, the Company and the Banks had 407 full-time
employees and 169 part-time employees.
INDEPENDENT BANK
Independent Bank ("IB"), founded in 1864, operates in two geographically
distinct regions. Its south region consists of most of Ionia County and adjacent
townships in Montcalm County. Ionia County, with a population of nearly 60,000,
is located between the Grand Rapids and Lansing metropolitan areas. Within this
region, IB is the only depository institution in several communities. IB's
market share, in communities where its branches are located, exceeds 30% of
total deposits.
IB's north region is comprised of the former branches of North Bank,
acquired as a result of the NBC Acquisition. IB defines its markets in this
region of northeastern Michigan as the counties of Iosco, Alpena and Presque
Isle, along with portions of Ogemaw, Alcona and Montmorency counties. IB's
northeastern branches are located in Hale, Tawas City, Rogers City, Rose City,
Whittemore, Glennie, Hillman and Hubbard Lake, as well as the larger communities
of Alpena and Oscoda. Within seven of the ten communities served by its branches
in this region, IB's market share of deposits exceeds 50%, and it is the only
bank with an office located within four of these communities.
While the regions are geographically distinct, the rural communities served
by IB's branches are demographically similar and rely on an economic base that
includes manufacturers, service and retail businesses, agriculture, mining,
forest products and government. Notwithstanding these similarities, Ionia
County's population and IB's business benefit from the region's proximity to
Grand Rapids and Lansing as well as the six facilities of the Michigan
Department of Corrections that are located in Ionia and Carson City. IB's
northeastern region benefits from a substantial retirement population as well as
vacationers.
37
<PAGE> 38
INDEPENDENT BANK WEST MICHIGAN
The main office of Independent Bank West Michigan ("IBWM") is located in
Rockford, a northern suburb of Grand Rapids. IBWM's branches serve the
communities of Howard City, Sand Lake, Cedar Springs, White Cloud, Newaygo,
Sparta and Croton Hardy located in northern Kent County, western Montcalm County
and southern Newaygo County. IBWM is the only financial institution with an
office in two of these communities; within three other markets IBWM's market
share exceeds 55% of total deposits. Additionally, IBWM has established loan
production offices with 21 commissioned real estate mortgage loan originators
that serve Muskegon, Mecosta and Ottawa counties.
IBWM's principal markets contain two distinct demographic groups. As a
suburb of Grand Rapids, Rockford is a fast growing, affluent residential
community while most of the remaining markets are rural. Reflecting the profile
of its markets, IBWM has emphasized consumer banking and, given the rapid growth
of western Michigan, real estate mortgage lending. As a result of IBWM's success
in real estate mortgage lending, the Company has experience in secondary
marketing and servicing that promotes the success of the other Banks.
INDEPENDENT BANK SOUTH MICHIGAN
Independent Bank South Michigan ("IBSM") has its headquarters in Leslie,
located between Lansing and Jackson. IBSM's branches are located in Ingham and
Eaton counties and the northern portion of Jackson County. Within the
communities of Rives Junction, Pleasant Lake, Potterville, Vermontville and
Leslie, IBSM is the only depository institution. Within seven of the nine
communities served by IBSM's branches, its market share exceeds 60% of total
deposits. Principal employers within this market include General Motors
Corporation, the State of Michigan and Michigan State University.
Although historically characterized as an agricultural bank, IBSM has
increased its focus on consumer and real estate mortgage lending and, to a
lesser degree, the non-agricultural commercial lending opportunities within its
markets. Its Okemos-based loan production office serves the greater Lansing area
and further leverages the Company's expertise in real estate mortgage lending.
INDEPENDENT BANK EAST MICHIGAN
The main office of IBEM is located in Caro, centrally located in Tuscola
County in the heart of eastern Michigan's thumb region. In addition to the
communities of Unionville, Kingston, Snover and Reese within Tuscola County,
IBEM's branches serve Clifford, North Branch, Clio and Marlette located in
northern Lapeer, Sanilac and Genesse counties. Within four of these communities,
IBEM is the only depository institution. Notwithstanding the agricultural-based
economy of the thumb region, IBEM's markets benefit from their proximity to the
Detroit metropolitan areas.
The pending acquisition of the FOA Branches, located in the communities of
Bad Axe, Sebewaing, Caseville, Elkton, Kinde, Ubly and Gagetown would add
approximately $121.5 million of deposits, based on September 30, 1996
information. As a result, IBEM will become the largest depository institution in
Huron County with a market share of approximately 25% of total deposits.
LEGAL PROCEEDINGS
The Company and the Banks are parties to various claims, complaints and
other legal actions that have arisen in the ordinary course of business from
time to time. Management believes that the outcome of all pending legal
proceedings, in the aggregate, will not have a material adverse effect on the
Company's or the Banks' business, results of operations or financial condition.
38
<PAGE> 39
SUPERVISION AND REGULATION
The following is a summary of certain statutes and regulations affecting
the Company and the Banks. This summary is qualified in its entirety by
reference to the particular statutes and regulations. A change in applicable
laws or regulations may have a material effect on the Company, the Banks and the
businesses of the Company and the Banks. See "Risk Factors."
GENERAL
Financial institutions and their holding companies are extensively
regulated under federal and state law. Consequently, the growth and earnings
performance of the Company and the Banks can be affected not only by management
decisions and general and local economic conditions, but also by the statutes
administered by, and the regulations and policies of, various governmental
regulatory authorities. Those authorities include, but are not limited to the
Federal Reserve, the FDIC, the Commissioner of the Michigan Financial
Institutions Bureau ("Commissioner"), the Internal Revenue Service, and state
taxing authorities. The effect of such statutes, regulations and policies and
any changes thereto can be significant and cannot be predicted.
Federal and state laws and regulations generally applicable to financial
institutions and their holding companies regulate, among other things, the scope
of business, investments, reserves against deposits, capital levels relative to
operations, lending activities and practices, the nature and amount of
collateral for loans, the establishment of branches, mergers, consolidations and
dividends. The system of supervision and regulation applicable to the Company
and the Banks establishes a comprehensive framework for their respective
operations and is intended primarily for the protection of the FDIC's deposit
insurance funds, the depositors of the Banks, and the public, rather than
shareholders of the Company.
Federal law and regulations, including provisions added by the Federal
Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") and regulations
promulgated thereunder, establish supervisory standards applicable to the
lending activities of the Banks, including internal controls, credit
underwriting, loan documentation, and loan-to-value ratios for loans secured by
real property.
THE COMPANY
GENERAL. The Company is a bank holding company and, as such, is registered
with, and subject to regulation by, the Federal Reserve under the Bank Holding
Company Act, as amended (the "BHCA"). Under the BHCA, the Company is subject to
periodic examination by the Federal Reserve, and is required to file periodic
reports of its operations and such additional information as the Federal Reserve
may require.
In accordance with Federal Reserve policy, the Company is expected to act
as a source of financial strength to the Banks and to commit resources to
support the Banks in circumstances where the Company might not do so absent such
policy. In addition, in certain circumstances a Michigan state bank having
impaired capital may be required by the Commissioner either to restore the
bank's capital by a special assessment upon its shareholders, or to initiate the
liquidation of the bank.
Any capital loans by a bank holding company to a subsidiary bank are
subordinate in right of payment to deposits and to certain other indebtedness of
such subsidiary bank. In the event of a bank holding company's bankruptcy, any
commitment by the bank holding company to a federal bank regulatory agency to
maintain the capital of a subsidiary bank will be assumed by the bankruptcy
trustee and entitled to a priority of payment.
INVESTMENTS AND ACTIVITIES. Under the BHCA, bank holding companies are
prohibited, with certain limited exceptions, from engaging in activities other
than those of banking or of managing or controlling banks and from acquiring or
retaining direct or indirect ownership or control of voting shares or assets of
any company which is not a bank or bank holding company, other than subsidiary
companies furnishing services to or performing services for its subsidiaries,
and other subsidiaries engaged in activities which, by the Federal Reserve's
determination, are closely related to banking or managing or controlling banks.
Since September 29, 1995, the BHCA has permitted the Federal Reserve under
specified circumstances to approve the acquisition
39
<PAGE> 40
by a bank holding company located in one state, of a bank or bank holding
company located in another state, without regard to any prohibition contained in
state law. See "Recent Regulatory Developments."
In general, any direct or indirect acquisition by the Company of any voting
shares of any bank which would result in the Company's direct or indirect
ownership or control of more than 5% of any class of voting shares of such bank,
and any merger or consolidation of the Company with another bank holding
company, will require the prior written approval of the Federal Reserve under
the BHCA. In acting on such applications, the Federal Reserve must consider
various statutory factors, including among others, the effect of the proposed
transaction on competition in relevant geographic and product markets, and each
party's financial condition, managerial resources, and record of performance
under the Community Reinvestment Act.
In addition and subject to certain exceptions, the Change in the Bank
Control Act ("Control Act") and regulations promulgated thereunder by the
Federal Reserve, require any person acting directly or indirectly, or through or
in concert with one or more persons, to give the Federal Reserve 60 days'
written notice before acquiring control of a bank holding company. Transactions
which are presumed to constitute the acquisition of control include the
acquisition of any voting securities of a bank holding company having securities
registered under Section 12 of the Securities Exchange Act of 1934, as amended,
if, after the transaction, the acquiring person (or persons acting in concert)
owns, controls or holds with power to vote 25% or more of any class of voting
securities of the institution. The acquisition may not be consummated subsequent
to such notice if the Federal Reserve issues a notice within 60 days, or within
certain extensions of such period, disapproving the same.
The merger or consolidation of an existing bank subsidiary of the Company
with another bank, or the acquisition by such a subsidiary of the assets of
another bank, or the assumption of the deposit and other liabilities by such a
subsidiary requires the prior written approval of the responsible Federal
depository institution regulatory agency under the Bank Merger Act, based upon a
consideration of statutory factors similar to those outlined above with respect
to the BHCA. In addition, in certain such cases an application to, and the prior
approval of, the Federal Reserve under the BHCA and/or the Commissioner under
Michigan banking laws, may be required.
With certain limited exceptions, the BHCA prohibits bank holding companies
from acquiring direct or indirect ownership or control of voting shares or
assets of any company other than a bank, unless the company involved is engaged
solely in one or more activities which the Federal Reserve has determined to be
closely related to banking or managing or controlling banks. In making this
determination, the Federal Reserve considers various factors, including among
others the financial and managerial resources of the notifying bank holding
company, and the relative public benefits and adverse effects which may be
expected to result from the performance of the activity by an affiliate of such
company. The Federal Reserve may apply different standards to activities
proposed to be commenced de novo and activities commenced by acquisition, in
whole or in part, of a going concern.
The recent enactment of the Economic Growth and Regulatory Paperwork
Reduction Act of 1996 ("EGRPRA") streamlines the nonbanking activities
application process for well capitalized and well managed bank holding
companies. See "Recent Regulatory Developments." Under EGRPRA, qualified bank
holding companies may commence a regulatory approved nonbanking activity without
prior notice to the Federal Reserve; written notice is merely required within
ten days after commencing the activity. Also, under EGRPRA, the prior notice
period is reduced to 12 days in the event of any nonbanking acquisition or share
purchase, assuming the size of the acquisition does not exceed 10% of
risk-weighted assets of the acquiring bank holding company and the consideration
does not exceed 15% in Tier 1 capital. This prior notice requirement also
applies to commencing a nonbanking activity de novo which has been previously
approved by order of the Federal Reserve, but not yet implemented by
regulations.
CAPITAL REQUIREMENTS. The Federal Reserve uses capital adequacy guidelines
in its examination and regulation of bank holding companies. If capital falls
below minimum guidelines, a bank holding company may, among other things, be
denied approval to acquire or establish additional banks or non-bank businesses.
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The Federal Reserve's capital guidelines establish the following minimum
regulatory capital requirements for bank holding companies: (i) a capital
leverage requirement expressed as a percentage of total assets, (ii) a
risk-based requirement expressed as a percentage of total risk-weighted assets,
and (iii) a Tier 1 leverage requirement expressed as a percentage of total
assets. The capital leverage requirement consists of a minimum ratio of total
capital to total assets of 6%, with an expressed expectation that banking
organizations generally should operate above such minimum level. The risk-based
requirement consists of a minimum ratio of total capital to total risk-weighted
assets of 8%, of which at least one-half must be Tier 1 capital (which consists
principally of shareholders' equity). The Tier 1 leverage requirement consists
of a minimum ratio of Tier 1 capital to total assets, less goodwill ("Tier 1
capital leverage ratio") of 3% for the most highly rated companies, with minimum
requirements of 4% to 5% for all others.
The risk-based and leverage standards presently used by the Federal Reserve
are minimum requirements, and higher capital levels will be required if
warranted by the particular circumstances or risk profiles of individual banking
organizations. Further, any banking organization experiencing or anticipating
significant growth would be expected to maintain capital ratios, including
tangible capital positions (i.e., Tier 1 capital less all intangible assets),
well above the minimum levels. The Federal Reserve has not advised the Company
of any specific minimum Tier 1 capital leverage ratio applicable to it.
FDICIA requires the federal bank regulatory agencies biennially to review
risk-based capital standards to ensure that they adequately address interest
rate risk, concentration of credit risk and risks from non-traditional
activities and, since adoption of the Riegle Community Development and
Regulatory Improvement Act of 1994 (the "Riegle Act"), to do so taking into
account the size and activities of depository institutions and the avoidance of
undue reporting burdens. See "Recent Regulatory Developments." In 1995, the
federal bank regulatory agencies adopted regulations requiring as part of the
assessment of an institution's capital adequacy the consideration of: (i)
identified concentrations of credit risks, (ii) the exposure of the institution
to a decline in the value of its capital due to changes in interest rates, and
(iii) the application of revised conversion factors and netting rules on the
institution's potential future exposure from derivative transactions.
DIVIDENDS. The Company is a corporation separate and distinct from the
Banks. Most of the Company's revenues are received by it in the form of
dividends paid by the Banks. The Banks are subject to statutory restrictions on
their ability to pay dividends to the Company. See "The Banks -- Dividends." The
Federal Reserve has issued a policy statement on the payment of cash dividends
by bank holding companies. In the policy statement, the Federal Reserve
expressed its view that a bank holding company experiencing earnings weaknesses
should not pay cash dividends exceeding its net income or which could only be
funded in ways that weakened the bank holding company's financial health, such
as by borrowing. Additionally, the Federal Reserve possesses enforcement powers
over bank holding companies and their non-bank subsidiaries to prevent or remedy
actions that represent unsafe or unsound practices or violations of applicable
statutes and regulations. Among these powers is the ability to proscribe the
payment of dividends by banks and bank holding companies. Similar enforcement
powers over the Banks are possessed by the FDIC. The "prompt corrective action"
provisions of FDICIA impose further restrictions on the payment of dividends by
insured banks which fail to meet specified capital levels and, in some cases,
impose similar restrictions on their parent bank holding companies.
In addition to the restrictions on dividends imposed by the Federal
Reserve, the Michigan Business Corporation Act provides that dividends may be
legally declared or paid only if after the distribution a corporation, such as
the Company, can pay its debts as they come due in the usual course of business
and its total assets equal or exceed the sum of its liabilities plus the amount
that would be needed to satisfy the preferential rights upon dissolution of any
holders of preferred stock whose preferential rights are superior to those
receiving the distribution.
THE BANKS
GENERAL. The Banks are Michigan banking corporations and their deposit
accounts are principally insured by the BIF of the FDIC. As BIF-insured Michigan
chartered banks, the Banks are subject to the examination, supervision,
reporting and enforcement requirements of the Commissioner, as the chartering
authority for
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Michigan banks, and the FDIC, as administrator of the BIF. These agencies and
federal and state law extensively regulate various aspects of the banking
business including, among other things, permissible types and amounts of loans,
investments and other activities, capital adequacy, branching, interest rates on
loans and on deposits, the maintenance of noninterest-bearing reserves on
deposit accounts, and the safety and soundness of banking practices.
DEPOSIT INSURANCE. As FDIC-insured institutions, the Banks are required to
pay deposit insurance premium assessments to the FDIC. Pursuant to FDICIA, the
FDIC adopted a risk-based assessment system under which all insured depository
institutions are placed into one of nine categories and assessed insurance
premiums, based upon their level of capital and supervisory evaluation.
Institutions classified as well-capitalized (as defined by the FDIC) and
considered healthy pay the lowest premium while institutions that are less than
adequately capitalized (as defined by the FDIC) and considered of substantial
supervisory concern pay the highest premium. Risk classification of all insured
institutions is made by the FDIC for each semi-annual assessment period.
FDICIA required the FDIC to establish assessment rates at levels which
would restore the BIF to a mandated reserve ratio of 1.25% of insured deposits
over a period not to exceed 15 years. In 1995, the FDIC determined that the BIF
had reached the required ratio. Accordingly, the FDIC has established the
schedule of BIF insurance assessments for the first semi-annual assessment
period of 1996, ranging from 0% of deposits for institutions in the highest
category to .27% of deposits for institutions in the lowest category. For the
first nine months of 1996, the Banks paid $32,000 in BIF insurance assessments.
At September 30, 1996, the Banks held less than $11 million of SAIF-insured
deposits, and paid an average rate premium of .23% on such deposits during the
first nine months of 1996. The deposit liabilities to be assumed in connection
with the acquisition of the FOA Branches are all insured by SAIF. Effective
September 30, 1996, the FDIC was authorized to impose a special assessment on
certain SAIF-assessable deposits. Because IBEM held no SAIF-assessable deposits
as of March 31, 1995, IBEM will be exempt from the special assessment.
The FDIC may terminate the deposit insurance of any insured depository
institution if the FDIC determines, after a hearing, that the institution or its
directors have engaged or are engaging in unsafe or unsound practices, or have
violated any applicable law, regulation, order, or any condition imposed in
writing by, or written agreement with, the FDIC, or if the institution is in an
unsafe or unsound condition to continue operations. The FDIC may also suspend
deposit insurance temporarily during the hearing process for a permanent
termination of insurance if the institution has no tangible capital.
CAPITAL REQUIREMENTS. Consistent with the Federal Reserve's guidelines for
bank holding companies, the FDIC has established the following minimum capital
standards for state-chartered, FDIC-insured non-member banks, such as the Banks:
a leverage requirement consisting of a minimum ratio of Tier 1 capital to total
assets of 3% for the most highly-rated banks with minimum requirements of 4% to
5% for all others and a risk-based capital requirement consisting of a minimum
ratio of total capital to total risk-weighted assets of 8%, at least one-half of
which must be Tier 1 capital (which consists principally of shareholders'
equity). These capital requirements are minimum requirements. Higher capital
levels will be required if warranted by the particular circumstances or risk
profiles of individual institutions.
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FDICIA establishes five capital categories, and the federal depository
institution regulators, as directed by FDICIA, have adopted, subject to certain
exceptions, the following minimum requirements for each of such categories:
<TABLE>
<CAPTION>
TOTAL TIER 1
RISK-BASED RISK-BASED
CAPITAL RATIO CAPITAL RATIO LEVERAGE RATIO
-------------- -------------- -----------------------
<S> <C> <C> <C>
Well capitalized............................ 10% or above 6% or above 5% or above
Adequately capitalized...................... 8% or above 4% or above 4% or above
Undercapitalized............................ Less than 8% Less than 4% Less than 4%
Significantly undercapitalized.............. Less than 6% Less than 3% Less than 3%
Critically undercapitalized................. -- -- A ratio of tangible
equity to total assets
of 2% or less
</TABLE>
At September 30, 1996, each of the Banks' ratios exceeded minimum
requirements for the well-capitalized category.
Among other things, FDICIA requires the federal depository institution
regulators to take prompt corrective action in respect of depository
institutions that do not meet minimum capital requirements. The scope and degree
of regulatory intervention is linked to the capital category to which a
depository institution is assigned.
Depending upon the capital category to which an institution is assigned,
the regulators' corrective powers include: requiring the submission of a capital
restoration plan; placing limits on asset growth and restrictions on activities;
requiring the institution to issue additional capital stock (including
additional voting stock) or to be acquired; restricting transactions with
affiliates; restricting the interest rate the institution may pay on deposits;
ordering a new election of directors of the institution; requiring that senior
executive officers or directors be dismissed; prohibiting the institution from
accepting deposits from correspondent banks; requiring the institution to divest
certain subsidiaries; prohibiting the payment of principal or interest on
subordinated debt; and ultimately, appointing a receiver for the institution.
In general, a depository institution may be reclassified to a lower
category than is indicated by its capital position if the appropriate federal
depository institution regulatory agency determines the institution to be
otherwise in an unsafe or unsound condition or to be engaged in an unsafe or
unsound practice. Such a practice could include a failure by the institution,
following receipt of a less-than-satisfactory rating on its most recent
examination report, to correct the deficiency.
DIVIDENDS. Under Michigan law, the Banks are restricted as to the maximum
amount of dividends they may pay on their common stock. A Michigan state bank
may not declare or pay a dividend unless the bank will have a surplus amounting
to at least 20% of its capital after the payment of the dividend. A Michigan
state bank may, with the approval of the Commissioner, by vote of shareholders
owning 2/3 of the stock eligible to vote, increase its capital stock by a
declaration of a stock dividend, provided that after the increase the bank's
surplus equals at least 20% of its capital stock, as increased. The Banks may
not declare or pay any dividend until the cumulative dividends on preferred
stock (should any such stock be issued and outstanding) have been paid in full.
The Banks have no present plans to issue preferred stock other than the
Preferred Stock.
FDICIA generally prohibits a depository institution from making any capital
distribution (including payment of a dividend) or paying any management fee to
its holding company if the depository institution would thereafter be
undercapitalized. The FDIC may also prevent an insured bank from paying
dividends if the bank is in default of payment of any assessment due to the
FDIC. In addition, payment of dividends by a bank may be prevented by the
applicable federal regulatory authority if such payment is determined, by reason
of the financial condition of such bank, to be an unsafe and unsound banking
practice. The Federal Reserve Board has issued a policy statement providing that
bank holding companies and insured banks should generally only pay dividends out
of current operating earnings.
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INSIDER TRANSACTIONS. The Banks are subject to certain restrictions imposed
by the Federal Reserve Act on "covered transactions" with the Company or its
subsidiaries. The "covered transactions" that an insured bank and its
subsidiaries are permitted to engage in with their nonbank affiliates are
limited to the following amounts: (i) in the case of any one such affiliate, the
aggregate amount of "covered transactions" of the insured bank and its
subsidiaries cannot exceed 10% of the capital stock and surplus of the insured
bank; and (ii) in the case of all affiliates, the aggregate amount of all
"covered transactions" of the insured bank and its subsidiaries cannot exceed
20% of the capital stock and surplus of the insured bank. "Covered transactions"
are defined by statute to include a loan or extension of credit to the
affiliate, a purchase of securities issued by an affiliate, a purchase of assets
from the affiliate (unless otherwise exempted by the Federal Reserve), the
acceptance of securities issued by the affiliate as collateral for a loan, and
the issuance of a guaranty, acceptance, or letter of credit for the benefit of
an affiliate. Covered transactions must also be collateralized. The Federal
Reserve Act further requires that (i) "covered transactions" with affiliates;
(ii) asset sales to affiliates; (iii) contractual arrangements with affiliates;
(iv) transactions in which an affiliate acts as an agent or broker; and (v) any
transaction in which an affiliate has a financial interest or is a participant,
must be made: (x) on terms and under circumstances, including credit standards,
that are substantially the same as those prevailing at the time for comparable
transactions with or involving other nonaffiliated companies; or (y) in the
absence of comparable transactions, on terms and under circumstances, including
credit standards, that in good faith would be offered to, or would apply to,
nonaffiliated companies. Certain limitations and reporting requirements are also
placed on extensions of credit by the Banks to their directors and officers, to
directors and officers of the Company and its subsidiaries, to principal
shareholders of the Company, and to "related interests" of such directors,
officers and principal shareholders. In addition, such legislation and
regulations may affect the terms upon which any person becoming a director or
officer of the Company or one of its subsidiaries or a principal shareholder of
the Company may obtain credit from banks with which any of the Banks maintains a
correspondent relationship.
SAFETY AND SOUNDNESS STANDARDS. On July 10, 1995, the FDIC, the Office of
Thrift Supervision, the Federal Reserve and the Office of the Comptroller of the
Currency published final guidelines implementing the FDICIA requirement that the
federal banking agencies establish operational and managerial standards to
promote the safety and soundness of federally insured depository institutions.
The guidelines, which took effect on August 9, 1995, establish standards for
internal controls, information systems, internal audit systems, loan
documentation, credit underwriting, interest rate exposure, asset growth, and
compensation, fees and benefits. In general, the guidelines prescribe the goals
to be achieved in each area, and each institution is responsible for
establishing its own procedures to achieve those goals. If an institution fails
to comply with any of the standards set forth in the guidelines, the
institution's primary federal regulator may require the institution to submit a
plan for achieving and maintaining compliance. The preamble to the guidelines
states that the agencies expect to require a compliance plan from an institution
whose failure to meet one or more of the standards is of such severity that it
could threaten the safe and sound operation of the institution. Failure to
submit an acceptable compliance plan, or failure to adhere to a compliance plan
that has been accepted by the appropriate regulator, would constitute grounds
for further enforcement action. The federal banking agencies have also published
for comment proposed asset quality and earnings standards which, if adopted,
would be added to the safety and soundness guidelines. This proposal, like the
final guidelines, would make each depository institution responsible for
establishing its own procedures to meet such goals.
STATE BANK ACTIVITIES. Under FDICIA, as implemented by final regulations
adopted by the FDIC, FDIC-insured state banks are prohibited, subject to certain
exceptions, from making or retaining equity investments of a type, or in an
amount, that are not permissible for a national bank. FDICIA, as implemented by
FDIC regulations, also prohibits FDIC-insured state banks and their
subsidiaries, subject to certain exceptions, from engaging as a principal in any
activity that is not permitted for a national bank or its subsidiary,
respectively, unless the bank meets, and continues to meet, its minimum
regulatory capital requirements and the FDIC determines the activity would not
pose a significant risk to the deposit insurance fund of which the bank is a
member. Impermissible investments and activities must be divested or
discontinued within certain time frames set by the FDIC in accordance with
FDICIA.
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CONSUMER BANKING. The Banks' business includes making a variety of types of
loans to individuals. In making these loans, the Banks are subject to State
usury and regulatory laws and to various Federal statutes, such as the Equal
Credit Opportunity Act, Fair Credit Reporting Act, Truth in Lending Act, Real
Estate Settlement Procedures Act, and Home Mortgage Disclosure Act, and the
regulations promulgated thereunder, which (x) prohibit discrimination based on
race, color, religion, national origin, sex, marital status, age (except in
limited circumstances), receipt of income from public assistance programs, or
good faith exercise of any rights under the Consumer Credit Protection Act, (y)
specify disclosures to be made to borrowers regarding credit and settlement
costs, and (z) regulate the mortgage loan servicing activities of the Bank,
including the maintenance and operation of escrow accounts and the transfer of
mortgage loan servicing. The Riegle Act imposed new escrow requirements on
mortgage lenders and servicers under the National Flood Insurance Program. See
"Recent Regulatory Developments." In receiving deposits, the Banks are subject
to extensive regulation under state and federal law and regulations, including
the Truth in Savings Act, the Expedited Funds Availability Act, the Bank Secrecy
Act, the Electronic Funds Transfer Act, and the Federal Deposit Insurance Act.
Violation of these laws could result in the imposition of significant damages
and fines upon the Banks and their respective directors and officers.
RECENT REGULATORY DEVELOPMENTS
In 1994, the Congress enacted two major pieces of banking legislation, the
Riegle Act and the Riegle-Neal Interstate Banking and Branching Efficiency Act
of 1994 (the "Riegle-Neal Act"). The Riegle Act addressed such varied issues as
the promotion of economic revitalization of defined urban and rural "qualified
distressed communities" through special purpose "Community Development Financial
Institutions," the expansion of consumer protection with respect to certain
loans secured by a consumer's home and reverse mortgages, and reductions in
compliance burdens regarding Currency Transaction Reports, reform of the
National Flood Insurance Program, the promotion of a secondary market for small
business loans and leases, and mandating specific changes to reduce regulatory
impositions on depository institutions and holding companies.
The Riegle-Neal Act substantially changed the geographic constraints
applicable to the banking industry. Effective September 29, 1995, the
Riegle-Neal Act allows bank holding companies to acquire banks located in any
state in the United States without regard to geographic restrictions or
reciprocity requirements imposed by state law, but subject to certain
conditions, including limitations on the aggregate amount of deposits that may
be held by the acquiring holding company and all of its insured depository
institution affiliates. Effective June 1, 1997 (or earlier if expressly
authorized by applicable state law), the Riegle-Neal Act allows banks to
establish interstate branch networks through acquisitions of other banks,
subject to certain conditions that include limitations on the aggregate amount
of deposits that may be held by the surviving bank and all of its insured
depository institution affiliates. The establishment of de novo interstate
branches or the acquisition of individual branches of a bank in another state
(rather than the acquisition of an out-of-state bank in its entirety) is allowed
by the Riegle-Neal Act only if specifically authorized by state law. The
legislation allows individual states to "opt-out" of certain provisions of the
Riegle-Neal Act by enacting appropriate legislation prior to June 1, 1997.
In November, 1995, Michigan exercised its right to opt-in early to the
Riegle-Neal Act, and permitted non-U.S. banks to establish branch offices in
Michigan. Effective November 29, 1995, the Michigan Banking Code was amended to
permit, in appropriate circumstances and with the approval of the Commissioner,
(i) the acquisition of Michigan-chartered banks by FDIC-insured banks, savings
banks, or savings and loan associations located in other states, (ii) the sale
by a Michigan-chartered bank of one or more of its branches (not comprising all
or substantially all of its assets) to an FDIC insured bank, savings bank or
savings and loan association located in a state in which a Michigan-chartered
bank could purchase one or more branches of the purchasing entity, (iii) the
acquisition by a Michigan-chartered bank of an FDIC-insured bank, savings bank
or savings and loan association located in another state, (iv) the acquisition
by a Michigan-chartered bank of one or more branches (not comprising all or
substantially all of the assets) of an FDIC-insured bank, savings bank or
savings and loan association located in another state, (v) the consolidation of
one or more Michigan-chartered banks and FDIC-insured banks, savings banks or
savings and loan associations located in
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<PAGE> 46
other states having laws permitting such consolidation, with the resulting
organization chartered either by Michigan or one of such other states, (vi) the
establishment by Michigan-chartered banks of branches located in other states,
the District of Columbia, or U.S. territories or protectorates with the consent
of the appropriate state or territorial regulatory authority, and (vii) the
establishment by foreign banks of branches located in Michigan. The amending
legislation also expanded the regulatory authority of the Commissioner and made
certain other changes.
The Michigan Legislature adopted, effective March 28, 1996, the Credit
Reform Act. This statute, together with amendments to other related laws,
permits regulated lenders, indirectly including Michigan-chartered banks, to
charge and collect higher rates of interest and increased fees on certain types
of loans to individuals and businesses. The laws prohibit "excessive fees and
charges," and authorize governmental authorities and borrowers to bring actions
for injunctive relief and statutory and actual damages for violations by
lenders. The statutes specifically authorize class actions, and also civil money
penalties for knowing and willful, or persistent violations.
FDIC regulations which became effective April 1, 1996, impose limitations
(and in certain cases, prohibitions) on (1) certain "golden parachute" severance
payments by troubled depository institutions and their affiliated holding
companies to institution-affiliated parties (primarily directors, officers,
employees, or principal shareholders of the institution), and (ii) certain
indemnification payments by a depository institution or its affiliated holding
company, regardless of financial condition, to institution-affiliated parties.
The FDIC regulations impose limitations on indemnification payments which could
restrict, in certain circumstances, payments by the Company or the Banks to
their respective directors or officers otherwise permitted under the Michigan
Business Corporation Act ("MBCA") or the Michigan Banking Code, respectively.
On September 30, 1996, EGRPRA was signed into law, which provides for the
recapitalization of SAIF and includes approximately 40 regulatory relief
initiatives. Among other matters, this legislation provides for expedited
application procedures for nonbanking activities by well capitalized and well
managed bank holding companies, provides reforms to the Fair Credit Reporting
Act, and provides other forms of regulatory relief to the financial services
industry.
DESCRIPTION OF PREFERRED SECURITIES
The Preferred Securities will be issued pursuant to the terms of the Trust
Agreement. The Trust Agreement will be qualified as an indenture under the Trust
Indenture Act. Initially, State Street Bank and Trust Company will be the
Property Trustee and will act as trustee for the purpose of complying with the
Trust Indenture Act. The terms of the Preferred Securities will include those
stated in the Trust Agreement and those made part of the Trust Agreement by the
Trust Indenture Act. This summary of the material terms and provisions of the
Preferred Securities and the Trust Agreement does not purport to be complete and
is subject to, and is qualified in its entirety by reference to, all the
provisions of the Trust Agreement, including the definitions therein of certain
terms, and the Trust Indenture Act. Wherever particular defined terms of the
Trust Agreement (as amended or supplemented from time to time) are referred to
herein, such defined terms are incorporated herein. The form of the Trust
Agreement has been filed as an exhibit to the Registration Statement of which
this Prospectus forms a part.
GENERAL
Pursuant to the terms of the Trust Agreement, the Trustees on behalf of IBC
Capital will issue the Preferred Securities and the Common Securities
(collectively, the "Trust Securities"). The Preferred Securities will represent
preferred beneficial interests in IBC Capital and the holders thereof will be
entitled to a preference in certain circumstances with respect to Distributions
and amounts payable on redemption or liquidation over the Common Securities of
IBC Capital, as well as other benefits as described in the Trust Agreement.
The Preferred Securities will rank pari passu, and payments will be made
thereon pro rata, with the Common Securities of IBC Capital except as described
under "-- Subordination of Common Securities."
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<PAGE> 47
Legal title to the Subordinated Debentures will be held by the Property Trustee
in trust for the benefit of the holders of the Preferred Securities and Common
Securities. The Guarantee executed by the Company for the benefit of the holders
of the Preferred Securities will be a guarantee on a subordinated basis with
respect to the Preferred Securities but will not guarantee payment of
Distributions or amounts payable on redemption or liquidation of such Preferred
Securities when IBC Capital does not have funds on hand available to make such
payments. See "Description of Guarantee."
DISTRIBUTIONS
PAYMENT OF DISTRIBUTIONS. The Preferred Securities represent beneficial
interests in IBC Capital, and Distributions on each Preferred Security will be
payable at the annual rate of 9.25% of the stated Liquidation Amount of $25,
payable quarterly in arrears on March 31, June 30, September 30 and December 31
of each year, to the holders of the Preferred Securities on the relevant record
dates (each date on which Distributions are payable in accordance with the
foregoing, a "Distribution Date"). The record date will be, for so long as the
Preferred Securities remain in book-entry form, one Business Day prior to the
relevant Distribution Date and, in the event the Preferred Securities are not in
book-entry form, the 15th day of the month in which the relevant Distribution
Date occurs. Distributions will accumulate from the date of original issuance.
The first Distribution Date for the Preferred Securities will be March 31, 1997.
The amount of Distributions payable for any period will be computed on the basis
of a 360-day year of twelve 30-day months. In the event that any date on which
Distributions are payable on the Preferred Securities is not a Business Day,
then payment of the Distributions payable on such date will be made on the next
succeeding day that is a Business Day (and without any additional Distributions,
interest or other payment in respect of any such delay), in each case with the
same force and effect as if made on the date such payment was originally
payable. As used in this Prospectus, a "Business Day" shall mean any day other
than a Saturday or a Sunday, or a day on which banking institutions in The City
of New York are authorized or required by law or executive order to remain
closed or a day on which the corporate trust office of the Property Trustee or
the Debenture Trustee is closed for business.
EXTENSION PERIOD. So long as no Event of Default under the Indenture has
occurred and is continuing, the Company has the right under the Indenture to
defer the payment of interest on the Subordinated Debentures at any time and
from time to time for a period not exceeding 20 consecutive quarters with
respect to each such period (each, an "Extension Period"), provided that no
Extension Period may extend beyond the Stated Maturity of the Subordinated
Debentures. As a consequence of any such election, quarterly Distributions on
the Preferred Securities will be deferred by IBC Capital during any such
Extension Period. Distributions to which holders of the Preferred Securities are
entitled will accumulate additional Distributions thereon at the rate per annum
of 9.25% thereof, compounded quarterly from the relevant Distribution Date. The
term "Distributions" as used herein shall include any such additional
Distributions. During any such Extension Period, the Company may not, and may
not permit any subsidiary of the Company to, (i) declare or pay any dividends or
distributions on, or redeem, purchase, acquire or make a liquidation payment
with respect to, any of the Company's capital stock or (ii) make any payment of
principal, interest or premium, if any, on or repay, repurchase or redeem any
debt securities of the Company that rank pari passu with or junior in interest
to the Subordinated Debentures or make any guarantee payments with respect to
any guarantee by the Company of the debt securities of any subsidiary of the
Company if such guarantee ranks pari passu with or junior in interest to the
Subordinated Debentures (other than (a) dividends or distributions in Common
Stock, (b) any declaration of a dividend in connection with the implementation
of a shareholders' rights plan, or the issuance of stock under any such plan in
the future, or the redemption or repurchase of any such rights pursuant thereto,
(c) payments under the Guarantee and (d) purchases of Common Stock under any of
the Company's benefit plans for its directors, officers or employees). Prior to
the termination of any such Extension Period, the Company may defer the payment
of interest, provided that no Extension Period may exceed 20 consecutive
quarters, or extend beyond the Stated Maturity of the Subordinated Debentures.
Upon the termination of any such Extension Period and the payment of all amounts
then due, the Company may elect to begin a new Extension Period. Subject to the
foregoing, there is no limitation on the number of times that the Company may
elect to begin an Extension Period.
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The Company has no current intention of exercising its right to defer
payments of interest by extending the interest payment period on the
Subordinated Debentures.
CUMULATIVE DISTRIBUTIONS. Distributions on the Preferred Securities will
accumulate from the date of original issuance and will be payable on the
Distribution Dates. In the event that any date on which Distributions are
payable on the Preferred Securities is not a Business Day, then payment of the
Distribution payable on such date will be made on the next succeeding day that
is a Business Day (and without any additional Distributions, interest or other
payment in respect to any such delay) with the same force and effect as if made
on the date such payment was originally payable.
The funds of IBC Capital available for distribution to holders of its
Preferred Securities will be limited to payments under the Subordinated
Debentures in which IBC Capital will invest the proceeds from the issuance and
sale of its Preferred Securities. See "Description of Subordinated Debentures."
If the Company does not make interest payments on the Subordinated Debentures,
the Property Trustee will not have funds available to pay Distributions on the
Preferred Securities. The payment of Distributions (if and to the extent IBC
Capital has funds legally available for the payment of such Distributions and
cash sufficient to make such payments) is guaranteed by the Company. See
"Description of Guarantee."
Distributions on the Preferred Securities will be payable to the holders
thereof as they appear on the register of IBC Capital on the relevant record
dates, which, as long as the Preferred Securities remain in book-entry form,
will be one Business Day prior to the relevant Distribution Date. Subject to any
applicable laws and regulations and the provisions of the Trust Agreement, each
such payment will be made as described under "Book-Entry Issuance."
REDEMPTION OR EXCHANGE
The Company will have the right to redeem the Subordinated Debentures (i)
on or after December 31, 2001, in whole at any time or in part from time to
time, or (ii) at any time, in whole (but not in part), upon the occurrence of a
Tax Event or an Investment Company Event, in each case subject to receipt of
prior approval by the Federal Reserve if then required under applicable capital
guidelines or policies of the Federal Reserve.
MANDATORY REDEMPTION. Upon the repayment or redemption, in whole or in
part, of any Subordinated Debentures, whether at Stated Maturity or upon earlier
redemption as provided in the Indenture, the proceeds from such repayment or
redemption shall be applied by the Property Trustee to redeem a Like Amount (as
defined below) of the Trust Securities, upon not less than 30 nor more than 60
days notice, at a redemption price (the "Redemption Price") equal to the
aggregate Liquidation Amount of such Trust Securities plus accumulated but
unpaid Distributions thereon to the date of redemption (the "Redemption Date").
See "Description of Subordinated Debentures -- Redemption or Exchange." If less
than all of the Subordinated Debentures are to be repaid or redeemed on a
Redemption Date, then the proceeds from such repayment or redemption shall be
allocated to the redemption of the Preferred Securities and the Common
Securities pro rata or by lot.
DISTRIBUTION OF SUBORDINATED DEBENTURES. Subject to the Company having
received prior approval of the Federal Reserve if so required under applicable
capital guidelines or policies of the Federal Reserve, the Company will have the
right at any time to liquidate IBC Capital and, after satisfaction of the
liabilities of creditors of IBC Capital as provided by applicable law, cause the
Subordinated Debentures to be distributed to the holders of Preferred Securities
and Common Securities in liquidation of IBC Capital.
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TAX EVENT REDEMPTION OR INVESTMENT COMPANY EVENT REDEMPTION. If a Tax Event
or an Investment Company Event in respect of the Preferred Securities and Common
Securities shall occur and be continuing, the Company has the right to redeem
the Subordinated Debentures in whole (but not in part) and thereby cause a
mandatory redemption of such Preferred Securities and Common Securities in whole
(but not in part) at the Redemption Price within 90 days following the
occurrence of such Tax Event or Investment Company Event. In the event a Tax
Event or an Investment Company Event in respect of the Preferred Securities and
Common Securities has occurred and is continuing and the Company does not elect
to redeem the Subordinated Debentures and thereby cause a mandatory redemption
of such Preferred Securities and Common Securities or to liquidate IBC Capital
and cause the Subordinated Debentures to be distributed to holders of such
Preferred Securities and Common Securities in liquidation of IBC Capital as
described below, such Preferred Securities will remain outstanding and
Additional Sums (as defined below) may be payable on the Subordinated
Debentures.
"Additional Sums" means the additional amounts as may be necessary in order
that the amount of Distributions then due and payable by IBC Capital on the
outstanding Preferred Securities and Common Securities of IBC Capital shall not
be reduced as a result of any additional taxes, duties and other governmental
charges to which IBC Capital has become subject as a result of a Tax Event or an
Investment Company Event.
"Like Amount" means (i) with respect to a redemption of Trust Securities,
Trust Securities having a Liquidation Amount (as defined below) equal to that
portion of the principal amount of Subordinated Debentures to be
contemporaneously redeemed in accordance with the Indenture, allocated to the
Common Securities and to the Preferred Securities based upon the relative
Liquidation Amounts of such classes and the proceeds of which will be used to
pay the Redemption Price of such Trust Securities, and (ii) with respect to a
distribution of Subordinated Debentures to holders of Trust Securities in
connection with a dissolution or liquidation of IBC Capital, Subordinated
Debentures having a principal amount equal to the Liquidation Amount of the
Trust Securities of the holder to whom such Subordinated Debentures are
distributed.
"Liquidation Amount" means the stated amount of $25 per Trust Security.
After the liquidation date fixed for any distribution of Subordinated
Debentures for Preferred Securities (i) such Preferred Securities will no longer
be deemed to be outstanding, (ii) The Depository Trust Company (the
"Depositary") or its nominee, as the record holder of the Preferred Securities,
will receive a registered global certificate or certificates representing the
Subordinated Debentures to be delivered upon such distribution and (iii) any
certificates representing Preferred Securities not held by the Depositary or its
nominee will be deemed to represent the Subordinated Debentures having a
principal amount equal to the Liquidation Amount of such Preferred Securities,
and bearing accrued and unpaid interest in an amount equal to the accrued and
unpaid Distributions on the Preferred Securities until such certificates are
presented to the Administrative Trustees or their agent for transfer or
reissuance.
There can be no assurance as to the market prices for the Preferred
Securities or the Subordinated Debentures that may be distributed in exchange
for Preferred Securities if a dissolution and liquidation of IBC Capital were to
occur. Accordingly, the Preferred Securities that an investor may purchase, or
the Subordinated Debentures that the investor may receive on dissolution and
liquidation of IBC Capital, may trade at a discount to the price that the
investor paid to purchase the Preferred Securities offered hereby.
REDEMPTION PROCEDURES
Preferred Securities redeemed on each Redemption Date shall be redeemed at
the Redemption Price with the applicable proceeds from the contemporaneous
redemption of the Subordinated Debentures. Redemptions of the Preferred
Securities shall be made and the Redemption Price shall be payable on each
Redemption Date only to the extent that IBC Capital has funds on hand available
for the payment of such Redemption Price. See "Subordination of Common
Securities."
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If IBC Capital gives a notice of redemption in respect of its Preferred
Securities, then, by 12:00 noon, eastern standard time, on the Redemption Date,
to the extent funds are available, the Property Trustee will deposit irrevocably
with the Depositary funds sufficient to pay the aggregate Redemption Price and
will give the Depositary irrevocable instructions and authority to pay the
Redemption Price to the holders of such Preferred Securities. See "Book-Entry
Issuance." If such Preferred Securities are no longer in book-entry form, the
Property Trustee, to the extent funds are available, will irrevocably deposit
with the paying agent for such Preferred Securities funds sufficient to pay the
aggregate Redemption Price and will give such paying agent irrevocable
instructions and authority to pay the Redemption Price to the holders thereof
upon surrender of their certificates evidencing such Preferred Securities.
Notwithstanding the foregoing, Distributions payable on or prior to the
Redemption Date for any Preferred Securities called for redemption shall be
payable to the holders of such Preferred Securities on the relevant record dates
for the related Distribution Dates. If notice of redemption shall have been
given and funds deposited as required, then upon the date of such deposit, all
rights of the holders of such Preferred Securities so called for redemption will
cease, except the right of the holders of such Preferred Securities to receive
the Redemption Price, but without interest on such Redemption Price, and such
Preferred Securities will cease to be outstanding. In the event that any date
fixed for redemption of Preferred Securities is not a Business Day, then payment
of the Redemption Price payable on such date will be made on the next succeeding
day which is a Business Day (and without any additional Distribution, interest
or other payment in respect of any such delay). In the event that payment of the
Redemption Price in respect of Preferred Securities called for redemption is
improperly withheld or refused and not paid either by IBC Capital or by the
Company pursuant to the Guarantee. Distributions on such Preferred Securities
will continue to accrue at the then applicable rate, from the Redemption Date
originally established by IBC Capital for such Preferred Securities to the date
such Redemption Price is actually paid, in which case the actual payment date
will be the date fixed for redemption for purposes of calculating the Redemption
Price. See "Description of Guarantee."
Subject to applicable law (including, without limitation, United States
federal securities law), the Company or its subsidiaries may at any time and
from time to time purchase outstanding Preferred Securities by tender, in the
open market or by private agreement.
Payment of the Redemption Price on the Preferred Securities and any
distribution of Subordinated Debentures to holders of Preferred Securities shall
be made to the applicable recordholders thereof as they appear on the register
for such Preferred Securities on the relevant record date, which date shall be
one Business Day prior to the relevant Redemption Date or liquidation date, as
applicable; provided, however, that in the event that any Preferred Securities
are not in book-entry form, the relevant record date for such Preferred
Securities shall be a date at least 15 days prior to the Redemption Date or
liquidation date, as applicable.
If less than all of the Preferred Securities and Common Securities issued
by IBC Capital are to be redeemed on a Redemption Date, then the aggregate
Liquidation Amount of such Preferred Securities and Common Securities to be
redeemed shall be allocated pro rata to the Preferred Securities and the Common
Securities based upon the relative Liquidation Amounts of such classes. The
particular Preferred Securities to be redeemed shall be selected by the Property
Trustee from the outstanding Preferred Securities not previously called for
redemption, by such method as the Property Trustee shall deem fair and
appropriate and which may provide for the selection for redemption of portions
(equal to $25 or an integral multiple of $25 in excess thereof) of the
Liquidation Amount of Preferred Securities of a denomination larger than $25.
The Property Trustee shall promptly notify the trust registrar in writing of the
Preferred Securities selected for redemption and, in the case of any Preferred
Securities selected for partial redemption, the Liquidation Amount thereof to be
redeemed. For all purposes of the Trust Agreement, unless the context otherwise
requires, all provisions relating to the redemption of Preferred Securities
shall relate to the portion of the aggregate Liquidation Amount of Preferred
Securities which has been or is to be redeemed.
Notice of any redemption will be mailed at least 30 days but not more than
60 days before the Redemption Date to each Holder of Trust Securities to be
redeemed at its registered address. Unless the Company defaults in payment of
the Redemption Price on the Subordinated Debentures, on and after the
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Redemption Date interest will cease to accrue on such Subordinated Debentures or
portions thereof (and distributions will cease to accrue on the related
Preferred Securities or portions thereof) called for redemption.
SUBORDINATION OF COMMON SECURITIES
Payment of Distributions on, and the Redemption Price of, the Preferred
Securities and Common Securities, as applicable, shall be made pro rata based on
the Liquidation Amount of the Preferred Securities and Common Securities;
provided, however, that if on any Distribution Date or Redemption Date a
Debenture Event of Default shall have occurred and be continuing, no payment of
any Distribution on, or Redemption Price of, any of the Common Securities, and
no other payment on account of the redemption, liquidation or other acquisition
of such Common Securities, shall be made unless payment in full in cash of all
accumulated and unpaid Distributions on all of the outstanding Preferred
Securities for all Distribution periods terminating on or prior thereto, or in
the case of payment of the Redemption Price the full amount of such Redemption
Price on all of the outstanding Preferred Securities then called for redemption,
shall have been made or provided for, and all funds available to the Property
Trustee shall first be applied to the payment in full in cash of all
Distributions on, or Redemption Price of, the Preferred Securities then due and
payable.
In the case of any Event of Default resulting from a Debenture Event of
Default, the Company as holder of the Common Securities will be deemed to have
waived any right to act with respect to any such Event of Default under the
applicable Trust Agreement until the effect of all such Events of Default with
respect to such Preferred Securities have been cured, waived or otherwise
eliminated. Until any such Events of Default under the Trust Agreement with
respect to the Preferred Securities have been so cured, waived or otherwise
eliminated, the Property Trustee shall act solely on behalf of the holders of
the Preferred Securities and not on behalf of the Company as holder of the
Common Securities, and only the holders of the Preferred Securities will have
the right to direct the Property Trustee to act on their behalf.
LIQUIDATION DISTRIBUTION UPON TERMINATION
The Company will have the right at any time to terminate IBC Capital and
cause the Subordinated Debentures to be distributed to the holders of the
Preferred Securities. Such right is subject to the Company having received prior
approval of the Federal Reserve if then required under applicable capital
guidelines or policies of the Federal Reserve.
In addition, pursuant to the Trust Agreement, IBC Capital shall
automatically terminate upon expiration of its term and shall earlier terminate
on the first to occur of: (i) certain events of bankruptcy, dissolution or
liquidation of the Company; (ii) the distribution of a Like Amount of the
Subordinated Debentures to the holders of its Trust Securities, if the Company,
as Depositor, has given written direction to the Property Trustee to terminate
IBC Capital (which direction is optional and wholly within the discretion of the
Company, as Depositor); (iii) redemption of all of the Preferred Securities as
described under "Description of Preferred Securities -- Redemption or
Exchange -- Mandatory Redemption;" and (iv) the entry of an order for the
dissolution of IBC Capital by a court of competent jurisdiction.
If an early termination occurs as described in clause (i), (ii) or (iv)
above, IBC Capital shall be liquidated by the Trustees as expeditiously as the
Trustees determine to be possible by distributing, after satisfaction of
liabilities to creditors of IBC Capital as provided by applicable law, to the
holders of such Trust Securities a Like Amount of the Subordinated Debentures,
unless such distribution is determined by the Property Trustee not to be
practical, in which event such holders will be entitled to receive out of the
assets of IBC Capital available for distribution to holders, after satisfaction
of liabilities to creditors of IBC Capital as provided by applicable law, an
amount equal to, in the case of holders of Preferred Securities, the aggregate
of the Liquidation Amount plus accrued and unpaid Distributions thereon to the
date of payment (such amount being the "Liquidation Distribution"). If such
Liquidation Distribution can be paid only in part because IBC Capital has
insufficient assets available to pay in full the aggregate Liquidation
Distribution, then the amounts payable directly by IBC Capital on the Preferred
Securities shall be paid on a pro rata basis. The holder(s) of the Common
Securities will be entitled to receive distributions upon any such liquidation
pro rata with the
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holders of the Preferred Securities, except that if a Debenture Event of Default
has occurred and is continuing, the Preferred Securities shall have a priority
over the Common Securities.
Under current United States federal income tax law and interpretations and
assuming, as expected, IBC Capital is treated as a grantor trust, a distribution
of the Subordinated Debentures should not be a taxable event to holders of the
Preferred Securities. Should there be a change in law, a change in legal
interpretation, a Tax Event or other circumstances, however, the distribution
could be a taxable event to holders of the Preferred Securities. See "Certain
Federal Income Tax Consequences." If the Company elects neither to redeem the
Subordinated Debentures prior to maturity nor to liquidate IBC Capital and
distribute the Subordinated Debentures to holders of the Preferred Securities,
the Preferred Securities will remain outstanding until the repayment of the
Subordinated Debentures.
If the Company elects to liquidate IBC Capital and thereby causes the
Subordinated Debentures to be distributed to holders of the Preferred Securities
in liquidation of IBC Capital, the Company shall continue to have the right to
shorten or extend the maturity of such Subordinated Debentures, subject to
certain conditions. See "Description of Subordinated Debentures -- General."
LIQUIDATION VALUE
The amount payable on the Preferred Securities in the event of any
liquidation of IBC Capital is $25 per Preferred Security plus accrued and unpaid
Distributions thereon to the date of payment, which may be in the form of a
distribution of such amount in Subordinated Debentures, subject to certain
exceptions. See "Description of Preferred Securities -- Liquidation Distribution
Upon Termination."
EVENTS OF DEFAULT; NOTICE
Any one of the following events constitutes an "Event of Default" under the
Trust Agreement (an "Event of Default") with respect to the Preferred Securities
(whatever the reason for such Event of Default and whether it shall be voluntary
or involuntary or be effected by operation of law or pursuant to any judgment,
decree or order of any court or any order, rule or regulation of any
administrative or governmental body):
(i) the occurrence of a Debenture Event of Default under the Indenture
(see "Description of Subordinated Debentures -- Debenture Events of
Default"); or
(ii) default by the Property Trustee in the payment of any
Distribution when it becomes due and payable, and continuation of such
default for a period of 30 days; or
(iii) default by the Property Trustee in the payment of any Redemption
Price of any Trust Security when it becomes due and payable; or
(iv) default in the performance, or breach, in any material respect,
of any covenant or warranty of the Trustees in the Trust Agreement (other
than a covenant or warranty a default in the performance of which or the
breach of which is dealt with in clauses (ii) or (iii) above), and
continuation of such default or breach for a period of 60 days after there
has been given, by registered or certified mail, to the Trustee or Trustees
by the holders of at least 25% in aggregate Liquidation Amount of the
outstanding Preferred Securities, a written notice specifying such default
or breach and requiring it to be remedied and stating that such notice is a
"Notice of Default" under the Trust Agreement; or
(v) the occurrence of certain events of bankruptcy or insolvency with
respect to the Property Trustee and the failure by the Company to appoint a
successor Property Trustee within 60 days thereof.
Within five Business Days after the occurrence of any Event of Default
actually known to the Property Trustee, the Property Trustee shall transmit
notice of such Event of Default to the holders of the Preferred Securities, the
Administrative Trustees and the Company, as Depositor, unless such Event of
Default shall
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have been cured or waived. The Company, as Depositor, and the Administrative
Trustees are required to file annually with the Property Trustee a certificate
as to whether or not they are in compliance with all the conditions and
covenants applicable to them under each Trust Agreement.
If a Debenture Event of Default has occurred and is continuing, the
Preferred Securities shall have a preference over the Common Securities upon
termination of IBC Capital as described above. See "-- Liquidation Distribution
Upon Termination." The existence of an Event of Default does not entitle the
holders of Preferred Securities to accelerate the maturity thereof.
REMOVAL OF IBC CAPITAL TRUSTEES
Unless a Debenture Event of Default shall have occurred and be continuing,
any Trustee may be removed at any time by the holder of the Common Securities.
If a Debenture Event of Default has occurred and is continuing, the Property
Trustee and the Delaware Trustee may be removed at such time by the holders of a
majority in Liquidation Amount of the outstanding Preferred Securities. In no
event will the holders of the Preferred Securities have the right to vote to
appoint, remove or replace the Administrative Trustees, which voting rights are
vested exclusively in the Company as the holder of the Common Securities. No
resignation or removal of a Trustee and no appointment of a successor trustee
shall be effective until the acceptance of appointment by the successor trustee
in accordance with the provisions of the applicable Trust Agreement.
CO-TRUSTEES AND SEPARATE PROPERTY TRUSTEE
Unless an Event of Default shall have occurred and be continuing, at any
time or times, for the purpose of meeting the legal requirements of the Trust
Indenture Act or of any jurisdiction in which any part of the Trust Property may
at the time be located, the Company, as the holder of the Common Securities, and
the Administrative Trustees shall have power to appoint one or more persons
either to act as a co-trustee, jointly with the Property Trustee, of all or any
part of such Trust Property, or to act as separate trustee of any such property,
in either case with such powers as may be provided in the instrument of
appointment, and to vest in such person or persons in such capacity any
property, title, right or power deemed necessary or desirable, subject to the
provisions of the applicable Trust Agreement. In case a Debenture Event of
Default has occurred and is continuing, the Property Trustee alone shall have
power to make such appointment.
MERGER OR CONSOLIDATION OF TRUSTEES
Any person into which the Property Trustee, the Delaware Trustee or any
Administrative Trustee that is not a natural person may be merged or converted
or with which it may be consolidated, or any person resulting from any merger,
conversion or consolidation to which such Trustee shall be a party, or any
person succeeding to all or substantially all the corporate trust business of
such Trustee, shall be the successor of such Trustee under each Trust Agreement,
provided such person shall be otherwise qualified and eligible.
MERGERS, CONSOLIDATIONS, AMALGAMATIONS OR REPLACEMENTS OF IBC CAPITAL
IBC Capital may not merge with or into, consolidate, amalgamate, or be
replaced by, or convey, transfer or lease its properties and assets
substantially as an entirety to any corporation or other person, except as
described below. IBC Capital may, at the request of the Company, with the
consent of the Administrative Trustees and without the consent of the holders of
the Preferred Securities, merge with or into, consolidate, amalgamate, or be
replaced by or convey, transfer or lease its properties and assets substantially
as an entirety to a trust organized as such under the laws of any State;
provided, that (i) such successor entity either (a) expressly assumes all of the
obligations of IBC Capital with respect to the Preferred Securities or (b)
substitutes for the Preferred Securities other securities having substantially
the same terms as the Preferred Securities (the "Successor Securities") so long
as the Successor Securities rank the same as the Preferred Securities rank in
priority with respect to distributions and payments upon liquidation, redemption
and otherwise, (ii) the Company expressly appoints a trustee of such successor
entity possessing the same powers and duties as the Property Trustee in its
capacity as the holder of the Subordinated Debentures, (iii) the Successor
Securities are listed, or any Successor Securities will be listed upon
notification of issuance,
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on the Nasdaq National Market or any national securities exchange or other
organization on which the Preferred Securities are then listed, if any, (iv)
such merger, consolidation, amalgamation, replacement, conveyance, transfer or
lease does not adversely affect the rights, preferences and privileges of the
holders of the Preferred Securities (including any Successor Securities) in any
material respect, (v) such successor entity has a purpose identical to that of
IBC Capital, (vi) prior to such merger, consolidation, amalgamation,
replacement, conveyance, transfer or lease, the Company has received an opinion
from independent counsel to IBC Capital experienced in such matters to the
effect that (a) such merger, consolidation, amalgamation, replacement,
conveyance, transfer or lease does not adversely affect the rights, preferences
and privileges of the holders of the Preferred Securities (including any
Successor Securities) in any material respect, and (b) following such merger,
consolidation, amalgamation, replacement, conveyance, transfer or lease, neither
IBC Capital nor such successor entity will be required to register as an
investment company under the Investment Company Act of 1940, as amended (the
"Investment Company Act") and (vii) the Company or any permitted successor or
assignee owns all of the common securities of such successor entity and
guarantees the obligations of such successor entity under the Successor
Securities at least to the extent provided by the Guarantee. Notwithstanding the
foregoing, IBC Capital shall not, except with the consent of holders of 100% in
Liquidation Amount of the Preferred Securities, consolidate, amalgamate, merge
with or into, or be replaced by or convey, transfer or lease its properties and
assets substantially as an entirety to any other entity or permit any other
entity to consolidate, amalgamate, merge with or into, or replace it if such
consolidation, amalgamation, merger, replacement, conveyance, transfer or lease
would cause IBC Capital or the successor entity to be classified as other than a
grantor trust for United States federal income tax purposes.
VOTING RIGHTS; AMENDMENT OF TRUST AGREEMENT
Except as provided below and under "Description of Guarantee -- Amendments
and Assignment" and as otherwise required by law and the Trust Agreement, the
holders of the Preferred Securities will have no voting rights.
The Trust Agreement may be amended from time to time by the Company, the
Property Trustee and the Administrative Trustees, without the consent of the
holders of the Preferred Securities (i) to cure any ambiguity, correct or
supplement any provisions in such Trust Agreement that may be inconsistent with
any other provision, or to make any other provisions with respect to matters or
questions arising under the Trust Agreement, which shall not be inconsistent
with the other provisions of the Trust Agreement, or (ii) to modify, eliminate
or add to any provisions of the Trust Agreement to such extent as shall be
necessary to ensure that IBC Capital will be classified for United States
federal income tax purposes as a grantor trust at all times that any Trust
Securities are outstanding or to ensure that IBC Capital will not be required to
register as an "investment company" under the Investment Company Act; provided,
however, that in the case of clause (i), such action shall not adversely affect
in any material respect the interests of any holder of Trust Securities, and any
amendments of such Trust Agreement shall become effective when notice thereof is
given to the holders of Trust Securities. The Trust Agreement may be amended by
the Trustees and the Company with (i) the consent of holders representing not
less than a majority in the aggregate Liquidation Amount of the outstanding
Trust Securities, and (ii) receipt by the Trustees of an opinion of counsel to
the effect that such amendment or the exercise of any power granted to the
Trustees in accordance with such amendment will not affect IBC Capital's status
as a grantor trust for United States federal income tax purposes or IBC
Capital's exemption from status as an "investment company" under the Investment
Company Act. Notwithstanding anything in this paragraph to the contrary, without
the consent of each holder of Trust Securities, such Trust Agreement may not be
amended to (i) change the amount or timing of any Distribution on the Trust
Securities or otherwise adversely affect the amount of any Distribution required
to be made in respect of the Trust Securities as of a specified date or (ii)
restrict the right of a holder of Trust Securities to institute suit for the
enforcement of any such payment on or after such date.
So long as any Subordinated Debentures are held by the Property Trustee,
the Trustees shall not (i) direct the time, method and place of conducting any
proceeding for any remedy available to the Debenture Trustee, or executing any
trust or power conferred on the Property Trustee with respect to the
Subordinated Debentures, (ii) waive any past default that is waivable under the
Indenture, (iii) exercise any right to rescind
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or annul a declaration that the principal of all the Subordinated Debentures
shall be due and payable or (iv) consent to any amendment, modification or
termination of the Indenture or the Subordinated Debentures, where such consent
shall be required, without, in each case, obtaining the prior approval of the
holders of a majority in aggregate Liquidation Amount of all outstanding
Preferred Securities; provided, however, that where a consent under the
Indenture would require the consent of each holder of Subordinated Debentures
affected thereby, no such consent shall be given by the Property Trustee without
the prior consent of each holder of the Preferred Securities. The Trustees shall
not revoke any action previously authorized or approved by a vote of the holders
of the Preferred Securities except by subsequent vote of the holders of the
Preferred Securities. The Property Trustee shall notify each holder of Preferred
Securities of any notice of default with respect to the Subordinated Debentures.
In addition to obtaining the foregoing approvals of the holders of the Preferred
Securities, prior to taking any of the foregoing actions, the Trustees shall
obtain an opinion of counsel experienced in such matters to the effect that IBC
Capital will not be classified as an association taxable as a corporation for
United States federal income tax purposes on account of such action.
Any required approval of holders of Preferred Securities may be given at a
meeting of holders of Preferred Securities convened for such purpose or pursuant
to written consent. The Property Trustee will cause a notice of any meeting at
which holders of Preferred Securities are entitled to vote, or of any matter
upon which action by written consent of such holders is to be taken, to be given
to each holder of record of Preferred Securities in the manner set forth in the
Trust Agreement.
No vote or consent of the holders of Preferred Securities will be required
for IBC Capital to redeem and cancel its Preferred Securities in accordance with
the Trust Agreement.
Notwithstanding the fact that holders of Preferred Securities are entitled
to vote or consent under any of the circumstances described above, any of the
Preferred Securities that are owned by the Company, the Trustees or any
affiliate of the Company or any Trustee, shall, for purposes of such vote or
consent, be treated as if they were not outstanding.
GLOBAL PREFERRED SECURITIES
The Preferred Securities will be represented by one or more global
certificates registered in the name of the Depositary or its nominee ("Global
Preferred Security"). Beneficial interests in the Preferred Securities will be
shown on, and transfers thereof will be effected only through, records
maintained by participants in the Depositary. Except as described below,
Preferred Securities in certificated form will not be issued in exchange for the
global certificates. See "Book-Entry Issuance."
A global security shall be exchangeable for Preferred Securities registered
in the names of persons other than the Depositary or its nominee only if (i) the
Depositary notifies the Company that it is unwilling or unable to continue as a
depositary for such global security and no successor depositary shall have been
appointed, or if at any time the Depositary ceases to be a clearing agency
registered under the Securities Exchange Act of 1934, as amended, at a time when
the Depositary is required to be so registered to act as such depositary, (ii)
the Company in its sole discretion determines that such global security shall be
so exchangeable, or (iii) there shall have occurred and be continuing an Event
of Default under the Indenture. Any global security that is exchangeable
pursuant to the preceding sentence shall be exchangeable for definitive
certificates registered in such names as the Depositary shall direct. It is
expected that such instructions will be based upon directions received by the
Depositary with respect to ownership of beneficial interests in such global
security. In the event that Preferred Securities are issued in definitive form,
such Preferred Securities will be in denominations of $25 and integral multiples
thereof and may be transferred or exchanged at the offices described below.
Unless and until it is exchanged in whole or in part for the individual
Preferred Securities represented thereby, a Global Preferred Security may not be
transferred except as a whole by the Depositary to a nominee of such Depositary
or by a nominee of such Depositary to such Depositary or another nominee of such
Depositary or by the Depositary or any nominee to a successor Depositary or any
nominee of such successor.
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Payments on Preferred Securities represented by a global security will be
made to the Depositary, as the depositary for the Preferred Securities. In the
event Subordinated Debentures are issued in definitive form, principal and
Distributions will be payable, the transfer of the Preferred Securities will be
registrable, and Preferred Securities will be exchangeable for Preferred
Securities of other denominations of a like aggregate Liquidation Amount, at the
corporate office of the Property Trustee in Boston, Massachusetts, or at the
offices of any paying agent or transfer agent appointed by the Administrative
Trustees, provided that payment of any Distribution may be made at the option of
the Administrative Trustees by check mailed to the address of the persons
entitled thereto or by wire transfer. In addition, if the Preferred Securities
are issued in certificated form, the record dates for payment of Distributions
will be the 15th day of the month in which the relevant Distribution Date
occurs. For a description of the terms of the depositary arrangements relating
to payments, transfers, voting rights, redemptions and other notices and other
matters, see "Book-Entry Issuance."
Upon the issuance of a Global Preferred Security, and the deposit of such
Global Preferred Security with or on behalf of the Depositary, the Depositary
for such Global Preferred Security or its nominee will credit, on its book-entry
registration and transfer system, the respective aggregate Liquidation Amounts
of the individual Preferred Securities represented by such Global Preferred
Securities to the accounts of Participants. Such accounts shall be designated by
the dealers, underwriters or agents with respect to such Preferred Securities.
Ownership of beneficial interests in a Global Preferred Security will be limited
to Participants or persons that may hold interests through Participants.
Ownership of beneficial interests in such Global Preferred Security will be
shown on, and the transfer of that ownership will be effected only through,
records maintained by the applicable Depositary or its nominee (with respect to
interests of Participants) and the records of Participants (with respect to
interests of persons who hold through Participants). The laws of some states
require that certain purchasers of securities take physical delivery of such
securities in definitive form. Such limits and such laws may impair the ability
to transfer beneficial interests in a Global Preferred Security.
So long as the Depositary for a Global Preferred Security, or its nominee,
is the registered owner of such Global Preferred Security, such Depositary or
such nominee, as the case may be, will be considered the sole owner or holder of
the Preferred Securities represented by such Global Preferred Security for all
purposes under the Indenture governing such Preferred Securities. Except as
provided below, owners of beneficial interests in a Global Preferred Security
will not be entitled to have any of the individual Preferred Securities
represented by such Global Preferred Security registered in their names, will
not receive or be entitled to receive physical delivery of any such Preferred
Securities in definitive form and will not be considered the owners or holders
thereof under the Indenture.
None of the Company, the Property Trustee, any Paying Agent, or the
Securities Registrar for such Preferred Securities will have any responsibility
or liability for any aspect of the records relating to or payments made on
account of beneficial ownership interests of the Global Preferred Security
representing such Preferred Securities or for maintaining, supervising or
reviewing any records relating to such beneficial ownership interests.
The Company expects that the Depositary for Preferred Securities or its
nominee, upon receipt of any payment of the Liquidation Amount, Redemption Price
or Distributions in respect of a permanent Global Preferred Security immediately
will credit Participants' accounts with payments in amounts proportionate to
their respective beneficial interest in the aggregate Liquidation Amount of such
Global Preferred Security as shown on the records of such Depositary or its
nominee. The Company also expects that payments by Participants to owners of
beneficial interests in such Global Preferred Security held through such
Participants will be governed by standing instructions and customary practices,
as is now the case with securities held for the accounts of customers in bearer
form or registered in "street name." Such payments will be the responsibility of
such Participants.
If the Depositary for the Preferred Securities is at any time unwilling,
unable or ineligible to continue as depositary and a successor depositary is not
appointed by the Company within 90 days, IBC Capital will issue individual
Preferred Securities in exchange for the Global Preferred Security. In addition,
IBC Capital may at any time and in its sole discretion, subject to any
limitations described herein relating to such Preferred Securities, determine
not to have any Preferred Securities represented by one or more Global Preferred
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Securities and, in such event, will issue individual Preferred Securities in
exchange for the Global Preferred Security or Securities representing the
Preferred Securities. Further, if IBC Capital so specifies with respect to the
Preferred Securities, an owner of a beneficial interest in a Global Preferred
Security representing Preferred Securities may, on terms acceptable to the
Company, the Property Trustee and the Depositary for such Global Preferred
Security, receive individual Preferred Securities in exchange for such
beneficial interests, subject to any limitations described herein. In any such
instance, an owner of a beneficial interest in a Global Preferred Security will
be entitled to physical delivery of individual Preferred Securities represented
by such Global Preferred Security equal in Liquidation Amount to such beneficial
interest and to have such Preferred Securities registered in its name.
Individual Preferred Securities so issued will be issued in denominations,
unless otherwise specified by IBC Capital, of $25 and integral multiples
thereof.
PAYMENT AND PAYING AGENCY
Payments in respect of the Preferred Securities shall be made to the
Depositary, which shall credit the relevant accounts at the Depositary on the
applicable Distribution Dates or, if any Preferred Securities are not held by
the Depositary, such payments shall be made by check mailed to the address of
the holder entitled thereto as such address shall appear on the register of
holders of Preferred Securities. The paying agent ("Paying Agent") shall
initially be the Property Trustee and any copaying agent chosen by the Property
Trustee and acceptable to the Administrative Trustees and the Company. The
Paying Agent shall be permitted to resign as Paying Agent upon 30 days' written
notice to the Property Trustee and the Company. In the event that the Property
Trustee shall no longer be the Paying Agent, the Administrative Trustees shall
appoint a successor (which shall be a bank or trust company acceptable to the
Administrative Trustees and the Company) to act as Paying Agent.
REGISTRAR AND TRANSFER AGENT
The Property Trustee will act as registrar and transfer agent for the
Preferred Securities. Registration of transfers of Preferred Securities will be
effected without charge by or on behalf of IBC Capital, but upon payment of any
tax or other governmental charges that may be imposed in connection with any
transfer or exchange. IBC Capital will not be required to register or cause to
be registered the transfer of Preferred Securities after such Preferred
Securities have been called for redemption.
INFORMATION CONCERNING THE PROPERTY TRUSTEE
The Property Trustee, other than upon the occurrence and during the
continuance of an Event of Default, undertakes to perform only such duties as
are specifically set forth in the Trust Agreement and, after such Event of
Default, must exercise the same degree of care and skill as a prudent person
would exercise or use in the conduct of his or her own affairs. Subject to this
provision, the Property Trustee is under no obligation to exercise any of the
powers vested in it by the Trust Agreement at the request of any holder of
Preferred Securities unless it is offered reasonable indemnity against the
costs, expenses and liabilities that might be incurred thereby. If no Event of
Default has occurred and is continuing and the Property Trustee is required to
decide between alternative causes of action, construe ambiguous provisions in
the applicable Trust Agreement or is unsure of the application of any provision
of the Trust Agreement, and the matter is not one on which holders of Preferred
Securities are entitled under the Trust Agreement to vote, then the Property
Trustee shall take such action as is directed by the Company and if not so
directed, shall take such action as it deems advisable and in the best interests
of the holders of the Trust Securities and will have no liability except for its
own bad faith, negligence or willful misconduct.
MISCELLANEOUS
The Administrative Trustees are authorized and directed to conduct the
affairs of and to operate IBC Capital in such a way that IBC Capital will not be
deemed to be an "investment company" required to be registered under the
Investment Company Act or classified as an association taxable as a corporation
for United States federal income tax purposes and so that the Subordinated
Debentures will be treated as indebtedness of the Company for United States
federal income tax purposes. In this connection, the Company
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and the Administrative Trustees are authorized to take any action, not
inconsistent with applicable law, the certificate of trust of IBC Capital or the
Trust Agreement, that the Company and the Administrative Trustees determine in
their discretion to be necessary or desirable for such purposes, as long as such
action does not materially adversely affect the interests of the holders of the
related Preferred Securities.
Holders of the Preferred Securities have no preemptive or similar rights.
DESCRIPTION OF SUBORDINATED DEBENTURES
The Subordinated Debentures will be issued under the Indenture, dated as of
December 17, 1996 ("Indenture"), between the Company and State Street Bank and
Trust Company, as trustee ("Debenture Trustee"). The following summary of the
material terms and provisions of the Subordinated Debentures and the Indenture
does not purport to be complete and is subject to, and is qualified in its
entirety by reference to, the Indenture, which has been filed as an exhibit to
the Registration Statement of which this Prospectus forms a part, and to the
Trust Indenture Act. The Indenture is qualified under the Trust Indenture Act.
Whenever particular defined terms of the Indenture are referred to herein, such
defined terms are incorporated herein or therein by reference.
Concurrently with the issuance of the Preferred Securities, IBC Capital
will invest the proceeds thereof, together with the consideration paid by the
Company for the Common Securities, in the Subordinated Debentures issued by the
Company. The Subordinated Debentures will be issued as unsecured debt under the
Indenture.
GENERAL
The Subordinated Debentures will bear interest at the annual rate of 9.25%
of the principal amount thereof, payable quarterly in arrears on March 31, June
30, September 30, and December 31 of each year (each, an "Interest Payment
Date") beginning March 31, 1997, to the person in whose name each Subordinated
Debenture is registered, subject to certain exceptions, at the close of business
on the Business Day next preceding such Interest Payment Date. It is anticipated
that, until the liquidation, if any, of IBC Capital, the Subordinated Debentures
will be held in the name of the Property Trustee in trust for the benefit of the
holders of the Preferred Securities. The amount of interest payable for any
period will be computed on the basis of a 360-day year of twelve 30-day months.
In the event that any date on which interest is payable on the Subordinated
Debentures is not a Business Day, then payment of the interest payable on such
date will be made on the next succeeding day that is a Business Day (and without
any interest or other payment in respect of any such delay) with the same force
and effect as if made on the date such payment was originally payable. Accrued
interest that is not paid on the applicable Interest Payment Date will bear
additional interest on the amount thereof (to the extent permitted by law) at
the rate per annum of 9.25% thereof, compounded quarterly. The term "interest"
as used herein shall include quarterly interest payments, interest on quarterly
interest payments not paid on the applicable Interest Payment Date and
Additional Sums (as defined below), as applicable.
The Subordinated Debentures will mature on December 31, 2026 (such date, as
it may be shortened or extended as hereinafter described, the "Stated
Maturity"). Such date may be shortened at any time by the Company to any date
not earlier than December 31, 2001, subject to the Company having received prior
approval of the Federal Reserve if then required under applicable capital
guidelines or policies of the Federal Reserve. Such date may also be extended at
any time at the election of the Company but in no event to a date later than
December 31, 2045, provided that at the time such election is made and at the
time of extension (i) the Company is not in bankruptcy, otherwise insolvent or
in liquidation, (ii) the Company is not in default in the payment of any
interest or principal on the Subordinated Debentures, and (iii) IBC Capital is
not in arrears on payments of Distributions on the Preferred Securities and no
deferred Distributions are accumulated. In the event that the Company elects to
shorten or extend the Stated Maturity of the Subordinated Debentures, it shall
give notice to the Debenture Trustee, and the Debenture Trustee shall give
notice of such shortening or extension to the holders of the Subordinated
Debentures no more than 180 days and no less than 90 days prior to the
effectiveness thereof.
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The Subordinated Debentures will be unsecured and will rank junior and be
subordinate in right of payment to all Senior Debt and Subordinated Debt of the
Company and, in certain circumstances relating to the dissolution, winding-up,
liquidation or reorganization of the Company, to all Additional Senior
Obligations of the Company. See "Description of Subordinated Debentures --
Subordination." Because the Company is a holding company, the right of the
Company to participate in any distribution of assets of any of the Banks, upon
any such Bank's liquidation or reorganization or otherwise (and thus the ability
of holders of the Preferred Securities to benefit indirectly from such
distribution), is subject to the prior claims of creditors of that Bank, except
to the extent that the Company may itself be recognized as a creditor of such
Bank. Accordingly, the Subordinated Debentures will be effectively subordinated
to all existing and future liabilities of the Banks, and holders of Subordinated
Debentures should look only to the assets of the Company for payments on the
Subordinated Debentures. The Indenture does not limit the incurrence or issuance
of other secured or unsecured debt of the Company, including Senior Debt,
Subordinated Debt, Additional Senior Obligations, whether under the Indenture or
any existing indenture or other indenture that the Company may enter into in the
future or otherwise. See "Description of Subordinated Debentures --
Subordination."
The Indenture does not contain provisions that afford holders of the
Subordinated Debentures protection in the event of a highly leveraged
transaction or other similar transaction involving the Company that may
adversely affect such holders.
OPTION TO EXTEND INTEREST PAYMENT PERIOD
So long as no Event of Default under the Indenture has occurred and is
continuing, the Company has the right under the Indenture at any time during the
term of the Subordinated Debentures to defer the payment of interest at any time
or from time to time for a period not exceeding 20 consecutive quarters (each
such period an "Extension Period"), provided that no Extension Period may extend
beyond the Stated Maturity of the Preferred Securities. At the end of such
Extension Period, the Company must pay all interest then accrued and unpaid
(together with interest thereon at the annual rate of 9.25%, compounded
quarterly, to the extent permitted by applicable law). During an Extension
Period, interest will continue to accrue and holders of Subordinated Debentures
(or holders of Preferred Securities while such series is outstanding) will be
required to accrue interest income for United States federal income tax
purposes. See "Certain Federal Income Tax Consequences -- Potential Extension of
Interest Payment Period and Original Issue Discount."
During any such Extension Period, the Company may not, and may not permit
any Bank or other subsidiary of the Company to, (i) declare or pay any dividends
or distributions on, or redeem, purchase, acquire or make a liquidation payment
with respect to, any of the Company's capital stock or (ii) make any payment of
principal, interest or premium, if any, on or repay, repurchase or redeem any
debt securities of the Company (including other Subordinated Debentures) that
rank pari passu with or junior in interest to the Subordinated Debentures or
make any guarantee payments with respect to any guarantee by the Company of the
debt securities of any subsidiary of the Company if such guarantee ranks pari
passu or junior in interest to the Subordinated Debentures (other than (a)
dividends or distributions in Common Stock, (b) any declaration of a dividend in
connection with the implementation of a shareholders' rights plan, or the
issuance of stock under any such plan in the future or the redemption or
repurchase of any such rights pursuant thereto, (c) payments under the
Guarantee, and (d) purchases of Common Stock related to rights under any of the
Company's benefit plans for its directors, officers or employees). Prior to the
termination of any such Extension Period, the Company may further extend the
interest payment period, provided that no Extension Period may exceed 20
consecutive quarters or extend beyond the Stated Maturity of the Subordinated
Debentures. Upon the termination of any such Extension Period and the payment of
all amounts then due on any Interest Payment Date, the Company may elect to
begin a new Extension Period subject to the above requirements. No interest
shall be due and payable during an Extension Period, except at the end thereof.
The Company must give the Property Trustee, the Administrative Trustees and the
Debenture Trustee notice of its election of such Extension Period at least one
Business Day prior to the earlier of (i) the date the Distributions on the
Preferred Securities would have been payable except for the election to begin
such Extension Period or (ii) the date the Administrative Trustees are required
to give notice to the Nasdaq National Market or other applicable self-regulatory
organization, or to holders of such Preferred Securities on the record date for
the date such Distributions are payable, but in any event not less than one
Business Day prior to such record date.
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The Debenture Trustee shall give notice of the Company's election to begin a new
Extension Period to the holders of the Preferred Securities. Subject to the
foregoing, there is no limitation on the number of times that the Company may
elect to begin an Extension Period.
ADDITIONAL SUMS
If IBC Capital is required to pay any additional taxes, duties or other
governmental charges as a result of a Tax Event, the Company will pay as
additional amounts on the Subordinated Debentures such amounts ("Additional
Sums") as shall be required so that the Distributions payable by IBC Capital
shall not be reduced as a result of any such additional taxes, duties or other
governmental charges.
REDEMPTION OR EXCHANGE
Subject to the Company having received prior approval of the Federal
Reserve, if then required under applicable capital guidelines or policies of the
Federal Reserve, the Subordinated Debentures are redeemable prior to maturity at
the option of the Company (i) on or after December 31, 2001, in whole at any
time or in part from time to time or (ii) at any time in whole (but not in
part), upon the occurrence and during the continuance of a Debenture Tax Event
or an Investment Company Event in each case at a redemption price equal to the
accrued and unpaid interest on the Subordinated Debentures so redeemed to the
date fixed for redemption, plus 100% of the principal amount thereof.
"Debenture Tax Event" means the receipt by the Company of an opinion of
counsel experienced in such matters to the effect that, as a result of any
amendment to, or change (including any announced prospective change) in, the
laws (or any regulations thereunder) of the United States or any political
subdivision or taxing authority thereof or therein, or as a result of any
official administrative pronouncement or judicial decision interpreting or
applying such laws or regulations, which amendment or change is effective or
which pronouncement or decision is announced on or after the date of issuance of
the Subordinated Debentures under the Indenture, there is more than an
insubstantial risk that (i) interest payable by the Company on the Subordinated
Debentures is not, or within 90 days of the date of such opinion will not be,
deductible by the Company, in whole or in part, for United States federal income
tax purposes, (ii) IBC Capital is, or will be within 90 days after the date of
such opinion of counsel, subject to United States federal income tax with
respect to income received or accrued on the Subordinated Debentures, or (iii)
IBC Capital is, or will be within 90 days after the date of such opinion of
counsel, subject to more than a de minimis amount of other taxes, duties,
assessments or other governmental charges.
Notice of any redemption will be mailed at least 30 days but not more than
60 days before the redemption date to each holder of Subordinated Debentures to
be redeemed at its registered address. Unless the Company defaults in payment of
the redemption price, on and after the redemption date interest ceases to accrue
on such Subordinated Debentures or portions thereof called for redemption.
The Subordinated Debentures will not be subject to any sinking fund.
DISTRIBUTION UPON LIQUIDATION
As described under "Description of Preferred Securities--Liquidation
Distribution Upon Termination," under certain circumstances involving the
termination of IBC Capital, the Subordinated Debentures may be distributed to
the holders of the Preferred Securities in liquidation of IBC Capital after
satisfaction of liabilities to creditors of IBC Capital as provided by
applicable law. If distributed to holders of Preferred Securities in
liquidation, the Subordinated Debentures will initially be issued in the form of
one or more global securities and the Depositary, or any successor depositary
for the Preferred Securities, will act as depositary for the Subordinated
Debentures. It is anticipated that the depositary arrangements for the
Subordinated Debentures would be substantially identical to those in effect for
the Preferred Securities. If the Subordinated Debentures are distributed to the
holders of Preferred Securities upon the liquidation of IBC Capital, the Company
will use its best efforts to list the Subordinated Debentures on the Nasdaq
National Market or such stock exchanges, if any, on which the Preferred
Securities are then listed. There can be no assurance as to the market price of
any Subordinated Debentures that may be distributed to the holders of Preferred
Securities.
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RESTRICTIONS ON CERTAIN PAYMENTS
The Company will covenant, as to the Subordinated Debentures, that if at
such time (i) there shall have occurred any event of which the Company has
actual knowledge that (a) with the giving of notice or the lapse of time, or
both, would constitute an "Event of Default" under the Indenture with respect to
the Subordinated Debentures of IBC Capital, and (b) in respect of which the
Company shall not have taken reasonable steps to cure, or (ii) the Company shall
have given notice of its election of an Extension Period as provided in the
Indenture with respect to the Subordinated Debentures and shall not have
rescinded such notice, or such Extension Period, or any extension thereof, shall
be continuing, it will not, and will not permit any subsidiary of the Company
to, (1) declare or pay any dividends or distributions on, or redeem, purchase,
acquire, or make a liquidation payment with respect to, any of the Company's
capital stock or (2) make any payment of principal, interest or premium, if any,
on or repay or repurchase or redeem any debt securities of the Company that rank
pari passu with or junior in interest to the Subordinated Debentures or make any
guarantee payments with respect to any guarantee by the Company of the debt
securities of any subsidiary of the Company if such guarantee ranks pari passu
or junior in interest to the Subordinated Debentures (other than (a) dividends
or distributions in Common Stock, (b) any declaration of a dividend in
connection with the implementation of a shareholders' rights plan, or the
issuance of stock under any such plan in the future, or the redemption or
repurchase of any such rights pursuant thereto, (c) payments under the Guarantee
and (d) purchases of Common Stock related to rights under any of the Company's
benefit plans for its directors, officers or employees.
SUBORDINATION
In the Indenture, the Company has covenanted and agreed that any
Subordinated Debentures issued thereunder will be subordinate and junior in
right of payment to all Senior Debt, Subordinated Debt and Additional Senior
Obligations to the extent provided in the Indenture. Upon any payment or
distribution of assets to creditors upon any liquidation, dissolution, winding
up, reorganization, assignment for the benefit of creditors, marshaling of
assets or any bankruptcy, insolvency, debt restructuring or similar proceedings
in connection with any insolvency or bankruptcy proceeding of the Company, the
holders of Senior Debt, Subordinated Debt and Additional Senior Obligations will
first be entitled to receive payment in full of principal of (and premium, if
any) and interest, if any, on such Senior Debt, Subordinated Debt and Additional
Senior Obligations before the holders of Subordinated Debentures will be
entitled to receive or retain any payment in respect of the principal of or
interest, if any, on the Subordinated Debentures.
In the event of the acceleration of the maturity of any Subordinated
Debentures, the holders of all Senior Debt, Subordinated Debt and Additional
Senior Obligations outstanding at the time of such acceleration will first be
entitled to receive payment in full of all amounts due thereon (including any
amounts due upon acceleration) before the holders of Subordinated Debentures
will be entitled to receive or retain any payment in respect of the principal of
or interest, if any, on the Subordinated Debentures; provided, however, that
holders of Subordinated Debt shall not be entitled to receive payment of any
such amounts to the extent that such Subordinated Debt is by its terms
subordinated to trade creditors.
No payments on account of principal or interest, if any, in respect of the
Subordinated Debentures may be made if there shall have occurred and be
continuing a default in any payment with respect to Senior Debt, Subordinated
Debt or Additional Senior Obligations or an event of default with respect to any
Senior Debt, Subordinated Debt or Additional Senior Obligations resulting in the
acceleration of the maturity thereof, or if any judicial proceeding shall be
pending with respect to any such default.
"Debt" means with respect to any person, whether recourse is to all or a
portion of the assets of such person and whether or not contingent, (i) every
obligation of such person for money borrowed; (ii) every obligation of such
person evidenced by bonds, debentures, notes or other similar instruments,
including obligations incurred in connection with the acquisition of property,
assets or businesses; (iii) every reimbursement obligation of such person with
respect to letters of credit, bankers' acceptances or similar facilities issued
for the account of such person; (iv) every obligation of such person issued or
assumed as the deferred purchase price of property or services (but excluding
trade accounts payable or accrued liabilities arising in the ordinary course of
business); (v) every capital lease obligation of such person; and (vi) and every
obligation of the type referred to in clauses (i) through (v) of another person
and all dividends of another person the
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payment of which, in either case, such person has guaranteed or is responsible
or liable, directly or indirectly, as obligor or otherwise.
"Senior Debt" means the principal of (and premium, if any) and interest, if
any (including interest accruing on or after the filing of any petition in
bankruptcy or for reorganization relating to the Company whether or not such
claim for post-petition interest is allowed in such proceeding), on Debt,
whether incurred on or prior to the date of the Indenture or thereafter
incurred, unless, in the instrument creating or evidencing the same or pursuant
to which the same is outstanding, it is provided that such obligations are not
superior in right of payment to the Subordinated Debentures or to other Debt
which is pari passu with, or subordinated to, the Subordinated Debentures;
provided, however, that Senior Debt shall not be deemed to include (i) any Debt
of the Company which when incurred and without respect to any election under
section 1111(b) of the United States Bankruptcy Code of 1978, as amended, was
without recourse to the Company, (ii) any Debt of the Company to any of its
subsidiaries, (iii) Debt to any employee of the Company, (iv) Debt which by its
terms is subordinated to trade accounts payable or accrued liabilities arising
in the ordinary course of business to the extent that payments made to the
holders of such Debt by the holders of the Subordinated Debentures as a result
of the subordination provisions of the Indenture would be greater than they
otherwise would have been as a result of any obligation of such holders to pay
amounts over to the obligees on such trade accounts payable or accrued
liabilities arising in the ordinary course of business as a result of
subordination provisions to which such Debt is subject; (v) Debt which
constitutes Subordinated Debt, and (vi) any other debt securities issued
pursuant to the Indenture.
"Subordinated Debt" means the principal of (and premium, if any) and
interest, if any (including interest accruing on or after the filing of any
petition in bankruptcy or for reorganization relating to the Company whether or
not such claim for post-petition interest is allowed in such proceeding), on
Debt, whether incurred on or prior to the date of the Indenture or thereafter
incurred, which is by its terms expressly provided to be junior and subordinate
to other Debt of the Company (other than the Subordinated Debentures).
"Additional Senior Obligations" means all indebtedness of the Company
whether incurred on or prior to the date of the Indenture or thereafter
incurred, for claims in respect of derivative products such as interest and
foreign exchange rate contracts, commodity contracts and similar arrangements;
provided, however, that Additional Senior Obligations do not include claims in
respect of Senior Debt or Subordinated Debt or obligations which, by their
terms, are expressly stated to be not superior in right of payment to the
Subordinated Debentures or to rank pari passu in right of payment with the
Subordinated Debentures. For purposes of this definition, "claim" shall have the
meaning assigned thereto in Section 101(4) of the United States Bankruptcy Code
of 1978, as amended.
The Indenture places no limitation on the amount of additional Senior Debt
that may be incurred by the Company. The Company expects from time to time to
incur additional indebtedness constituting Senior Debt, Subordinated Debt and
Additional Senior Obligations.
DENOMINATIONS, REGISTRATION AND TRANSFER
The Subordinated Debentures will be represented by global certificates
registered in the name of the Depositary or its nominee. Beneficial interests in
the Subordinated Debentures will be shown on, and transfers thereof will be
effected only through, records maintained by the Depositary. Except as described
below, Subordinated Debentures in certificated form will not be issued in
exchange for the global certificates. See "Book-Entry Issuance."
Unless and until a Global Subordinated Debenture is exchanged in whole or
in part for the individual Subordinated Debentures represented thereby, it may
not be transferred except as a whole by the Depositary for such Global
Subordinated Debenture to a nominee of such Depositary or by a nominee of such
Depositary to such Depositary or another nominee of such Depositary or by the
Depositary or any nominee to a successor Depositary or any nominee of such
successor.
A global security shall be exchangeable for Subordinated Debentures
registered in the names of persons other than the Depositary or its nominee only
if (i) the Depositary notifies the Company that it is unwilling or unable to
continue as a depositary for such global security and no successor depositary
shall have been
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appointed, or if at any time the Depositary ceases to be a clearing agency
registered under the Securities Exchange Act of 1934, as amended, at a time when
the Depositary is required to be so registered to act as such depositary, (ii)
the Company in its sole discretion determines that such global security shall be
so exchangeable or (iii) there shall have occurred and be continuing an Event of
Default under the Indenture with respect to such global security. Any global
security that is exchangeable pursuant to the preceding sentence shall be
exchangeable for definitive certificates registered in such names as the
Depositary shall direct. It is expected that such instructions will be based
upon directions received by the Depositary from its Participants with respect to
ownership of beneficial interests in such global security. In the event that
Subordinated Debentures are issued in definitive form, such Subordinated
Debentures will be in denominations of $25 and integral multiples thereof and
may be transferred or exchanged at the offices described below.
Payments on Subordinated Debentures represented by a global security will
be made to the Depositary, as the depositary for the Subordinated Debentures. In
the event Subordinated Debentures are issued in definitive form, principal and
interest will be payable, the transfer of the Subordinated Debentures will be
registrable, and Subordinated Debentures will be exchangeable for Subordinated
Debentures of other denominations of a like aggregate principal amount, at the
corporate office of the Debenture Trustee in Boston, Massachusetts, or at the
offices of any paying agent or transfer agent appointed by the Company (the
"Place of Payment"), provided that payment of interest may be made at the option
of the Company by check mailed to the address of the persons entitled thereto or
by wire transfer. In addition, if the Subordinated Debentures are issued in
certificated form, the record dates for payment of interest will be the 15th day
of the last month of each calendar quarter. For a description of the Depositary
and the terms of the depositary arrangements relating to payments, transfers,
voting rights, redemptions and other notices and other matters, see "Book-Entry
Issuance."
The Company will appoint the Debenture Trustee as securities registrar
under the Indenture (the "Securities Registrar"). Subordinated Debentures may be
presented for exchange as provided above, and may be presented for registration
of transfer (with the form of transfer endorsed thereon, or a satisfactory
written instrument of transfer, duly executed), at the office of the Securities
Registrar. The Company may at any time rescind the designation of any such
transfer agent or approve a change in the location through which any such
transfer agent acts, provided that the Company maintains a transfer agent in the
Place of Payment. The Company may at any time designate additional transfer
agents with respect to the Subordinated Debentures.
In the event of any redemption, neither the Company nor the Debenture
Trustee shall be required to (i) issue, register the transfer of or exchange
Subordinated Debentures during a period beginning at the opening of business 15
days before the day of selection for redemption of Subordinated Debentures and
ending at the close of business on the day of mailing of the relevant notice of
redemption or (ii) transfer or exchange any Subordinated Debentures so selected
for redemption, except, in the case of any Subordinated Debentures being
redeemed in part, any portion thereof not to be redeemed.
GLOBAL SUBORDINATED DEBENTURES
Upon the issuance of the Global Subordinated Debenture, and the deposit of
such Global Subordinated Debenture with or on behalf of the Depositary, the
Depositary for such Global Subordinated Debenture or its nominee will credit, on
its book-entry registration and transfer system, the respective principal
amounts of the individual Subordinated Debentures represented by such Global
Subordinated Debenture to the accounts of persons that have accounts with such
Depositary ("Participants"). Ownership of beneficial interests in a Global
Subordinated Debenture will be limited to Participants or persons that may hold
interests through Participants. Ownership of beneficial interests in such Global
Subordinated Debenture will be shown on, and the transfer of that ownership will
be effected only through, records maintained by the applicable Depositary or its
nominee (with respect to interests of Participants) and the records of
Participants (with respect to interests of persons who hold through
Participants). The laws of some states require that certain purchasers of
securities take physical delivery of such securities in definitive form. Such
limits and such laws may impair the ability to transfer beneficial interests in
a Global Subordinated Debenture.
So long as the Depositary for a Global Subordinated Debenture, or its
nominee, is the registered owner of such Global Subordinated Debenture, such
Depositary or such nominee, as the case may be, will be
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considered the sole owner or holder of the Subordinated Debentures represented
by such Global Subordinated Debenture for all purposes under the Indenture
governing such Subordinated Debentures. Except as provided below, owners of
beneficial interests in a Global Subordinated Debenture will not be entitled to
have any of the individual Subordinated Debentures represented by such Global
Subordinated Debenture registered in their names, will not receive or be
entitled to receive physical delivery of any such Subordinated Debentures in
definitive form and will not be considered the owners or holders thereof under
the Indenture.
Payments of principal of and interest on individual Subordinated Debentures
represented by a Global Subordinated Debenture registered in the name of the
Depositary or its nominee will be made to the Depositary or its nominee, as the
case may be, as the registered owner of the Global Subordinated Debenture
representing such Subordinated Debentures. None of the Company, the Debenture
Trustee, any Paying Agent, or the Securities Registrar for such Subordinated
Debentures will have any responsibility or liability for any aspect of the
records relating to or payments made on account of beneficial ownership
interests of the Global Subordinated Debenture representing such Subordinated
Debentures or for maintaining, supervising or reviewing any records relating to
such beneficial ownership interests.
The Company expects that the Depositary or its nominee, upon receipt of any
payment of principal, premium or interest in respect of a permanent Global
Subordinated Debenture representing the Subordinated Debentures, immediately
will credit Participants' accounts with payments in amounts proportionate to
their respective beneficial interest in the principal amount of the Global
Subordinated Debenture as shown on the records of such Depositary or its
nominee. The Company also expects that payments by Participants to owners of
beneficial interests in such Global Subordinated Debenture held through such
Participants will be governed by standing instructions and customary practices,
as is now the case with securities held for the accounts of customers in bearer
form or registered in "street name." Such payments will be the responsibility of
such Participants.
If the Depositary is at any time unwilling, unable or ineligible to
continue as depositary and a successor depositary is not appointed by the
Company within 90 days, the Company will issue individual Subordinated
Debentures in exchange for the Global Subordinated Debenture. In addition, the
Company may at any time and in its sole discretion, determine not to have the
Subordinated Debentures represented by one or more Global Subordinated
Debentures and, in such event, will issue individual Subordinated Debentures in
exchange for the Global Subordinated Debenture. Further, if the Company so
specifies with respect to the Subordinated Debentures, an owner of a beneficial
interest in a Global Subordinated Debenture representing Subordinated Debentures
may, on terms acceptable to the Company, the Debenture Trustee and the
Depositary for such Global Subordinated Debenture, receive individual
Subordinated Debentures in exchange for such beneficial interests. In any such
instance, an owner of a beneficial interest in a Global Subordinated Debenture
will be entitled to physical delivery of individual Subordinated Debentures
equal in principal amount to such beneficial interest and to have such
Subordinated Debentures registered in its name. Individual Subordinated
Debentures so issued will be issued in denominations, unless otherwise specified
by the Company, of $25 and integral multiples thereof.
PAYMENT AND PAYING AGENTS
Payment of principal of and any interest on the Subordinated Debentures
will be made at the office of the Debenture Trustee in the City of Boston,
Massachusetts, except that at the option of the Company payment of any interest
may be made (i) except in the case of Global Subordinated Debentures, by check
mailed to the address of the person entitled thereto as such address shall
appear in the securities register or (ii) by transfer to an account maintained
by the person entitled thereto as specified in the securities register, provided
that proper transfer instructions have been received by the regular record date.
Payment of any interest on Subordinated Debentures will be made to the person in
whose name such Subordinated Debenture is registered at the close of business on
the regular record date for such interest, except in the case of Defaulted
Interest. The Company may at any time designate additional Paying Agents or
rescind the designation of any Paying Agent; however the Company will at all
times be required to maintain a Paying Agent in each Place of Payment for the
Subordinated Debentures.
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Any moneys deposited with the Debenture Trustee or any Paying Agent, or
then held by the Company in trust, for the payment of the principal of or
interest on the Subordinated Debentures and remaining unclaimed for two years
after such principal or interest has become due and payable shall, at the
request of the Company, be repaid to the Company and the holder of such
Subordinated Debenture shall thereafter look, as a general unsecured creditor,
only to the Company for payment thereof.
MODIFICATION OF INDENTURE
From time to time the Company and the Debenture Trustee may, without the
consent of the holders of the Subordinated Debentures, amend, waive or
supplement the Indenture for specified purposes, including, among other things,
curing ambiguities, defects or inconsistencies (provided that any such action
does not materially adversely affect the interests of the holders of the
Subordinated Debentures or the Preferred Securities so long as they remain
outstanding) and qualifying, or maintaining the qualification of, the Indenture
under the Trust Indenture Act. The Indenture contains provisions permitting the
Company and the Debenture Trustee, with the consent of the holders of not less
than a majority in principal amount of the outstanding Subordinated Debentures,
to modify the Indenture in a manner affecting the rights of the holders of the
Subordinated Debentures; provided, that no such modification may, without the
consent of the holder of each outstanding Subordinated Debenture, (i) change the
Stated Maturity of the Subordinated Debentures, or reduce the principal amount
thereof, or reduce the rate or extend the time of payment of interest thereon or
(ii) reduce the percentage of principal amount of Subordinated Debentures, the
holders of which are required to consent to any such modification of the
Indenture, provided that so long as any of the Preferred Securities remain
outstanding, no such modification may be made that adversely affects the holders
of such Preferred Securities in any material respect, and no termination of the
Indenture may occur, and no waiver of any Debenture Event of Default or
compliance with any covenant under the Indenture may be effective, without the
prior consent of the holders of at least a majority of the aggregate Liquidation
Amount of the Preferred Securities unless and until the principal of the
Subordinated Debentures and all accrued and unpaid interest thereon have been
paid in full and certain other conditions are satisfied.
DEBENTURE EVENTS OF DEFAULT
The Indenture provides that any one or more of the following described
events with respect to the Subordinated Debentures that has occurred and is
continuing constitutes a "Debenture Event of Default" with respect to the
Subordinated Debentures:
(i) failure for 30 days to pay any interest on the Subordinated
Debentures, when due (subject to the deferral of any due date in the case
of an Extension Period); or
(ii) failure to pay any principal on the Subordinated Debentures when
due whether at maturity, upon redemption by declaration or otherwise; or
(iii) failure to observe or perform in any material respect certain
other covenants contained in the Indenture for 90 days after written notice
to the Company from the Debenture Trustee or the holders of at least 25% in
aggregate outstanding principal amount of the Subordinated Debentures; or
(iv) certain events in bankruptcy, insolvency or reorganization of the
Company.
The holders of a majority in aggregate outstanding principal amount of the
Subordinated Debentures have the right to direct the time, method and place of
conducting any proceeding for any remedy available to the Debenture Trustee. The
Debenture Trustee or the holders of not less than 25% in aggregate outstanding
principal amount of the Subordinated Debentures may declare the principal due
and payable immediately upon a Debenture Event of Default. The holders of a
majority in aggregate outstanding principal amount of the Subordinated
Debentures may annul such declaration and waive the default if the default
(other than the non-payment of the principal of the Subordinated Debentures
which has become due solely by such acceleration) has been cured and a sum
sufficient to pay all matured installments of interest and principal due
otherwise than by acceleration has been deposited with the Debenture Trustee.
Should the holders of the
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Subordinated Debentures fail to annul such declaration and waive such default,
the holders of a majority in aggregate Liquidation Amount of the Preferred
Securities shall have such right.
The Company is required to file annually with the Debenture Trustee a
certificate as to whether or not the Company is in compliance with all the
conditions and covenants applicable to it under the Indenture.
In case a Debenture Event of Default shall occur and be continuing as to
the Subordinated Debentures, the Property Trustee will have the right to declare
the principal of and the interest on such Subordinated Debentures, and any other
amounts payable under the Indenture, to be forthwith due and payable and to
enforce its other rights as a creditor with respect to such Subordinated
Debentures.
ENFORCEMENT OF CERTAIN RIGHTS BY HOLDERS OF PREFERRED SECURITIES
If a Debenture Event of Default has occurred and is continuing and such
event is attributable to the failure of the Company to pay interest or principal
on the Subordinated Debentures on the date such interest or principal is
otherwise payable, a holder of Preferred Securities may institute a legal
proceeding directly against the Company for enforcement of payment to such
holder of the principal of or interest on such Subordinated Debentures having a
principal amount equal to the aggregate Liquidation Amount of the Preferred
Securities of such holder ("Direct Action"). The Company may not amend the
Indenture to remove the foregoing right to bring a Direct Action without the
prior written consent of the holders of all of the Preferred Securities. If the
right to bring a Direct Action is removed, IBC Capital may become subject to the
reporting obligations under the Securities Exchange Act of 1934, as amended. The
Company shall have the right under the Indenture to set-off any payment made to
such holder of Preferred Securities by the Company in connection with a Direct
Action.
The holders of the Preferred Securities would not be able to exercise
directly any remedies other than those set forth in the preceding paragraph
available to the holders of the Subordinated Debentures unless there shall have
been an Event of Default under the Trust Agreement. See "Description of
Preferred Securities -- Events of Default; Notice."
CONSOLIDATION, MERGER, SALE OF ASSETS AND OTHER TRANSACTIONS
The Indenture provides that the Company shall not consolidate with or merge
into any other Person or convey, transfer or lease its properties and assets
substantially as an entirety to any Person, and no Person shall consolidate with
or merge into the Company or convey, transfer or lease its properties and assets
substantially as an entirety to the Company, unless (i) in case the Company
consolidates with or merges into another Person or conveys or transfers its
properties and assets substantially as an entirety to any Person, the successor
Person is organized under the laws of the United States or any state or the
District of Columbia, and such successor Person expressly assumes the Company's
obligations on the Subordinated Debentures issued under the Indenture; (ii)
immediately after giving effect thereto, no Debenture Event of Default, and no
event which, after notice or lapse of time or both, would become a Debenture
Event of Default, shall have occurred and be continuing; and (iii) certain other
conditions as prescribed in the Indenture are met.
The general provisions of the Indenture do not afford holders of the
Subordinated Debentures protection in the event of a highly leveraged or other
transaction involving the Company that may adversely affect holders of the
Subordinated Debentures.
SATISFACTION AND DISCHARGE
The Indenture provides that when, among other things, all Subordinated
Debentures not previously delivered to the Debenture Trustee for cancellation
(i) have become due and payable or (ii) will become due and payable at their
Stated Maturity within one year, and the Company deposits or causes to be
deposited with the Debenture Trustee trust funds, in trust, for the purpose and
in an amount in the currency or currencies in which the Subordinated Debentures
are payable sufficient to pay and discharge the entire indebtedness on the
Subordinated Debentures not previously delivered to the Debenture Trustee for
cancellation, for the principal and interest to the date of the deposit or to
the Stated Maturity, as the case may
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be, then the Indenture will cease to be of further effect (except as to the
Company's obligations to pay all other sums due pursuant to the Indenture and to
provide the officers' certificates and opinions of counsel described therein),
and the Company will be deemed to have satisfied and discharged the Indenture.
GOVERNING LAW
The Indenture and the Subordinated Debentures will be governed by and
construed in accordance with the laws of the State of Michigan.
INFORMATION CONCERNING THE DEBENTURE TRUSTEE
The Debenture Trustee shall have and be subject to all the duties and
responsibilities specified with respect to an indenture trustee under the Trust
Indenture Act. Subject to such provisions, the Debenture Trustee is under no
obligation to exercise any of the powers vested in it by the Indenture at the
request of any holder of Subordinated Debentures, unless offered reasonable
indemnity by such holder against the costs, expenses and liabilities which might
be incurred thereby. The Debenture Trustee is not required to expend or risk its
own funds or otherwise incur personal financial liability in the performance of
its duties if the Debenture Trustee reasonably believes that repayment or
adequate indemnity is not reasonably assured to it.
The Company will covenant in the Indenture, as to the Subordinated
Debentures, that if and so long as (i) IBC Capital is the holder of all such
Subordinated Debentures, (ii) a Tax Event in respect of IBC Capital has occurred
and is continuing and (iii) the Company has elected, and has not revoked such
election, to pay Additional Sums (as defined under "Description of Preferred
Securities -- Redemption or Exchange") in respect of the Preferred Securities,
the Company will pay to IBC Capital such Additional Sums. The Company will also
covenant, as to the Subordinated Debentures, (i) to maintain directly or
indirectly 100% ownership of the Common Securities of IBC Capital to which
Subordinated Debentures have been issued, provided that certain successors which
are permitted pursuant to the Indenture may succeed to the Company's ownership
of the Common Securities, (ii) not to voluntarily terminate, wind up or
liquidate IBC Capital, except upon prior approval of the Federal Reserve if then
so required under applicable capital guidelines or policies of the Federal
Reserve, and (a) in connection with a distribution of Subordinated Debentures to
the holders of the Preferred Securities in liquidation of IBC Capital, or (b) in
connection with certain mergers, consolidations or amalgamations permitted by
the related Trust Agreement and (iii) to use its reasonable efforts, consistent
with the terms and provisions of the related Trust Agreement, to cause IBC
Capital to remain classified as a grantor trust and not as an association
taxable as a corporation for United States federal income tax purposes.
BOOK-ENTRY ISSUANCE
The Depositary will act as securities depositary for all of the Preferred
Securities and the Subordinated Debentures. The Preferred Securities and the
Subordinated Debentures will be issued only as fully-registered securities
registered in the name of Cede & Co. (the Depositary's nominee). One or more
fully-registered global certificates will be issued for the Preferred Securities
and the Subordinated Debentures and will be deposited with the Depositary.
The Depositary is a limited purpose trust company organized under the New
York Banking Law, a "banking organization" within the meaning of the New York
Banking Law, a member of the Federal Reserve System, a "clearing corporation"
within the meaning of the New York Uniform Commercial Code, and a "clearing
agency" registered pursuant to the provisions of Section 17A of the Exchange
Act. The Depositary holds securities that its Participants deposit with the
Depositary. The Depositary also facilitates the settlement among Participants of
securities transactions, such as transfers and pledges, in deposited securities
through electronic computerized book-entry changes in Participants' accounts,
thereby eliminating the need for physical movement of securities certificates.
"Direct Participants" include securities brokers and dealers, banks, trust
companies, clearing corporations and certain other organizations. The Depositary
is owned by a number of its Direct Participants and by the New York Stock
Exchange, Inc., the American Stock Exchange, Inc. and the National Association
of Securities Dealers, Inc. Access to the the Depositary system is also
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available to others such as securities brokers and dealers, banks and trust
companies that clear through or maintain custodial relationships with Direct
Participants, either directly or indirectly ("Indirect Participants"). The rules
applicable to the Depositary and its Participants are on file with the
Commission.
Purchases of Preferred Securities or Subordinated Debentures within the
Depositary system must be made by or through Direct Participants, which will
receive a credit for the Preferred Securities or Subordinated Debentures on the
Depositary's records. The ownership interest of each actual purchaser of each
Preferred Security and each Subordinated Debenture ("Beneficial Owner") is in
turn to be recorded on the Direct and Indirect Participants' records. Beneficial
Owners will not receive written confirmation from the Depositary of their
purchases, but Beneficial Owners are expected to receive written confirmations
providing details of the transactions, as well as periodic statements of their
holdings, from the Direct or Indirect Participants through which the Beneficial
Owners purchased Preferred Securities or Subordinated Debentures. Transfers of
ownership interests in the Preferred Securities or Subordinated Debentures are
to be accomplished by entries made on the books of Participants acting on behalf
of Beneficial Owners. Beneficial Owners will not receive certificates
representing their ownership interests in Preferred Securities or Subordinated
Debentures, except in the event that use of the book-entry system for the
Preferred Securities of IBC Capital or Subordinated Debentures is discontinued.
The Depositary has no knowledge of the actual Beneficial Owners of the
Preferred Securities or Subordinated Debentures; the Depositary's records
reflect only the identity of the Direct Participants to whose accounts such
Preferred Securities or Subordinated Debentures are credited, which may or may
not be the Beneficial Owners. The Participants will remain responsible for
keeping account of their holdings on behalf of their customers.
Conveyance of notices and other communications by the Depositary to Direct
Participants, by Direct Participants to Indirect Participants, and by Direct
Participants and Indirect Participants to Beneficial Owners and the voting
rights of Direct Participants, Indirect Participants and Beneficial Owners will
be governed by arrangements among them, subject to any statutory or regulatory
requirements as may be in effect from time to time.
Redemption notices will be sent to Cede & Co. as the registered holder of
the Preferred Securities or Subordinated Debentures. If less than all of the
Preferred Securities or the Subordinated Debentures are being redeemed, the
Depositary will determine by lot or pro rata the amount of the Preferred
Securities of each Direct Participant to be redeemed.
Although voting with respect to the Preferred Securities or the
Subordinated Debentures is limited to the holders of record of the Preferred
Securities or Subordinated Debentures, in those instances in which a vote is
required, neither the Depositary nor Cede & Co. will itself consent or vote with
respect to Preferred Securities or Subordinated Debentures. Under its usual
procedures, the Depositary would mail an omnibus proxy (the "Omnibus Proxy") to
the relevant Trustee as soon as possible after the record date. The Omnibus
Proxy assigns Cede & Co.'s consenting or voting rights to those Direct
Participants to whose accounts such Preferred Securities or Subordinated
Debentures are credited on the record date (identified in a listing attached to
the Omnibus Proxy).
Distribution payments on the Preferred Securities or the Subordinated
Debentures will be made by the relevant Trustee to the Depositary. The
Depositary's practice is to credit Direct Participants' accounts on the relevant
payment date in accordance with their respective holdings shown on the
Depositary's records unless the Depositary has reason to believe that it will
not receive payments on such payment date. Payments by Participants to
Beneficial Owners will be governed by standing instructions and customary
practices and will be the responsibility of such Participant and not of the
Depositary, the relevant Trustee, IBC Capital or the Company, subject to any
statutory or regulatory requirements as may be in effect from time to time.
Payment of Distributions to the Depositary is the responsibility of the relevant
Trustee, disbursement of such payments to Direct Participants is the
responsibility of the Depositary, and disbursements of such payments to the
Beneficial Owners is the responsibility of Direct and Indirect Participants.
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The Depositary may discontinue providing its services as securities
depositary with respect to any of the Preferred Securities or the Subordinated
Debentures at any time by giving reasonable notice to the relevant Trustee and
the Company. In the event that a successor securities depositary is not
obtained, definitive Preferred Security or Subordinated Debenture certificates
representing such Preferred Securities or Subordinated Debentures are required
to be printed and delivered. The Company, at its option, may decide to
discontinue use of the system of book-entry transfers through the Depositary (or
a successor depositary). After a Debenture Event of Default, the holders of a
majority in liquidation preference of Preferred Securities or aggregate
principal amount of Subordinated Debentures may determine to discontinue the
system of book-entry transfers through the Depositary. In any such event,
definitive certificates for such Preferred Securities or Subordinated Debentures
will be printed and delivered.
The information in this section concerning the Depositary and the
Depositary's book-entry system has been obtained from sources that IBC Capital
and the Company believe to be accurate, but IBC Capital and the Company assume
no responsibility for the accuracy thereof. Neither IBC Capital nor the Company
has any responsibility for the performance by the Depositary or its Participants
of their respective obligations as described herein or under the rules and
procedures governing their respective operations.
DESCRIPTION OF GUARANTEE
The Preferred Securities Guarantee Agreement (the "Guarantee") will be
executed and delivered by the Company concurrently with the issuance of the
Preferred Securities for the benefit of the holders of the Preferred Securities.
State Street Bank and Trust Company will act as indenture trustee ("Guarantee
Trustee") under the Guarantee for the purposes of compliance with the Trust
Indenture Act, and the Guarantee will be qualified as an Indenture under the
Trust Indenture Act. The following summary of the material terms and provisions
of the Guarantee does not purport to be complete and is subject to, and
qualified in its entirety by reference to, all of the provisions of the
Guarantee Agreement, including the definitions therein of certain terms, and the
Trust Indenture Act. The form of the Guarantee has been filed as an exhibit to
the Registration Statement of which this Prospectus forms a part. The Guarantee
Trustee will hold the Guarantee for the benefit of the holders of the Preferred
Securities.
GENERAL
The Guarantee will be an irrevocable guarantee on a subordinated basis of
IBC Capital's obligations under the Preferred Securities, but will apply only to
the extent that IBC Capital has funds sufficient to make such payments, and is
not a guarantee of collection.
The Company will irrevocably agree to pay in full on a subordinated basis,
to the extent set forth herein, the Guarantee Payments (as defined below) to the
holders of the Preferred Securities, as and when due, regardless of any defense,
right of set-off or counterclaim that IBC Capital may have or assert other than
the defense of payment. The following payments with respect to the Preferred
Securities, to the extent not paid by or on behalf of IBC Capital (the
"Guarantee Payments"), will be subject to the Guarantee: (i) any accumulated and
unpaid Distributions required to be paid on the Preferred Securities, to the
extent that IBC Capital has funds on hand available therefor at such time, (ii)
the Redemption Price with respect to any Preferred Securities called for
redemption to the extent that IBC Capital has funds on hand available therefor
at such time, and (iii) upon a voluntary or involuntary dissolution, winding up
or liquidation of IBC Capital (unless the Subordinated Debentures are
distributed to holders of the Preferred Securities), the lesser of (a) the
Liquidation Distribution and (b) the amount of assets of IBC Capital remaining
available for distribution to holders of Preferred Securities. The Company's
obligation to make a Guarantee Payment may be satisfied by direct payment of the
required amounts by the Company to the holders of the Preferred Securities or by
causing IBC Capital to pay such amounts to such holders. Third party creditors
of IBC Capital may proceed directly against the Company under the Expense
Agreement, regardless of whether such creditors had notice of the Expense
Agreement.
If the Company does not make interest payments on the Subordinated
Debentures held by IBC Capital, IBC Capital will not be able to pay
Distributions on the Preferred Securities and will not have funds legally
available therefor. The Guarantee will rank subordinate and junior in right of
payment to all Senior Debt, Subordinated Debt, and, under certain circumstances,
Additional Senior Obligations of the Company. See
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"-- Status of the Guarantee." Because the Company is a holding company, the
right of the Company to participate in any distribution of assets of any
subsidiary upon such subsidiary's liquidation or reorganization or otherwise, is
subject to the prior claims of creditors of that subsidiary, except to the
extent the Company may itself be recognized as a creditor of that subsidiary.
Accordingly, the Company's obligations under the Guarantee will be effectively
subordinated to all existing and future liabilities of the Company's
subsidiaries, and claimants should look only to the assets of the Company for
payments thereunder. Except as otherwise described herein, the Guarantee does
not limit the incurrence or issuance of other secured or unsecured debt of the
Company, including Senior Debt, whether under the Indenture, any other indenture
that the Company may enter into in the future, or otherwise.
The Company has, through the Guarantee, the Trust Agreement, the
Subordinated Debentures, the Indenture and the Expense Agreement, taken
together, fully, irrevocably and unconditionally guaranteed all of IBC Capital's
obligations under the Preferred Securities. No single document standing alone or
operating in conjunction with fewer than all of the other documents constitutes
such guarantee. It is only the combined operation of these documents that has
the effect of providing a full, irrevocable and unconditional guarantee of IBC
Capital's obligations under the Preferred Securities. See "Relationship Among
the Preferred Securities, the Subordinated Debentures and the Guarantee."
STATUS OF THE GUARANTEE
The Guarantee will constitute an unsecured obligation of the Company and
will rank subordinate and junior in right of payment to all Senior Debt,
Subordinated Debt and, under certain circumstances, Additional Senior
Obligations of the Company in the same manner as the Subordinated Debentures.
The Guarantee will constitute a guarantee of payment and not of collection.
For example, the guaranteed party may institute a legal proceeding directly
against the Company to enforce its rights under the Guarantee without first
instituting a legal proceeding against any other person or entity. The Guarantee
will be held for the benefit of the holders of the related Preferred Securities.
The Guarantee will not be discharged except by payment of the Guarantee Payments
in full to the extent not paid by IBC Capital or upon distribution of the
Subordinated Debentures to the holders of the Preferred Securities. The
Guarantee does not place a limitation on the amount of additional Senior Debt,
Subordinated Debt or Additional Senior Obligations that may be incurred by the
Company. The Company expects from time to time to incur additional indebtedness
constituting Senior Debt, Subordinated Debt and Additional Senior Obligations.
AMENDMENTS AND ASSIGNMENT
Except with respect to any changes which do not materially adversely affect
the rights of holders of the related Preferred Securities (in which case no vote
will be required), the Guarantee may not be amended without the prior approval
of the holders of not less than a majority of the aggregate Liquidation Amount
of such outstanding Preferred Securities. See "Description of Preferred
Securities -- Voting Rights; Amendment of Trust Agreement." All guarantees and
agreements contained in the Guarantee shall bind the successors, assigns,
receivers, trustees and representatives of the Company and shall inure to the
benefit of the holders of the Preferred Securities then outstanding.
EVENTS OF DEFAULT
An event of default under the Guarantee will occur upon the failure of the
Company to perform any of its payment or other obligations thereunder. The
holders of not less than a majority in aggregate Liquidation Amount of the
Preferred Securities have the right to direct the time, method and place of
conducting any proceeding for any remedy available to the Guarantee Trustee in
respect of the Guarantee or to direct the exercise of any trust or power
conferred upon the Guarantee Trustee under the Guarantee.
Any holder of Preferred Securities may institute a legal proceeding
directly against the Company to enforce its rights under the Guarantee without
first instituting a legal proceeding against IBC Capital, the Guarantee Trustee
or any other person or entity.
The Company, as guarantor, is required to file annually with the Guarantee
Trustee a certificate as to whether or not the Company is in compliance with all
the conditions and covenants applicable to it under the Guarantee.
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INFORMATION CONCERNING THE GUARANTEE TRUSTEE
The Guarantee Trustee, other than during the occurrence and continuance of
a default by the Company in performance of the Guarantee, undertakes to perform
only such duties as are specifically set forth in the Guarantee and, after
default with respect to any Guarantee, must exercise the same degree of care and
skill as a prudent person would exercise or use in the conduct of his or her own
affairs. Subject to this provision, the Guarantee Trustee is under no obligation
to exercise any of the powers vested in it by the Guarantee at the request of
any holder of any Preferred Securities unless it is offered reasonable indemnity
against the costs, expenses and liabilities that might be incurred thereby.
TERMINATION OF THE GUARANTEE
The Guarantee will terminate and be of no further force and effect upon
full payment of the Redemption Price of the Preferred Securities, upon full
payment of the amounts payable upon liquidation of IBC Capital or upon
distribution of the Subordinated Debentures to the holders of the Preferred
Securities. The Guarantee will continue to be effective or will be reinstated,
as the case may be, if at any time any holder of the Preferred Securities must
restore payment of any sums paid under such Preferred Securities or the
Guarantee.
GOVERNING LAW
The Guarantee will be governed by and construed in accordance with the laws
of the State of Michigan.
THE EXPENSE AGREEMENT
Pursuant to the Expense Agreement entered into by the Company under the
Trust Agreement (the "Expense Agreement"), the Company will irrevocably and
unconditionally guarantee to each person or entity to whom IBC Capital becomes
indebted or liable, the full payment of any costs, expenses or liabilities of
IBC Capital, other than obligations of IBC Capital to pay to the holders of the
Preferred Securities or other similar interests in IBC Capital of the amounts
due such holders pursuant to the terms of the Preferred Securities or such other
similar interests, as the case may be.
RELATIONSHIP AMONG THE PREFERRED SECURITIES,
THE SUBORDINATED DEBENTURES
AND THE GUARANTEE
FULL AND UNCONDITIONAL GUARANTEE
Payments of Distributions and other amounts due on the Preferred Securities
(to the extent IBC Capital has funds available for the payment of such
Distributions) are irrevocably guaranteed by the Company as and to the extent
set forth under "Description of Guarantee." The Company and IBC Capital believe
that, taken together, the Company's obligations under the Subordinated
Debentures, the Indenture, the Trust Agreement, the Expense Agreement, and the
Guarantee provide, in the aggregate, a full, irrevocable and unconditional
guarantee of payment of distributions and other amounts due on the Preferred
Securities. No single document standing alone or operating in conjunction with
fewer than all of the other documents constitutes such guarantee. It is only the
combined operation of these documents that has the effect of providing a full,
irrevocable and unconditional guarantee of IBC Capital's obligations under the
Preferred Securities. If and to the extent that the Company does not make
payments on the Subordinated Debentures, IBC Capital will not pay Distributions
or other amounts due on the Preferred Securities. The Guarantee does not cover
payment of Distributions when IBC Capital does not have sufficient funds to pay
such Distributions. In such event, the remedy of a holder of Preferred
Securities is to institute a legal proceeding directly against the Company for
enforcement of payment of such Distributions to such holder. The obligations of
the Company under the Guarantee are subordinate and junior in right of payment
to all Senior Debt, Subordinated Debt and, under certain circumstances,
Additional Senior Obligations of the Company.
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SUFFICIENCY OF PAYMENTS
As long as payments of interest and other payments are made when due on the
Subordinated Debentures, such payments will be sufficient to cover Distributions
and other payments due on the Preferred Securities, primarily because (i) the
aggregate principal amount of the Subordinated Debentures will be equal to the
sum of the aggregate stated Liquidation Amount of the Preferred Securities and
Common Securities; (ii) the interest rate and interest and other payment dates
on the Subordinated Debentures will match the Distribution rate and Distribution
and other payment dates for the Preferred Securities; (iii) the Company shall
pay for all and any costs, expenses and liabilities of IBC Capital except IBC
Capital's obligations to holders of the Preferred Securities; and (iv) the Trust
Agreement further provides that IBC Capital will not engage in any activity that
is not consistent with the limited purposes of IBC Capital.
Notwithstanding anything to the contrary in the Indenture, the Company has
the right to set-off any payment it is otherwise required to make thereunder
with and to the extent the Company has theretofore made, or is concurrently on
the date of such payment making, a payment under the Guarantee.
ENFORCEMENT RIGHTS OF HOLDERS OF PREFERRED SECURITIES
A holder of any Preferred Security may institute a legal proceeding
directly against the Company to enforce its rights under the Guarantee without
first instituting a legal proceeding against the Guarantee Trustee, IBC Capital
or any other person or entity.
A default or event of default under any Senior Debt, Subordinated Debt or
Additional Senior Obligations of the Company would not constitute a default or
Event of Default. However, in the event of payment defaults under, or
acceleration of, Senior Debt, Subordinated Debt or Additional Senior Obligations
of the Company, the subordination provisions of the Indenture provide that no
payments may be made in respect of the Subordinated Debentures until such Senior
Debt, Subordinated Debt or Additional Senior Obligations has been paid in full
or any payment default thereunder has been cured or waived. Failure to make
required payments on the Subordinated Debentures would constitute an Event of
Default.
LIMITED PURPOSE OF IBC CAPITAL
The Preferred Securities evidence a beneficial interest in IBC Capital, and
IBC Capital exists for the sole purpose of issuing its Preferred Securities and
Common Securities and investing the proceeds thereof in Subordinated Debentures.
A principal difference between the rights of a holder of a Preferred Security
and a holder of a Subordinated Debenture is that a holder of a Subordinated
Debenture is entitled to receive from the Company the principal amount of and
interest accrued on Subordinated Debentures held, while a holder of Preferred
Securities is entitled to receive Distributions from IBC Capital (or from the
Company under the Guarantee) if and to the extent IBC Capital has funds
available for the payment of such Distributions.
RIGHTS UPON TERMINATION
Upon any voluntary or involuntary termination, winding-up or liquidation of
IBC Capital involving the liquidation of the Subordinated Debentures, the
holders of the Preferred Securities will be entitled to receive, out of assets
held by IBC Capital, the Liquidation Distribution in cash. See "Description of
Preferred Securities -- Liquidation Distribution Upon Termination." Upon any
voluntary or involuntary liquidation or bankruptcy of the Company, the Property
Trustee, as holder of the Subordinated Debentures, would be a subordinated
creditor of the Company, subordinated in right of payment to all Senior Debt,
Subordinated Debt and Additional Senior Obligations as set forth in the
Indenture, but entitled to receive payment in full of principal and interest
before any stockholders of the Company receive payments or distributions. Since
the Company is the guarantor under the Guarantee and has agreed to pay for all
costs, expenses and liabilities of IBC Capital (other than IBC Capital's
obligations to the holders of its Preferred Securities), the positions of a
holder of the Preferred Securities and a holder of the Subordinated Debentures
relative to other creditors and to stockholders of the Company in the event of
liquidation or bankruptcy of the Company are expected to be substantially the
same.
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DESCRIPTION OF CAPITAL STOCK
The Company's authorized capital stock consists of 200,000 shares of
preferred stock, none of which are outstanding, and 14,000,000 shares of Common
Stock, 2,861,399 of which were outstanding as of September 30, 1996. The
following is a description of the Company's capital stock.
COMMON STOCK
Subject to the rights, if any, of holders of any of the Company's preferred
stock then outstanding, all voting rights are vested in holders of shares of
Common Stock. Each share of Common Stock entitles the holder thereof to one
vote. Holders of shares of Common Stock are not entitled to cumulative voting
rights and have no preemptive right to subscribe for additional securities
issuable by the Company.
Subject to any prior rights of holders of preferred stock then outstanding,
holders of the Company's Common Stock are entitled to receive dividends as the
Board of Directors may from time to time declare out of funds legally available
for that purpose. In the event of the liquidation, dissolution or winding up of
the Company, holders of Common Stock are entitled to share pro rata in the
assets available for distribution to holders of Common Stock. The outstanding
shares of Common Stock are fully paid and non-assessable. The Company's transfer
agent is State Street Bank & Trust Company.
PREFERRED STOCK
The Board of Directors of the Company is authorized to issue shares of
preferred stock in series and affix the particular designations and terms of
those shares, including dividend rates, conversion prices, voting rights,
redemption prices and other matters, without further approval of the Company's
shareholders. No series of preferred stock is currently designated by the Board.
GENERAL
The Company's Articles of Incorporation and the Michigan Business
Corporation Act contain provisions which could be utilized by the Company to
impede any efforts to acquire control of the Company, namely:
Classified Board of Directors. The Company's Articles of Incorporation
provide for the division of the Board of Directors into three classes with
staggered three-year terms of office. Accordingly, because a person considering
the acquisition of voting control of the Company could not necessarily obtain
majority control of the Board of Directors until the second annual meeting of
the Company's shareholders following the acquisition of voting control, such a
person might be dissuaded from seeking to obtain voting control of the Company.
Michigan Fair Price Provisions. Chapter 7A of the Michigan Business
Corporation Act impacts certain business combinations involving Michigan
corporations such as the Company. Except in cases in which certain minimum
price, form of consideration, and procedural requirements are satisfied or for
certain transactions that may be approved in advance by the Company's Board of
Directors, higher than normal voting requirements are imposed with respect to
various transactions involving persons who own 10% or more of the Company's
voting stock (referred to as "Interested Shareholders"). Transactions to which
the higher voting requirements apply require an advisory statement from the
Board of Directors and must be approved by not less than 90% of the votes of
each class of stock entitled to vote and by not less than two-thirds of the
votes, other than the votes of Interested Shareholders who are (or whose
affiliates are) a party to the proposed transaction or an affiliate of the
Interested Shareholders, of each class entitled to vote.
Michigan Shareholder Equity Provisions. Chapter 7B of the Michigan Business
Corporation Act affects the voting rights of persons who acquire more than 20%,
33 1/3%, or 50% of a Michigan corporation's voting stock (referred to as
"Control Shares"). Chapter 7B denies shareholder voting rights to those persons
or entities who make purchase offers or investors who increase their holdings
above any of the Control Share levels, unless they are granted voting rights by
a majority vote of all disinterested shareholders (shareholders excluding the
bidders or owners of Control Shares and the corporation's management). If the
shareholders do not elect to grant voting rights to Control Shares, under
certain circumstances, the Control Shares may become subject to redemption.
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CERTAIN FEDERAL INCOME TAX CONSEQUENCES
GENERAL
This section is a summary of the material United States federal income tax
considerations that may be relevant to the purchasers of Preferred Securities
and represents the opinion of Varnum, Riddering, Schmidt & Howlett LLP, counsel
to the Company and IBC Capital, insofar as it relates to matters of law and
legal conclusions. The conclusions expressed herein are based upon current
provisions of the Internal Revenue Code of 1986, as amended ("Code"),
regulations thereunder and current administrative rulings and court decisions,
all of which are subject to change at any time, with possible retroactive
effects. Subsequent changes may cause tax consequences to vary substantially
from the consequences described below. Furthermore, the authorities on which
this summary is based are subject to various interpretations, and it is
therefore possible that the federal income tax treatment of the purchase,
ownership, and disposition of Preferred Securities may differ from the treatment
described below.
No attempt has been made in the following discussion to comment on all
United States federal income tax matters affecting purchasers of Preferred
Securities. Moreover, the discussion generally focuses on holders of Preferred
Securities who are individual citizens or residents of the United States and who
acquire Preferred Securities on their original issue at their offering price and
hold Preferred Securities as capital assets. The discussion has only limited
application to dealers in securities, corporations, estates, trusts or
nonresident aliens and does not address all the tax consequences that may be
relevant to holders who may be subject to special tax treatment, such as, for
example, banks, thrifts, real estate investment trusts, regulated investment
companies, insurance companies, dealers in securities or currencies, tax-exempt
investors, or persons that will hold the Preferred Securities as a position in a
"straddle," as part of a "synthetic security" or "hedge," as part of a
"conversion transaction" or other integrated investment, or as other than a
capital asset. This summary also does not address the tax consequences to
persons that have a functional currency other than the U.S. dollar or the tax
consequences to shareholders, partners or beneficiaries of a holder of Preferred
Securities. Further, it does not include any description of any alternative
minimum tax consequences or the tax laws of any state or local government or of
any foreign government that may be applicable to the Preferred Securities.
Accordingly, each prospective investor should consult, and should rely
exclusively on, the investor's own tax advisors in analyzing the federal, state,
local and foreign tax consequences of the purchase, ownership or disposition of
Preferred Securities.
CLASSIFICATION OF THE SUBORDINATED DEBENTURES
The Company intends to take the position that the Subordinated Debentures
will be classified for United States federal income tax purposes as indebtedness
of the Company under current law, and, by acceptance of a Preferred Security,
each holder covenants to treat the Subordinated Debentures as indebtedness and
the Preferred Securities as evidence of an indirect beneficial ownership
interest in the Subordinated Debentures. No assurance can be given, however,
that such position of the Company will not be challenged by the Internal Revenue
Service or, if challenged, that such a challenge will not be successful. The
remainder of this discussion assumes that the Subordinated Debentures will be
classified for United States federal income tax purposes as indebtedness of the
Company.
CLASSIFICATION OF IBC CAPITAL
With respect to the Preferred Securities, Varnum, Riddering, Schmidt &
Howlett LLP, counsel to the Company and IBC Capital, has rendered its opinion
generally to the effect that, under then current law and assuming full
compliance with the terms of the Trust Agreement and Indenture, IBC Capital will
be classified for United States federal income tax purposes as a grantor trust
and not as an association taxable as a corporation. Accordingly, for United
States federal income tax purposes, each holder of Preferred Securities
generally will be treated as owning an undivided beneficial interest in the
Subordinated Debentures, and each holder will be required to include in its
gross income any original issue discount ("OID") accrued with respect to its
allocable share of the Subordinated Debentures whether or not cash is actually
distributed to such holder.
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POTENTIAL EXTENSION OF INTEREST PAYMENT PERIOD AND ORIGINAL ISSUE DISCOUNT
Because the Company has the option, under the terms of the Subordinated
Debentures, to defer payments of interest by extending interest payment periods
for up to 20 consecutive quarters, all of the stated interest payments on the
Subordinated Debentures will be treated as OID. Holders of debt instruments
issued with OID must include that discount in income on an economic accrual
basis before the receipt of cash attributable to the interest, regardless of
their method of tax accounting. Generally, all of a holder's taxable interest
income with respect to the Subordinated Debentures will be accounted for as OID.
Actual payments and distributions of stated interest will not, however, be
separately reported as taxable income. The amount of OID that accrues in any
quarter will approximately equal the amount of the interest that accrues on the
Subordinated Debentures in that quarter at the stated interest rate. In the
event that the interest payment period is extended, holders will continue to
accrue OID approximately equal to the amount of the interest payment due at the
end of the extended interest payment period on an economic accrual basis over
the length of the extended interest payment period.
Because income on the Preferred Securities will constitute OID, corporate
holders of Preferred Securities will not be entitled to a dividends-received
deduction with respect to any income recognized with respect to the Preferred
Securities.
MARKET DISCOUNT AND ACQUISITION PREMIUM
Holders of Preferred Securities other than a holder who purchased the
Preferred Securities upon original issuance may be considered to have acquired
their undivided interests in the Subordinated Debentures with "market discount"
or "acquisition premium" as such phrases are defined for United States federal
income tax purposes. Such holders are advised to consult their tax advisors as
to the income tax consequences of the acquisition, ownership and disposition of
the Preferred Securities.
RECEIPT OF SUBORDINATED DEBENTURES OR CASH UPON LIQUIDATION OF IBC CAPITAL
Under certain circumstances, as described under "Description of the
Preferred Securities -- Redemption or Exchange," the Subordinated Debentures may
be distributed to holders of Preferred Securities upon a liquidation of IBC
Capital. Under current United States federal income tax law, such a distribution
would be treated as a nontaxable exchange to each such holder and would result
in such holder having an aggregate tax basis in the Subordinated Debentures
received in the liquidation equal to such holder's aggregate tax basis in the
Preferred Securities immediately before the distribution. A holder's holding
period in the Subordinated Debentures so received in liquidation of IBC Capital
would include the period for which such holder held the Preferred Securities.
If, however, a Tax Event occurs which results in IBC Capital being treated
as an association taxable as a corporation, the distribution would likely
constitute a taxable event to holders of the Preferred Securities. Under certain
circumstances described herein, the Subordinated Debentures may be redeemed for
cash and the proceeds of such redemption distributed to holders in redemption of
their Preferred Securities. Under current law, such a redemption would, for
United States federal income tax purposes, constitute a taxable disposition of
the redeemed Preferred Securities, and a holder would recognize gain or loss as
if the holder sold such Preferred Securities for cash. See "Description of
Preferred Securities -- Redemption or Exchange."
DISPOSITION OF PREFERRED SECURITIES
A holder that sells Preferred Securities will recognize gain or loss equal
to the difference between the amount realized on the sale of the Preferred
Securities and the holder's adjusted tax basis in such Preferred Securities. A
holder's adjusted tax basis in the Preferred Securities generally will be its
initial purchase price increased by OID previously includible in such holder's
gross income to the date of disposition and decreased by payments received on
the Preferred Securities to the date of disposition. Such gain or loss will be a
capital gain or loss and will be a long-term capital gain or loss if the
Preferred Securities have been held for more than one year at the time of sale.
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The Preferred Securities may trade at a price that does not accurately
reflect the value of accrued but unpaid interest with respect to the underlying
Subordinated Debentures. A holder that disposes of its Preferred Securities
between record dates for payments of distributions thereon will be required to
include accrued but unpaid interest on the Subordinated Debentures through the
date of disposition in income as ordinary income, and to add such amount to its
adjusted tax basis in its pro rata share of the underlying Subordinated
Debentures deemed disposed of. To the extent the selling price is less than the
holder's adjusted tax basis (which basis will include, in the form of OID, all
accrued but unpaid interest), a holder will recognize a capital loss. Subject to
certain limited exceptions, capital losses cannot be applied to offset ordinary
income for United States federal income tax purposes.
EFFECT OF PROPOSED CHANGES IN TAX LAWS
The Clinton Administration has proposed statutory changes in the Federal
income tax rules relating to financial instruments. Under one such proposal,
debt with a maximum maturity of more than 20 years that is not shown as debt on
the applicable balance sheet of the issuer would be characterized as equity of
the issuer, with the result that interest would be nondeductible to the issuer.
If this proposal were enacted and applied to the Preferred Securities, a Tax
Event would occur.
The Company has been advised by counsel that, under certain transition
rules contained in the proposed legislation, the Preferred Securities would not
be subject to such legislation. Moreover, the Chairman of the House Ways and
Means Committee and the Senate Finance Committee, as well as the ranking
minority members of the House Ways and Means Committee, have publicly indicated
that the proposals, if enacted, would not apply prior to the date of
"appropriate Congressional action." Thus, the Company believes such proposed
legislation, if ultimately enacted, will not apply to the Preferred Securities.
Nevertheless, no assurance can be given in this regard.
BACKUP WITHHOLDING AND INFORMATION REPORTING
The amount of OID accrued on the Preferred Securities held of record by
individual citizens or residents of the United States, or certain trusts,
estates, and partnerships, will be reported to the Internal Revenue Service on
Forms 1099, which forms should be mailed to such holders of Preferred Securities
by January 31 following each calendar year. Payments made on, and proceeds from
the sale of, the Preferred Securities may be subject to a "backup" withholding
tax (currently at 31%) unless the holder complies with certain identification
and other requirements. Any amounts withheld under the backup withholding rules
will be allowed as a credit against the holder's United States federal income
tax liability, provided the required information is provided to the Internal
Revenue Service.
THE UNITED STATES FEDERAL INCOME TAX DISCUSSION SET FORTH ABOVE IS INCLUDED
FOR GENERAL INFORMATION ONLY AND MAY NOT BE APPLICABLE DEPENDING UPON THE
PARTICULAR SITUATION OF A HOLDER OF PREFERRED SECURITIES. HOLDERS OF PREFERRED
SECURITIES SHOULD CONSULT THEIR TAX ADVISORS WITH RESPECT TO THE TAX
CONSEQUENCES TO THEM OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF THE PREFERRED
SECURITIES, INCLUDING THE TAX CONSEQUENCES UNDER STATE, LOCAL, FOREIGN AND OTHER
TAX LAWS AND THE POSSIBLE EFFECTS OF CHANGES IN UNITED STATES FEDERAL OR OTHER
TAX LAWS.
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ERISA CONSIDERATIONS
Generally, employee benefit plans that are subject to the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"), or Section 4975 of
the Code ("Plans"), may purchase Preferred Securities, subject to the investing
fiduciary's determination that the investment in Preferred Securities satisfies
ERISA's fiduciary standards and other requirements applicable to investments by
the Plan.
In any case, the Company and/or any of its affiliates may be considered a
"party in interest" (within the meaning of ERISA) or a "disqualified person"
(within the meaning of Section 4975 of the Code) with respect to certain plans
(generally, Plans maintained or sponsored by, or contributed to by, any such
persons). The acquisition and ownership of Preferred Securities by a Plan (or by
an individual retirement arrangement or other Plans described in Section
4975(e)(1) of the Code) with respect to which the Company or any of its
affiliates is considered a party in interest or a disqualified person, may
constitute or result in a prohibited transaction under ERISA or Section 4975 of
the Code, unless such Preferred Securities are acquired pursuant to and in
accordance with an applicable exemption.
As a result, Plans with respect to which the Company or any of its
affiliates is a party in interest or a disqualified person should not acquire
Preferred Securities unless such Preferred Securities are acquired pursuant to
and in accordance with an applicable exemption. Any other Plans or other
entities whose assets include Plan assets subject to ERISA or Section 4975 of
the Code proposing to acquire Preferred Securities should consult with their own
counsel.
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UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting
Agreement, the form of which is filed as an exhibit to the Registration
Statement of which this Prospectus is a part, the Company and IBC Capital have
agreed that IBC Capital will sell to Stifel, Nicolaus & Company, Incorporated
("Underwriter") and the Underwriter has agreed to purchase from IBC Capital
600,000 Preferred Securities. The Underwriter proposes initially to offer the
Preferred Securities to the public at the initial offering price set forth on
the cover page of this Prospectus and to certain dealers at such price less a
concession not in excess of $0.50 per Preferred Security. The Underwriter may
allow, and such dealers may reallow, a discount not in excess of $0.10 per
Preferred Security to certain other dealers. After the initial offering, the
offering price and other selling terms may be changed by the Underwriter.
IBC Capital has granted an option to the Underwriter, exercisable during
the 30-day period after the date of this Prospectus, to purchase up to 90,000
additional Preferred Securities to cover over-allotments, if any, at the same
price per Preferred Security as the initial 600,000 Preferred Securities to be
purchased by the Underwriter. The Underwriter may purchase such Preferred
Securities only to cover over-allotments made in connection with the offering.
In view of the fact that the proceeds from the sale of Preferred Securities
will be used to purchase the Subordinated Debentures issued by the Company, the
Underwriting Agreement provides that the Company will pay as Underwriter's
Compensation for the Underwriter's services an amount of $1.00 per Preferred
Security.
The Company and IBC Capital have agreed that, during the period beginning
from the date of the Underwriting Agreement and continuing to and including the
earlier of (i) the termination of trading restrictions on the Preferred
Securities, as determined by the Underwriter, or (ii) 180 days after the closing
date, they will not, directly or indirectly, offer, sell, agree to sell or
otherwise dispose of any Preferred Securities, any other beneficial interests in
the assets of IBC Capital, or any other securities of IBC Capital or the Company
which are substantially similar to the Preferred Securities, including any
guarantee of such beneficial interests or substantially similar securities, or
any securities convertible into or exchangeable for or representing the right to
receive securities, preferred securities or any such substantially similar
securities of either IBC Capital or the Company, without the prior written
consent of the Underwriter, except for the Preferred Securities offered in
connection with the offering.
The Underwriting Agreement provides that the Company and IBC Capital will
indemnify the Underwriter against certain liabilities, including civil
liabilities under the Securities Act of 1933, as amended, or will contribute to
payments the Underwriter may be required to make in respect thereof.
VALIDITY OF SECURITIES
Certain matters of Delaware law relating to the validity of the Preferred
Securities, the enforceability of the Trust Agreement and the formation of IBC
Capital will be passed upon by Richards, Layton & Finger, special Delaware
counsel to the Company and IBC Capital. Certain legal matters for the Company
and IBC Capital, including the validity of the Guarantee and the Subordinated
Debentures will be passed upon for the Company and IBC Capital by Varnum,
Riddering, Schmidt & Howlett LLP, Grand Rapids, Michigan, counsel to the Company
and IBC Capital. Certain legal matters will be passed upon for the Underwriter
by Bryan Cave LLP, St. Louis, Missouri. Varnum Riddering, Schmidt & Howlett LLP
and Bryan Cave LLP, will rely on the opinion of Richards, Layton & Finger as to
matters of Delaware law. Certain matters relating to United States federal
income tax considerations will be passed upon for the Company by Varnum,
Riddering, Schmidt & Howlett LLP.
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EXPERTS
The consolidated financial statements of the Company as of December 31,
1995 and 1994, and for each of the years in the three year period ended December
31, 1995 included herein and incorporated by reference in this Prospectus and
elsewhere in the Registration Statement have been audited by KPMG Peat Marwick
LLP, independent accountants, to the extent and for the periods set forth in
their report appearing elsewhere herein and incorporated herein by reference.
The consolidated financial statements of the Company are included and
incorporated herein in reliance upon such report given upon the authority of
such firm as an expert in auditing and accounting.
The consolidated financial statements of North Bank Corporation as of
December 31, 1995 and 1994, and for each of the years in the three year period
ended December 31, 1995 included herein and incorporated by reference in this
Prospectus and elsewhere in this Registration Statement have been audited by
Crowe, Chizek and Company LLP, independent accountants, to the extent and for
the periods set forth in their report appearing elsewhere herein, and
incorporated herein by reference. The consolidated financial statements of North
Bank Corporation are included and incorporated herein in reliance upon such
report given upon the authority of such firm as an expert in auditing and
accounting.
AVAILABLE INFORMATION
The Company is subject to the information requirements of the Securities
Exchange Act of 1934, as amended ("Exchange Act"), and, in accordance therewith
files reports, proxy statements and other information with the Securities and
Exchange Commission (the "Commission"). The reports, proxy statements and other
information can be inspected and copied at the Public Reference Section of the
Commission Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
Commission's Regional Offices located at 7 World Trade Center, Suite 1300, New
York, New York 10048, and 500 West Madison Street, Suite 1400, Chicago, Illinois
60601. Copies of such materials can be obtained by mail from the Public
Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C.
20549, at prescribed rates. The Commission maintains a Web site (which can be
found at http://www.sec.gov) that contains reports, proxy and information
statements and other information regarding registrants that file electronically
with the Commission.
No separate financial statements of IBC Capital have been included herein.
The Company and IBC Capital do not consider that such financial statements would
be material to holders of Preferred Securities because IBC Capital is a newly
formed special purpose entity, has no operating history or independent
operations and is not engaged in and does not propose to engage in any activity
other than holding as trust assets the Subordinated Debentures of the Company
and issuing the Trust Securities. See "Description of Preferred Securities,"
"Description of Subordinated Debentures" and "Description of Guarantee." In
addition, the Company and IBC Capital do not expect that IBC Capital will be
filing reports under the Exchange Act with the Commission.
The Company has filed with the Commission a Registration Statement on Form
S-2 (herein, together with all amendments and exhibits thereto and documents
incorporated by reference, referred to as the "Registration Statement") under
the Securities Act of 1933, as amended (the "Securities Act"). This Prospectus
does not contain all of the information set forth in the Registration Statement,
certain parts of which are omitted in accordance with the rules and regulations
of the Commission. For further information, reference is hereby made to the
Registration Statement. The statements contained in this Prospectus concerning
the contents of any contract or other document referred to are not necessarily
complete. Where such contract or other document is an exhibit to the
Registration Statement, each statement is qualified in all respects by the
provisions of such exhibit, to which reference is hereby made for a full
statement of the provisions thereof.
79
<PAGE> 80
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Company's annual report on Form 10-K for the year ended December 31,
1995, its quarterly reports on Form 10-Q for the quarters ended March 31, 1996,
June 30, 1996 and September 30, 1996, and its current report on Form 8-K, dated
June 6, 1996 (as amended August 9, 1996), and which have been filed by the
Company with the Commission (File No. 0-7818), are incorporated herein by
reference.
Any statement contained in a document incorporated herein by reference
shall be deemed to be modified or superseded for purposes of this Prospectus to
the extent that a statement contained herein modifies or supersedes such
statement. Any such statement so modified or superseded shall not be deemed,
except as so modified or superseded, to constitute a part of this Prospectus.
Upon request, the Company will provide, without charge, copies of any
documents incorporated by reference herein (other than certain exhibits) to any
person to whom a Prospectus is delivered. Requests for such copies should be
directed to William R. Kohls, Secretary, Independent Bank Corporation, 230 West
Main Street, Ionia, Michigan 48846, telephone (616) 527-9450.
80
<PAGE> 81
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
INDEPENDENT BANK CORPORATION AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets as of December 31, 1995 and 1994......................... F- 2
Consolidated Statements of Operations for each of the years ended December 31, 1995,
1994 and 1993...................................................................... F- 3
Consolidated Statements of Cash Flows for each of the years ended December 31, 1995,
1994 and 1993...................................................................... F- 4
Consolidated Statements of Shareholders' Equity for each of the years ended December
31, 1995, 1994 and 1993............................................................ F- 5
Notes to Consolidated Financial Statements........................................... F- 6
Independent Auditor's Report......................................................... F-21
INDEPENDENT BANK CORPORATION UNAUDITED CONSOLIDATED INTERIM
FINANCIAL STATEMENTS
Interim Consolidated Balance Sheet as of September 30, 1996 (unaudited).............. F-22
Interim Consolidated Statements of Operations for the nine months ended September 30,
1996
and 1995 (unaudited)............................................................... F-23
Interim Consolidated Statements of Cash Flows for the nine months ended September 30,
1996
and 1995 (unaudited)............................................................... F-24
Interim Consolidated Statements of Shareholders' Equity for the nine months ended
September 30, 1996 and 1995 (unaudited)............................................ F-25
Notes to Interim Consolidated Financial Statements (unaudited)....................... F-26
NORTH BANK CORPORATION CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Accountants.................................................... F-27
Consolidated Balance Sheets as of December 31, 1995 and 1994......................... F-28
Consolidated Statements of Income for the years ended December 31, 1995,
1994 and 1993...................................................................... F-29
Consolidated Statements of Changes in Shareholders' Equity for the years ended
December 31, 1995, 1994 and 1993................................................... F-30
Consolidated Statements of Cash Flows for the years ended December 31, 1995,
1994 and 1993...................................................................... F-31
Notes to Consolidated Financial Statements........................................... F-32
</TABLE>
F-1
<PAGE> 82
INDEPENDENT BANK CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31
----------------------------
1995 1994
------------ ------------
<S> <C> <C>
ASSETS
Cash and Cash Equivalents
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.
F-2
<PAGE> 83
INDEPENDENT BANK CORPORATION
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................................. $2.38 $2.09 $1.95
===== ===== =====
Cash dividends declared per common share................ $0.89 $0.72 $0.50
===== ===== =====
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE> 84
INDEPENDENT BANK CORPORATION
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.
F-4
<PAGE> 85
INDEPENDENT BANK CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
NET REALIZED
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, $.50
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, $.72
per share................... (2,088,000) (2,088,000)
Issuance of 18,356 shares of
common stock................ 18,000 345,000 363,000
Repurchase of 40,000 shares of
common stock................ (40,000) (884,000) (924,000)
Net change in unrealized gain
(loss) on securities
available for sale, net of
$1,138,000 of related tax
effect...................... (2,210,000) (2,210,000)
---------- ----------- ----------- ----------- -----------
Balances at December 31,
1994........................ 2,589,000 16,932,000 22,910,000 (2,120,000) 40,311,000
Net income for 1995........... 6,810,000 6,810,000
Cash dividends declared, $.89
per share................... (2,506,000) (2,506,000)
5% stock dividend............. 129,000 3,386,000 (3,531,000) (16,000)
Issuance of 22,430 shares of
common stock................ 22,000 463,000 485,000
Repurchase of 35,900 shares of
common stock................ (36,000) (857,000) (893,000)
Transfer of securities held to
maturity to available for
sale, net of $443,000 of
related tax effect.......... 859,000 859,000
Net change in unrealized gain
(loss) on securities
available for sale, net of
$1,017,000 of related tax
effect...................... 1,975,000 1,975,000
---------- ----------- ----------- ----------- -----------
Balances at December 31,
1995........................ $2,704,000 $19,924,000 $23,683,000 $ 714,000 $ 47,025,000
========== =========== =========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE> 86
INDEPENDENT BANK CORPORATION
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
F-6
<PAGE> 87
INDEPENDENT BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 1 -- SIGNIFICANT ACCOUNTING POLICIES -- CONTINUED
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.
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.
F-7
<PAGE> 88
INDEPENDENT BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 1 -- SIGNIFICANT ACCOUNTING POLICIES -- CONTINUED
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, 46,387 shares of common stock were
reserved for issuance under the Incentive Share Grant Plan, 26,089 shares of
common stock were reserved for issuance under the dividend reinvestment plan and
128,275 shares of common stock were reserved for issuance under stock option
plans.
Earnings Per Share -- Earnings per share is based on 2,861,898 average
shares and equivalents outstanding in 1995, 2,890,368 in 1994 and 2,878,386 in
1993. Per share data has been adjusted to give retroactive effect to 5% stock
dividends in 1996 and 1995.
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.
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
F-8
<PAGE> 89
INDEPENDENT BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 2 -- ACQUISITIONS -- CONTINUED
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
-----------
(UNAUDITED)
<S> <C>
Total revenue.................................................................. $42,700,000
Net income..................................................................... 5,700,000
Earnings per share............................................................. 1.98
</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 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.
NOTE 5 -- SECURITIES
Securities available for sale consist of the following at December 31:
<TABLE>
<CAPTION>
UNREALIZED
AMORTIZED ------------------------ 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>
F-9
<PAGE> 90
INDEPENDENT BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 5 -- SECURITIES -- CONTINUED
Securities held to maturity consist of the following at December 31:
<TABLE>
<CAPTION>
UNREALIZED
AMORTIZED ------------------------ 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>
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.
F-10
<PAGE> 91
INDEPENDENT BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 5 -- SECURITIES -- CONTINUED
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.
F-11
<PAGE> 92
INDEPENDENT BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
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
F-12
<PAGE> 93
INDEPENDENT BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 9 -- OTHER BORROWINGS -- CONTINUED
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.
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>
F-13
<PAGE> 94
INDEPENDENT BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 10 -- FEDERAL INCOME TAX -- CONTINUED
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.
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 137,800 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.
F-14
<PAGE> 95
INDEPENDENT BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 11 -- EMPLOYEE BENEFIT PLANS -- CONTINUED
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......................................... 22,050 $13.95
Granted................................................................ 22,050 18.31
Forfeited.............................................................. (1,103) 14.29
------ ------
Outstanding at December 31, 1993......................................... 42,997 16.18
Granted................................................................ 23,153 18.14
Exercised.............................................................. (1,103) 14.29
------ ------
Outstanding at December 31, 1994......................................... 65,047 16.91
Granted................................................................ 26,460 22.57
Exercised.............................................................. (8,435) 16.23
Forfeited.............................................................. (1,103) 22.22
------ ------
Outstanding at December 31, 1995......................................... 81,969 $18.73
====== ======
</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
F-15
<PAGE> 96
INDEPENDENT BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 12 -- FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK -- CONTINUED
credit risk in the event of non-performance by the counterparties to the
financial instruments for loan commitments to extend credit and letters of
credit is represented by the contractual amounts of those instruments.
Management does not, however, anticipate material losses as a result of these
financial instruments.
A summary of financial instruments with off-balance sheet risk at December
31 follows:
<TABLE>
<CAPTION>
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
=========== ===========
</TABLE>
F-16
<PAGE> 97
INDEPENDENT BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 14 -- OTHER OPERATING EXPENSES
Other operating expenses for the years ended December 31, follow:
<TABLE>
<CAPTION>
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.
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.
F-17
<PAGE> 98
INDEPENDENT BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 16 -- FAIR VALUES OF FINANCIAL INSTRUMENTS -- CONTINUED
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.
F-18
<PAGE> 99
INDEPENDENT BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 17 -- INDEPENDENT BANK CORPORATION (PARENT COMPANY ONLY) FINANCIAL
INFORMATION
Presented below are condensed financial statements for the parent company.
CONDENSED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
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>
F-19
<PAGE> 100
INDEPENDENT BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 17 -- INDEPENDENT BANK CORPORATION (PARENT COMPANY ONLY) FINANCIAL
INFORMATION -- CONTINUED
CONDENSED 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
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>
F-20
<PAGE> 101
INDEPENDENT BANK CORPORATION
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."
KPMG Peat Marwick LLP
Lansing, Michigan
February 1, 1996
F-21
<PAGE> 102
INDEPENDENT BANK CORPORATION
INTERIM CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
SEPTEMBER 30,
1996
-------------
(UNAUDITED)
<S> <C>
ASSETS
Cash and due from banks....................................................... $ 26,601,000
Securities available for sale................................................. 122,487,000
Securities held to maturity (fair value of $27,698,000 at September 30,
1996)....................................................................... 26,874,000
Federal Home Loan Bank stock, at cost......................................... 10,198,000
Loans held for sale........................................................... 10,389,000
Loans
Commercial and agricultural................................................. 141,747,000
Real estate mortgage........................................................ 310,079,000
Installment................................................................. 113,592,000
------------
Total Loans....................................................... 565,418,000
Allowance for loan losses................................................... (6,720,000)
------------
Net Loans......................................................... 558,698,000
Property and equipment, net................................................... 16,624,000
Accrued income and other assets............................................... 21,281,000
------------
Total Assets...................................................... $ 793,152,000
============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Non-interest bearing........................................................ $ 68,685,000
Savings and NOW............................................................. 263,841,000
Time........................................................................ 209,255,000
------------
Total Deposits.................................................... 541,781,000
Federal funds purchased....................................................... 37,100,000
Other borrowings.............................................................. 153,859,000
Accrued expenses and other liabilities........................................ 9,679,000
------------
Total Liabilities................................................. 742,419,000
------------
Shareholders' Equity
Preferred stock, no par value -- 200,000 shares authorized; none outstanding
Common stock, $1.00 par value -- 14,000,000 shares authorized; issued and
outstanding: 2,861,399 shares at September 30, 1996...................... 2,861,000
Capital surplus............................................................. 24,256,000
Retained earnings........................................................... 23,447,000
Net unrealized gain on securities available for sale, net of related tax
effect................................................................... 169,000
------------
Total Shareholders' Equity........................................ 50,733,000
------------
Total Liabilities and Shareholders' Equity..................... $ 793,152,000
============
</TABLE>
See notes to interim consolidated financial statements.
F-22
<PAGE> 103
INDEPENDENT BANK CORPORATION
INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30,
--------------------------
1996 1995
----------- -----------
(UNAUDITED)
<S> <C> <C>
INTEREST INCOME
Interest and fees on loans....................................... $35,587,000 $27,370,000
Securities
Taxable....................................................... 4,873,000 4,572,000
Tax-exempt.................................................... 1,502,000 1,328,000
Other investments................................................ 636,000 264,000
----------- -----------
Total Interest Income....................................... 42,598,000 33,534,000
----------- -----------
INTEREST EXPENSE
Deposits......................................................... 11,598,000 9,193,000
Other borrowings................................................. 5,950,000 3,688,000
----------- -----------
Total Interest Expense...................................... 17,548,000 12,881,000
----------- -----------
Net Interest Income......................................... 25,050,000 20,653,000
Provision for loan losses.......................................... 942,000 477,000
----------- -----------
Net Interest Income After
Provision for Loan Losses................................ 24,108,000 20,176,000
----------- -----------
NON-INTEREST INCOME
Service charges on deposit accounts.............................. 1,641,000 1,439,000
Net gains (losses) on asset sales
Real estate mortgage loans.................................... 1,251,000 405,000
Securities.................................................... (130,000) (110,000)
Other income..................................................... 1,219,000 922,000
----------- -----------
Total Non-interest Income................................... 3,981,000 2,656,000
----------- -----------
NON-INTEREST EXPENSE
Salaries and employee benefits................................... 11,404,000 8,903,000
Occupancy, net................................................... 1,458,000 1,135,000
Furniture and fixtures........................................... 1,337,000 975,000
Other expenses................................................... 5,605,000 4,884,000
----------- -----------
Total Non-interest Expense.................................. 19,804,000 15,897,000
----------- -----------
Income Before Federal Income Tax............................ 8,285,000 6,935,000
Federal income tax expense......................................... 2,466,000 1,948,000
----------- -----------
Net Income.................................................. $ 5,819,000 $ 4,987,000
=========== ===========
Net income per common share........................................ $2.02 $1.74
=========== ===========
Cash dividends declared per common share........................... $0.74 $0.66
=========== ===========
</TABLE>
See notes to interim consolidated financial statements.
F-23
<PAGE> 104
INDEPENDENT BANK CORPORATION
INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------------
1996 1995
------------ ------------
(UNAUDITED)
<S> <C> <C>
Net Income....................................................... $ 5,819,000 $ 4,987,000
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH FROM OPERATING
ACTIVITIES
Proceeds from sales of loans held for sale..................... 78,515,000 33,439,000
Disbursements for loans held for sale.......................... (69,135,000) (31,883,000)
Provision for loan losses...................................... 942,000 477,000
Deferred loan fees............................................. 158,000 23,000
Depreciation, amortization of intangible assets and premiums
and accretion of discounts on investment securities and
loans....................................................... 1,899,000 1,679,000
Net losses on sales of securities.............................. 130,000 110,000
Net gains on sales of real estate mortgage loans............... (1,251,000) (405,000)
Increase in accrued income and other assets.................... (7,784,000) (751,000)
Increase in accrued expenses and other liabilities............. 1,114,000 1,993,000
------------ ------------
Total Adjustments........................................... 4,588,000 4,682,000
------------ ------------
Net Cash from Operating Activities........................ 10,407,000 9,669,000
------------ ------------
CASH FLOW FROM INVESTING ACTIVITIES
Proceeds from sales of securities available for sale........... 15,907,000 13,152,000
Proceeds from maturities of securities held to maturity........ 8,898,000 10,925,000
Principal payments received on securities available for sale... 6,785,000 863,000
Principal payments received on securities held to maturity..... 601,000 3,867,000
Purchases of securities available for sale..................... (30,839,000)
Purchases of securities held to maturity....................... (295,000) (15,715,000)
Portfolio loans made to customers net of principal payments
received.................................................... (63,355,000) (75,788,000)
Acquisition of branch office, less cash received............... 13,949,000
Acquisition of bank, less cash received........................ 9,478,000
Capital expenditures........................................... (2,607,000) (1,133,000)
------------ ------------
Net Cash from Investing Activities........................ (55,427,000) (49,880,000)
------------ ------------
CASH FLOW FROM FINANCING ACTIVITIES
Net decrease in total deposits................................. (1,378,000) (15,371,000)
Net increase in short-term borrowings.......................... 20,165,000 6,663,000
Proceeds from Federal Home Loan Bank advances.................. 45,000,000 76,000,000
Payments of Federal Home Loan Bank advances.................... (17,000,000) (30,000,000)
Proceeds from issuance of long-term borrowings................. 10,000,000
Retirement of debt............................................. (500,000)
Dividends paid................................................. (1,933,000) (1,758,000)
Proceeds from issuance of common stock......................... 59,000 81,000
Repurchase of common stock..................................... (755,000)
------------ ------------
Net Cash from Financing Activities........................ 54,413,000 34,860,000
------------ ------------
Net Increase (Decrease) in Cash and Cash Equivalents...... 9,393,000 (5,351,000)
Cash and Cash Equivalents at Beginning of Period................. 17,208,000 23,719,000
------------ ------------
Cash and Cash Equivalents at End of Period................ $ 26,601,000 $ 18,368,000
============ ============
Cash paid during the period for:
Interest....................................................... $ 16,935,000 $ 12,530,000
Income taxes................................................... 2,990,000 2,150,000
Transfer of loans to other real estate........................... 808,000 367,000
</TABLE>
See notes to interim consolidated financial statements.
F-24
<PAGE> 105
INDEPENDENT BANK CORPORATION
INTERIM CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------
1996 1995
----------- -----------
(UNAUDITED)
<S> <C> <C>
Balance at beginning of period..................................... $47,025,000 $40,311,000
Net income....................................................... 5,819,000 4,987,000
Cash dividends declared.......................................... (2,125,000) (1,861,000)
Issuance of common stock......................................... 559,000 430,000
Repurchase of common stock....................................... (755,000)
Net change in unrealized gain on securities available for sale,
net of related tax effect..................................... (545,000) 1,794,000
----------- -----------
Balance at end of period........................................... $50,733,000 $44,906,000
=========== ===========
</TABLE>
See notes to interim consolidated financial statements.
F-25
<PAGE> 106
INDEPENDENT BANK CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. In the opinion of management of the Company, the accompanying unaudited
consolidated financial statements contain all the adjustments (consisting only
of normal recurring accruals) necessary to present fairly the consolidated
financial condition of the Company as of September 30, 1996 and the results of
operations for the nine-month periods ended September 30, 1996 and 1995.
2. Management's assessment of the allowance for loan losses is based on an
evaluation of the loan portfolio, recent loss experience, current economic
conditions and other pertinent factors. Loans on non-accrual status, past due
more than 90 days, or restructured amounted to $3,451,000 at September 30, 1996.
(See Management's Discussion and Analysis of Financial Condition and Results of
Operations).
3. The provision for income taxes represents federal income tax expense
calculated using annualized rates on taxable income generated during the
respective periods.
4. The unaudited pro forma combined results for the Company and NBC set
forth below are presented as if the NBC Acquisition had occurred at the
beginning of the periods presented.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------
1996 1995
----------- -----------
<S> <C> <C>
Revenues, net....................................... $51,700,000 $45,800,000
Net income.......................................... 5,600,000 4,600,000
Net income per common share......................... $1.93 $1.60
</TABLE>
5. The results of operations for the nine-month period ended September 30,
1996, are not necessarily indicative of the results to be expected for the full
year.
6. The Company adopted Statement of Financial Accounting Standards No. 122,
"Accounting for Mortgage Servicing Rights," effective January 1, 1996. (See
Management's Discussion and Analysis of Financial Condition and Results of
Operations).
F-26
<PAGE> 107
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS
NORTH BANK CORPORATION
HALE, MICHIGAN
We have audited the accompanying consolidated balance sheets of North Bank
Corporation as of December 31, 1995 and 1994, and the related consolidated
statements of income, changes in shareholders' equity and cash flows for each of
the three years in the period ended December 31, 1995. These financial
statements are the responsibility of the Corporation's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of North Bank
Corporation as of December 31, 1995 and 1994, and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
1995, in conformity with generally accepted accounting principles.
As discussed in Note 2 to the consolidated financial statements, the
Corporation changed its methods of accounting for impaired loans in 1995 and
investment securities and income taxes in 1993 to conform to new accounting
standards. The change in accounting for income taxes was made retroactively to
January 1, 1991.
Crowe, Chizek and Company LLP
Grand Rapids, Michigan
March 8, 1996
F-27
<PAGE> 108
NORTH BANK CORPORATION
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1995 AND 1994
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
ASSETS
Cash and due from banks (Note 3)........................................ $ 6,421 $ 8,121
Federal funds sold...................................................... 200
-------- --------
Total cash and cash equivalents.................................... 6,621 8,121
Securities available for sale (Note 4).................................. 48,665 26,503
Securities held to maturity (estimated fair value of $28,755) (Note
4).................................................................... 30,584
-------- --------
Total securities................................................... 48,665 57,087
Total loans (Note 5).................................................... 90,331 81,833
Less allowance for loan losses (Note 6)................................. (988) (949)
-------- --------
Net Loans.......................................................... 89,343 80,884
Premises and equipment -- net (Note 7).................................. 5,580 6,047
Accrued interest receivable............................................. 1,102 1,010
Other real estate....................................................... 118 628
Other assets............................................................ 1,287 2,496
-------- --------
Total assets....................................................... $152,716 $156,273
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits:
Noninterest-bearing demand......................................... $ 17,872 $ 17,189
Interest-bearing transaction accounts.............................. 19,858 19,292
Savings............................................................ 38,444 40,157
Time (Note 8)...................................................... 55,591 47,127
-------- --------
Total deposits................................................ 131,765 123,765
Long-term borrowings (Note 10)........................................ 9,000 19,728
Federal funds purchased............................................... 1,100
Accrued interest payable.............................................. 516 496
Other liabilities (Note 11)........................................... 789 1,661
-------- --------
Total liabilities.................................................. 142,070 146,750
Shareholders' Equity
Common stock, no par value, 1,500,000 shares authorized; 482,040 and
481,478 issued and outstanding in 1995 and 1994, respectively...... 1,207 1,204
Surplus............................................................... 5,635 5,629
Retained earnings..................................................... 3,841 4,159
Net unrealized appreciation (depreciation) on available for sale
securities, net of tax of $19 in 1995 and $585 in 1994 (Note 4).... (37) (1,136)
Minimum pension liability adjustment, net of tax of $171 in 1994 (Note
11)................................................................ (333)
-------- --------
Total shareholders' equity......................................... 10,646 9,523
-------- --------
Total liabilities and shareholders' equity.................... $152,716 $156,273
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-28
<PAGE> 109
NORTH BANK CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1995 1994 1993
------- ------ ------
<S> <C> <C> <C>
INTEREST INCOME
Loans, including fees............................................ $ 7,765 $6,539 $6,406
Securities
Taxable....................................................... 3,002 2,372 2,715
Tax-exempt.................................................... 342 584 814
Federal funds sold............................................... 124 70 62
------- ------ ------
Total interest income.................................... 11,233 9,565 9,997
INTEREST EXPENSE
Deposits......................................................... 4,401 3,127 3,917
Borrowings....................................................... 983 803 226
------- ------ ------
Total interest expense................................... 5,384 3,930 4,143
------- ------ ------
Net interest income...................................... 5,849 5,635 5,854
Provision for loan losses (Note 6)................................. (307) (180) (150)
------- ------ ------
Net interest income after provision for loan losses................ 5,542 5,455 5,704
Other operating income
Service charges on deposit accounts.............................. 404 422 394
Net gain (loss) on sales of securities........................... (111) (374) 1,201
Gain on sales of loans........................................... 424 116 441
Gain on sale of mortgage servicing rights........................ 124
Other operating income........................................... 361 353 420
------- ------ ------
Total other operating income............................. 1,202 517 2,456
Other operating expenses
Salaries and employee benefits (Note 11)......................... 2,738 2,745 3,076
Pension settlement (Note 11)..................................... 774
Net occupancy.................................................... 468 407 373
Equipment........................................................ 740 651 581
Legal fees....................................................... 132 109 131
FDIC premium..................................................... 144 274 304
Other operating expense.......................................... 1,898 1,535 2,004
------- ------ ------
Total other operating expense............................ 6,894 5,721 6,469
------- ------ ------
Income (loss) before federal income taxes.......................... (150) 251 1,691
Federal income tax expense (benefit) (Note 9)...................... (121) (82) 260
------- ------ ------
Net income (loss)........................................ $ (29) $333 $1,431
======= ====== ======
Net income (loss) per common share (Note 2)........................ $(.06) $ .70 $ 2.97
======= ====== ======
</TABLE>
See accompanying notes to consolidated financial statements.
F-29
<PAGE> 110
NORTH BANK CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
NET UNREALIZED
APPRECIATION
(DEPRECIATION) MINIMUM
ON SECURITIES PENSION
COMMON RETAINED AVAILABLE FOR LIABILITY
STOCK SURPLUS EARNINGS SALE ADJUSTMENT TOTAL
------ ------- -------- -------------- ---------- -------
<S> <C> <C> <C> <C> <C> <C>
BALANCE -- JANUARY 1, 1993.......... $1,223 $ 5,757 $2,949 $ 9,929
Net income, 1993.................... 1,431 1,431
Cash dividends ($.55 per share)..... (266) (266)
Retirement of shares................ (19 ) (128) (147)
Net unrealized appreciation on
securities available for sale..... $ 53 53
------ ------ ------ ------- -------
BALANCE -- DECEMBER 31, 1993........ 1,204 5,629 4,114 53 11,000
Net income, 1994.................... 333 333
Cash dividends ($.60 per share)..... (288) (288)
Net change in unrealized
appreciation (depreciation) on
securities available for sale..... (1,189) (1,189)
Minimum pension liability adjustment
(Note 11)......................... $ (333) (333)
------ ------ ------ ------- ----- -------
BALANCE -- DECEMBER 31, 1994........ 1,204 5,629 4,159 (1,136) (333) 9,523
Net loss, 1995...................... (29) (29)
Cash dividends ($.60 per share)..... (289) (289)
Exercise of options (Note 11)....... 3 6 9
Net change in unrealized
appreciation (depreciation) on
securities available for sale..... 1,099 1,099
Minimum pension liability adjustment
(Note 11)......................... 333 333
------ ------ ------ ------- ----- -------
BALANCE -- DECEMBER 31, 1995........ $1,207 $ 5,635 $3,841 $ (37) $ 0 $10,646
====== ====== ====== ======= ===== =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-30
<PAGE> 111
NORTH BANK CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss).................................................... $ (29) $ 333 $ 1,431
Adjustments to reconcile net income (loss) to net cash from operating
activities:
Depreciation....................................................... 534 613 546
Net amortization................................................... 86 87 76
Provision for loan losses.......................................... 307 180 150
(Gain) loss on sales of other real estate.......................... (76) 5
Gain on sales of loans............................................. (424) (116) (441)
Origination of loans for sale...................................... (24,592) (6,120) (18,765)
Proceeds from sales of loans originated for sale................... 23,926 6,297 19,623
Gain on sale of mortgage servicing rights.......................... (124)
Net (gain) loss on sales of securities............................. 111 374 (1,201)
Change in assets and liabilities
Securities available for sale.................................... (2,169)
Deferred taxes................................................... (178) (109) 28
Accrued interest receivable...................................... (92) (92) 354
Accrued interest payable......................................... 20 59 (13)
Other assets..................................................... 639 (728) 292
Other liabilities................................................ (539) 224 (327)
-------- -------- --------
Net cash from operating activities............................ (431) 1,007 (416)
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales of securities available for sale................. 62,290 20,612
Proceeds from maturities, calls, and paydowns of securities available
for sale........................................................... 3,572
Purchase of securities available for sale............................ (55,974) (8,550)
Proceeds from sales of securities held to maturity................... 9,251
Proceeds from maturities of securities held to maturity.............. 2 3,594 600
Purchase of securities held to maturity.............................. (6,558) (17,980)
Loan originations net of principal payments on loans................. (7,905) (16,595) 7,177
Proceeds from sales of other real estate............................. 815 233
Proceeds from sale of mortgage servicing rights...................... 306
Premises and equipment expenditures.................................. (67) (137) (1,126)
-------- -------- --------
Net cash from investing activities................................. 3,039 (7,401) (2,078)
CASH FLOWS FROM FINANCING ACTIVITIES
Acquisition of deposits.............................................. 6,767
Net change in deposits............................................... 1,233 (360) (16,076)
Dividends............................................................ (289) (288) (266)
Proceeds from FHLB advances.......................................... 3,000 4,728 15,000
Repayment of FHLB advances........................................... (13,728)
Change in Federal funds purchased.................................... (1,100) 1,100
Exercise of stock options............................................ 9
Stock retired........................................................ (147)
-------- -------- --------
Net cash from financing activities............................ (4,108) 5,180 (1,489)
Net change in cash and cash equivalents................................ (1,500) (1,214) (3,983)
Cash and cash equivalents at beginning of year......................... 8,121 9,335 13,318
-------- -------- --------
Cash and cash equivalents at end of year............................... $ 6,621 $ 8,121 $ 9,335
======== ======== ========
Supplemental disclosures of cash flow information
Cash paid during the year for
Interest........................................................... $ 5,364 $ 3,871 $ 4,156
Income taxes....................................................... 35 645
Supplemental disclosures on noncash investing activities
Transfer from loans to other real estate............................. 289 25 542
Transfer of securities to available for sale upon adoption of SFAS
115................................................................ 40,753
Transfer of securities from held to maturity to available for sale
(Note 4)........................................................... 29,499
</TABLE>
See accompanying notes to consolidated financial statements.
F-31
<PAGE> 112
NORTH BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1994
NOTE 1 -- NATURE OF OPERATIONS
The consolidated financial statements include the accounts of North Bank
Corporation and its wholly-owned subsidiary, North Bank (the Bank), and the
Bank's wholly-owned subsidiary, First Central Mortgage Corporation, after
elimination of significant inter-company transactions and accounts.
On October 3, 1994, North Bank acquired First Central Mortgage Corporation,
a residential mortgage originating company headquartered in Saginaw, Michigan.
The acquisition was recorded under the purchase method. Intangible assets
acquired are being amortized over their estimated economic lives.
In October 1995, North Bank acquired a branch of First of America in
Hubbard Lake, Michigan. Deposits acquired were approximately $6.8 million.
Intangible assets associated with this acquisition are being amortized over
their estimated economic lives.
The Bank grants commercial, installment and residential loans to customers
primarily in Northeastern Michigan. Although the loan portfolio is diversified,
a substantial portion of its debtors' ability to honor their contracts is
dependent upon the tourism industry. Primarily all installment and residential
loans are secured by personal property and real estate. Approximately 96% of the
commercial loans are secured by business assets and the remaining 4% are largely
unsecured.
The Bank's revenues primarily arise from interest income from residential
mortgage lending activities, investments and revenue derived from mortgage
banking through origination of, and sales of mortgage loans to the secondary
market with servicing retained, and related servicing income. The Bank maintains
eleven branches within Iosco, Ogemaw, Alpena, Presque Isle, Alcona and
Montmorency counties of Michigan.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following summarize the significant accounting and reporting policies
used in the preparation of the consolidated financial statements:
Use of Estimates in Preparing Financial Statements: The preparation of
financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amounts of assets, liabilities, disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those
estimates. The primary estimates incorporated into the Corporation's financial
statements which are susceptible to change in the near term include the
allowance for loan losses, the determination and carrying value of impaired
loans, the determination and carrying value of intangibles, the determination
and carrying value of certain financial instruments and the realization of
deferred tax assets.
Securities: At December 31, 1993, the Corporation adopted Statement of
Financial Accounting Standards No. 115, Accounting for Certain Investments in
Debt and Equity Securities (SFAS No. 115). As required by SFAS No. 115,
securities classified as available for sale are reported at their fair value and
the related unrealized holding gain or loss is reported, net of related income
tax effects, as a separate component of shareholders' equity, until realized.
Securities available for sale consist of those securities not classified as held
to maturity. Such securities might be sold prior to maturity due to changes in
interest rates, prepayment risks, yield and availability of alternative
investments, liquidity needs or other factors. Securities for which management
has the positive intent and the Corporation has the ability to hold to maturity
are reported at amortized cost.
Premiums and discounts on securities are recognized in interest income
using the interest method over the period to maturity. Gains and losses on the
sale of securities available for sale are determined using the specific
identification method.
F-32
<PAGE> 113
NORTH BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- CONTINUED
Loans and Interest and Fees on Loans: Loans are stated at their principal
amount outstanding. Interest on loans is accrued over the term of the loan based
upon the amount of the principal outstanding. The accrual of interest is
discontinued on a loan when management believes serious doubt exists as to the
collectibility of the loan principal or interest. Loan fees and certain direct
loan origination costs are deferred and amortized into interest income over the
term of the loans using the level yield method.
Allowance for Loan Losses: Because some loans may not be repaid in full, an
allowance for loan losses is recorded. Increases to the allowance are recorded
by a provision for possible loan losses charged to expense. Estimating the risk
of loss and the amount of loss on any loan is necessarily subjective.
Accordingly, the allowance is maintained by management at a level considered
adequate to cover possible losses that are currently anticipated based on past
loss experience, general economic conditions, information about specific
borrower situations including their financial position and collateral values,
and other factors and estimates which are subject to change over time. While
management may periodically allocate portions of the allowance for specific
problem loan situations, the whole allowance is available for any loan
charge-offs that occur. A loan is charged off by management as a loss when
deemed uncollectible, although collection efforts continue and further
recoveries may occur.
Statement of Financial Accounting Standards No. 114, Accounting by
Creditors for Impairment of a Loan (SFAS No. 114), as amended by SFAS No. 118,
was adopted by the Corporation on January 1, 1995. Under this Standard, loans
considered to be impaired are reduced to the present value of expected future
cash flows or to the fair value of collateral, by allocating a portion of the
allowance for loan losses to such loans. If these allocations cause the
allowance for loan losses to require an increase, such an increase is reported
as bad debt expense. The adoption of this Standard was immaterial to the 1995
consolidated financial statements.
The carrying values of impaired loans are periodically adjusted to reflect
cash payments, revised estimates of future cash flows, and increases in the
present value of expected cash flows due to the passage of time. Cash payments
representing interest income are reported as such. Other cash payments are
reported as reductions in the carrying value of the loan. Increases or decreases
due to changes in estimates of future payments and due to the passage of time
are reported within the provision for loan losses.
The Corporation has defined "impaired loans" as those loans for which it is
probable that all principal and interest due will not be repaid in accordance
with the original loan agreement. The Corporation has set minimum balance and
condition requirements before a loan may be considered to be impaired.
Loans Held for Sale: Mortgage loans originated and intended for sale in the
secondary market are carried at the lower of cost or market value in the
aggregate. Net unrealized losses are recognized in a valuation allowance by
adjustments to income.
Premises and Equipment: Premises and equipment are stated at cost less
accumulated depreciation and amortization. Depreciation and amortization are
provided primarily on the straight-line basis over the estimated useful lives of
the assets. Maintenance and repairs are expensed and major improvements are
capitalized. At the time of sales or disposition of an asset, the applicable
cost and accumulated depreciation amounts are removed from the books.
Other Real Estate: Other real estate includes properties acquired through,
or in lieu of, loan foreclosure and are initially recorded at fair value at the
date of foreclosure establishing a new cost basis. After foreclosure, valuations
are periodically performed by management and the real estate is carried at the
lower of carrying amount or fair value less costs to sell. Revenue and expenses
from operations and changes in the valuation allowance are included in loss on
other real estate.
F-33
<PAGE> 114
NORTH BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- CONTINUED
Intangible Assets and Goodwill: The value of core deposits acquired in a
1995 branch acquisition are amortized on an accelerated method over their
expected lives. The excess of purchase price over the fair value of assets and
liabilities acquired (goodwill) is amortized on a straight-line basis over 12
years.
Income Taxes: In 1995, the Corporation retroactively adopted Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes (SFAS No.
109), by restating 1991 and subsequent years. The Corporation records income tax
expense based on the amount of taxes due on its tax return plus deferred taxes
computed based on the expected future tax consequences of temporary differences
between the carrying amounts and tax bases of assets and liabilities, using
enacted tax rates. As changes in tax laws or rates are enacted, deferred tax
assets and liabilities are adjusted through the provision for income taxes.
Net Income (Loss) Per Common Share: Net income (loss) per common share is
based on the weighted average common shares outstanding during the years
presented, retroactively adjusted for a two-for-one stock split effected
December 31, 1993. The stock split was recorded at par value. Beginning in 1994,
Employee Stock Ownership Plan shares are considered outstanding for net
income(loss) per share calculations as they are committed to be released;
unallocated shares are not considered outstanding. The weighted average number
of common shares used in the per share computations were 481,759 in 1995,
472,876 in 1994 and 482,532 in 1993.
Statement of Cash Flows: For purposes of this statement, cash and cash
equivalents include cash on hand, demand deposits in other institutions, federal
funds sold and short-term investments. The Corporation reports net cash flows
for customer loan and deposit transactions.
Impact of New Accounting Standards: The following new accounting standards
have been issued by the Financial Accounting Standards Board that will apply in
1996. Statement of Financial Accounting Standards No. 121, Accounting for the
Impairment of Long-Lived Assets, requires a review of long-term assets for
impairment of recorded value and resulting write-downs if value is impaired.
Statement of Financial Accounting Standards No. 122, Accounting for Mortgage
Servicing Rights, requires recognition of an asset when servicing rights are
retained on in-house originated loans that are sold. Statement of Financial
Accounting Standards No. 123, Accounting for Stock-Based Compensation, requires
proforma disclosure of the effect on net income of valuing future option grants
at their estimated fair value. These Statements are not expected to have a
material effect on the Corporation's financial position or results of
operations.
Reclassification: Certain reclassifications have been made to prior period
consolidated financial statements to place them on a basis comparable with the
current year's consolidated financial statements.
NOTE 3 -- CASH AND DUE FROM BANKS
Included in cash and due from banks are amounts required to be deposited
with the Federal Reserve Bank. These reserve balances vary, depending on the
level of customer deposits in the Corporation's subsidiary bank. At December 31,
1995 and 1994, the Federal Reserve balances were $717,000 and $694,000,
respectively.
F-34
<PAGE> 115
NORTH BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 4 -- SECURITIES
The amortized cost and fair value of securities are as follows at December
31, in thousands:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- -------
<S> <C> <C> <C> <C>
AVAILABLE FOR SALE
1995
U.S. Government agencies............................ $20,660 $120 $ (9) $20,771
Obligations of states and political subdivisions.... 2,282 6 (16) 2,272
Mortgage-backed securities.......................... 24,786 54 (210) 24,630
Equity securities................................... 992 992
------- ---- ------- -------
$48,720 $180 $ (235) $48,665
======= ==== ======= =======
1994
U.S. Government agencies............................ $ 462 $ (3) $ 459
Mortgage-backed securities.......................... 26,769 (1,718) 25,051
Equity securities................................... 993 993
------- ------- -------
$28,224 $ (1,721) $26,503
======= ======= =======
HELD TO MATURITY
1994
U.S. Government agencies............................ $ 952 $ (7) $ 945
Obligations of states and political subdivisions.... 12,965 $ 65 (580) 12,450
Mortgage-backed securities.......................... 16,667 (1,307) 15,360
------- ---- ------- -------
$30,584 $ 65 $ (1,894) $28,755
======= ==== ======= =======
</TABLE>
Transfer of Securities from HTM to AFS: Effective in May 1995, the entire
portfolio of securities held to maturity were reclassified as securities
available for sale. The amount of securities transferred had a book value of
$30,249,000, a fair value of $29,499,000, and a net unrealized loss of $750,000
at the time of transfer. Management believes that classification of all
securities as available for sale will provide the Bank with greater flexibility
in managing the Bank's assets and liabilities.
The amortized cost and fair value of securities at December 31, 1995, by
contractual maturity, are shown below in thousands. Maturities may differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
AVAILABLE FOR SALE
--------------------
AMORTIZED FAIR
COST VALUE
--------- -------
<S> <C> <C>
Due in one year or less................................................... $ 1,243 $ 1,239
Due after 1 year through 5 years.......................................... 6,507 6,522
Due after 5 years through 10 years........................................ 15,192 15,282
Mortgage-backed securities................................................ 24,786 24,630
Equity securities......................................................... 992 992
------- -------
$48,720 $48,665
======= =======
</TABLE>
Because of their variable payments, mortgage-backed securities are not
reported by a specific maturity grouping.
F-35
<PAGE> 116
NORTH BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 4 -- SECURITIES -- CONTINUED
Sales activities for the years ended December 31 were as follows, in
thousands:
<TABLE>
<CAPTION>
AVAILABLE FOR SALE HELD TO MATURITY
----------------------------- ----------------------------
1995 1994 1993 1995 1994 1993
------- ------- ------- ------- ------- ------
<S> <C> <C> <C> <C> <C> <C>
Sales proceeds......................... $62,290 $20,612 $78,981 $9,251
Gross gains............................ 334 104 980 411
Gross losses........................... 445 478 167 23
</TABLE>
At December 31, 1995, mortgage-backed securities with a carrying value of
approximately $11,995,000 were pledged to secure public deposits and advances
from the Federal Home Loan Bank (Note 10).
NOTE 5 -- LOANS
Total loans consist of the following at December 31, in thousands:
<TABLE>
<CAPTION>
1995 1994
------- -------
<S> <C> <C>
Commercial................................................................ $20,923 $17,349
Consumer.................................................................. 30,335 25,907
Real Estate............................................................... 39,073 38,577
------- -------
$90,331 $81,833
======= =======
</TABLE>
Loans held for sale totaled $1,115,000 and $25,000 at December 31, 1995 and
1994, respectively. Loans sold with servicing retained totaled $1,671,000 and
$32,088,000 at December 31, 1995 and 1994, respectively.
NOTE 6 -- ALLOWANCE FOR LOAN LOSSES
An analysis of activity in the allowance for loan losses for the years
ended December 31, follows in thousands:
<TABLE>
<CAPTION>
1995 1994 1993
----- ----- -----
<S> <C> <C> <C>
Balance -- January 1................................................. $ 949 $ 902 $ 993
Provision charged to expense....................................... 307 180 150
Loans charged off.................................................. (386) (207) (348)
Recoveries......................................................... 118 74 107
----- ----- -----
Balance -- December 31............................................... $ 988 $ 949 $ 902
===== ===== =====
</TABLE>
Information regarding impaired loans is as follows for 1995:
<TABLE>
<S> <C>
Average investment in impaired loans................................. $ 319
Interest income recognized on impaired loans on cash basis........... 44
</TABLE>
Information regarding impaired loans at December 31, 1995 is as follows:
<TABLE>
<S> <C>
Total impaired loans................................................. $ 389
Less loans for which no allowance for loan losses is allocated....... (389)
-----
Impaired loans for which an allowance for loan losses is allocated... $ 0
=====
Portion of allowance allocated to these loans........................ $ 0
=====
</TABLE>
F-36
<PAGE> 117
NORTH BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 6 -- ALLOWANCE FOR LOAN LOSSES -- CONTINUED
Nonperforming loans, including loans on nonaccrual and loans past due
greater than 90 days, totaled $1,014,000 at December 31, 1994.
NOTE 7 -- PREMISES AND EQUIPMENT
Premises and equipment by classification are as follows at December 31, in
thousands:
<TABLE>
<CAPTION>
1995 1994
------- -------
<S> <C> <C>
Land...................................................................... $ 640 $ 497
Buildings and improvements................................................ 4,507 4,712
Furniture and fixtures.................................................... 3,974 3,915
------- -------
9,121 9,124
Accumulated depreciation.................................................. (3,541) (3,077)
------- -------
$ 5,580 $ 6,047
======= =======
</TABLE>
NOTE 8 -- DEPOSITS
The aggregate amount of time certificates of deposit in denominations of
$100,000 or more approximated $2,980,000 and $3,567,000 as of December 31, 1995
and 1994, respectively.
At December 31, 1995, the maturity of certificates of deposits for each
year is as follows:
<TABLE>
<S> <C>
1996............................................................................... $39,023
1997............................................................................... 4,432
1998............................................................................... 3,992
1999............................................................................... 4,185
2000............................................................................... 3,783
Afterwards......................................................................... 176
-------
$55,591
=======
</TABLE>
NOTE 9 -- INCOME TAXES
The following are the components of the federal income tax expense
(benefit) for the years ended December 31, in thousands:
<TABLE>
<CAPTION>
1995 1994 1993
----- ---- ----
<S> <C> <C> <C>
Current expense........................................................ $ 57 $ 27 $232
Deferred expense (benefit)............................................. (112) (13) 28
Net operating loss benefit............................................. (66) (96)
----- ---- ----
$(121) $(82) $260
===== ==== ====
</TABLE>
F-37
<PAGE> 118
NORTH BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 9 -- INCOME TAXES -- CONTINUED
The net deferred tax asset (liability) at December 31, 1995 and 1994 is
comprised of the following:
<TABLE>
<CAPTION>
1995 1994
----- ------
<S> <C> <C>
Deferred tax assets
Net unrealized depreciation on securities available for sale.............. $ 19 $ 585
Allowance for loan losses................................................. 154 140
Nonaccrual interest....................................................... 3 14
Pension................................................................... 100
AMT credit carry forward.................................................. 108 107
Net operating loss........................................................ 162 96
Other..................................................................... 32 36
----- ------
478 1,078
Deferred tax liabilities
Fixed assets.............................................................. (348) (223)
Purchase accounting adjustments........................................... (310) (477)
Pension................................................................... (17)
Other..................................................................... (45) (61)
----- ------
(720) (761)
----- ------
Net deferred tax asset (liability).......................................... $(242) $ 317
===== ======
</TABLE>
No valuation allowance has been provided on deferred tax assets.
The difference between the financial statement tax expense and amounts
computed by applying the federal statutory tax rate of 34% to pretax income is
reconciled as follows:
<TABLE>
<CAPTION>
1995 1994 1993
----- ----- -----
<S> <C> <C> <C>
Statutory rate applied to income (loss) before federal income
taxes.............................................................. $ (51) $ 85 $ 575
Add (Deduct)
Effect of tax exempt interest...................................... (125) (210) (299)
Effect of disallowed interest expense.............................. 19 27 31
Other.............................................................. 36 16 (47)
----- ----- -----
$(121) $ (82) $ 260
===== ===== =====
</TABLE>
A tax operating loss carryforward in the amount of $96,000 expires in 2009.
The remaining $66,000 in carryforward expires in 2010.
F-38
<PAGE> 119
NORTH BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 10 -- LONG TERM BORROWINGS
Included in long-term borrowings on the consolidated balance sheets are
advances from the Federal Home Loan Bank (FHLB) which consist of the following
at December 31, in thousands:
<TABLE>
<CAPTION>
RATE AT
DECEMBER 31,1995 MATURITY 1995 1994
----------------- ------------------ ------ -------
<S> <C> <C> <C> <C>
Adjustable Rate Advances:
November 10, 1999 $ 5,000
5.908% July 15, 1998 $9,000 10,000
Fixed Rate Advances:
August 15, 2003 2,364
December 15, 2003 2,364
------ -------
$9,000 $19,728
====== =======
</TABLE>
The adjustable rate advances are priced at the three-month LIBOR rate less
three basis points. The advances are secured by approximately $11,495,000 in
securities as of December 31, 1995. Interest is payable in monthly installments
through the date of maturity. Prepayments on the adjustable rate advances up to
10% of the principal balance will be accepted by the FHLB given the
Corporation's notification to the FHLB of their intent to prepay.
NOTE 11 -- EMPLOYEE BENEFIT PLANS
The Corporation maintains an Employee Stock Ownership Plan (ESOP), which
invests primarily in stock of North Bank Corporation. The ESOP is a stock bonus
and defined contribution plan covering substantially all full-time employees
ages 21 or older, having completed one full year of service. In accordance with
the terms of the ESOP, employees may make voluntary contributions to the Plan of
up to 10 percent of eligible compensation, subject to certain limitations. The
Corporation will match employee contributions equal to the greater of 50% of the
first 6% of compensation deferred by the participant or a discretionary amount
determined by the employer. The Corporation may also make a supplemental
matching contribution to the Plan in an amount determined by the employer. The
Corporation's contributions for 1995 and 1994 were $62,000 and $49,000,
respectively. At December 31, 1995, 48,114 shares were allocated to individual
participants under the plan.
The ESOP had a loan from a commercial bank which was paid off during 1995.
Accordingly, the Corporation had guaranteed the ESOP's debt. As loan payments
were made, unallocated shares were released and allocated to plan participants.
The ESOP's repayments of the debt were made from the contributions and dividends
on stock it received from the Corporation.
The Corporation has a stock option plan, adopted by shareholders in 1993,
which provides for the grant of a maximum of 20,000 shares of the Corporation's
common stock to certain officers and employees at a price which is not less than
the fair market value of the stock at the time the options are granted. The
options
F-39
<PAGE> 120
NORTH BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 11 -- EMPLOYEE BENEFIT PLANS -- CONTINUED
granted are exercisable immediately and expire five years after the date of the
grant. No options were granted in 1993. Activity in the plan was as follows:
<TABLE>
<CAPTION>
SHARES
OPTION SUBJECT TO
PRICE OPTION
------ ----------
<S> <C> <C>
Options granted in 1994................................................... $16.25 3,039
Options expired......................................................... 16.25 (218)
-----
Outstanding December 31, 1994............................................. 2,821
Options granted......................................................... 16.45 3,412
Options expired......................................................... 16.25 (262)
Options expired......................................................... 16.45 (255)
Options exercised....................................................... 16.25 (283)
Options exercised....................................................... 16.45 (279)
-----
Outstanding December 31, 1995............................................. 5,154
Exercisable at December 31, 1995.......................................... 16.25 2,276
-----
16.45 2,878
-----
5,154
=====
</TABLE>
Nonqualified stock options were granted to an officer of the Corporation
during 1993. The options cover 4,000 shares of common stock at the price of
$15.13 and expire in 1998. At December 31, 1995, the options had not been
exercised.
The Corporation sponsored a non-contributory, defined benefit pension plan
covering substantially all employees. On December 31, 1994, the Corporation
curtailed the defined benefit pension plan, which resulted in the freezing of
benefits as of that date. The net loss due to the plan curtailment was $72,230
for 1994. During December 1995, the Corporation terminated the plan and settled
$1,103,000 of the accumulated benefit obligation by making cash payments to plan
participants and purchasing nonparticipating annuity contracts. The remaining
accumulated benefit obligation is expected to be settled by April 1996. Defined
benefits were not provided under any successor plan. The net loss due to the
plan settlement was $773,910 for 1995.
The following sets forth the plan's funded status and amounts recognized in
the consolidated balance sheets at December 31, in thousands:
<TABLE>
<CAPTION>
1995 1994
---- -------
<S> <C> <C>
Actuarial present value of vested accumulated benefit obligation............ $(88) $(1,098)
Plan assets at fair value................................................... 178 802
---- -------
Excess (deficiency) of plan assets over (under) accumulated benefit
obligation............................................................. 90 (296)
Unrecognized net loss....................................................... 536
Unrecognized transition asset............................................... (33)
Adjustment required to recognize minimum liability.......................... (503)
---- -------
Net pension assets (liabilities).......................................... $ 90 $ (296)
==== =======
</TABLE>
F-40
<PAGE> 121
NORTH BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 11 -- EMPLOYEE BENEFIT PLANS -- CONTINUED
Net pension cost included in operations, including the effects of
curtailment and settlement, consisted of the following components:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- -------
<S> <C> <C> <C>
Service cost-benefits earned.......................................... $ 88 $ 80
Interest cost on projected benefit obligation......................... $ 75 80 79
Expected return on plan assets........................................ (92) (76) (71)
Net amortization and deferral......................................... (1) 34 34
Net loss due to curtailment........................................... 72
Net loss due to settlement............................................ 774
---- ---- -------
Net periodic pension cost........................................... $756 $198 $ 122
==== ==== =======
</TABLE>
In accordance with the provisions of Statement of Financial Accounting
Standards No. 87, the Corporation recorded an additional minimum pension
liability adjustment in 1994 representing the excess of the accumulated benefit
obligation over the fair value of plan assets plus the amount recognized as
prepaid pension costs. The additional minimum pension liability was included in
"Other liabilities". This transaction, which had no impact on earnings, resulted
in a reduction of shareholders' equity in 1994 of $332,640, net of tax.
A weighted average discount rate of 7% was used in determining the
actuarial present value of the accumulated benefit obligation in 1995 and 1994.
The expected long-term rate of return on plan assets was 9% in both years.
NOTE 12 -- RELATED PARTY TRANSACTIONS
The Corporation enters into transactions with certain executive officers,
directors, and their related interests. Included in these transactions are loans
which amounted to approximately $130,000 and $309,000 at December 31, 1995 and
1994, respectively. Deposit accounts with the same individuals amounted to
$549,324 and $492,863 at December 31, 1995 and 1994, respectively.
NOTE 13 -- COMMITMENTS AND CONTINGENCIES
From time to time, the Corporation is involved in legal matters in the
ordinary course of business. Management believes that the ultimate resolution of
such matters will not have a material effect on the consolidated financial
statements.
The Bank is a party to financial instruments with off-balance sheet risk in
the normal course of business to meet financing needs of its customers. These
financial instruments include commitments to make loans and unused lines of
credit. The Bank follows the same credit policy to make such commitments as is
followed for loans and investments recorded in the consolidated financial
statements.
As of December 31, 1995, the Bank has outstanding commitments to make loans
of which 67% are at fixed rates. These interest rates range from 8.25% to 9.75%.
The Bank also funds unused lines of credit of which 26% are at fixed rates. The
fixed interest rates on the line of credits range from 6.20% to 11.75%.
Outstanding commitments at December 31 were as follows:
<TABLE>
<CAPTION>
1995 1994
---------- ----------
<S> <C> <C>
To make loans........................................................ $ 341,000 $ 201,000
To fund lines of credit.............................................. 7,152,000 3,091,000
To extend letters of credit.......................................... 75,000 68,000
</TABLE>
F-41
<PAGE> 122
NORTH BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 14 -- NORTH BANK CORPORATION (PARENT COMPANY ONLY) CONDENSED FINANCIAL
INFORMATION (IN THOUSANDS)
Presented below are condensed financial statements for the parent company:
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
1995 1994
------- ------
<S> <C> <C>
Assets
Cash.................................................................. $ 34 $ 37
Investment in subsidiary.............................................. 10,545 9,415
Other assets.......................................................... 67 71
-------- ------
$10,646 $9,523
======== ======
Shareholders' equity.................................................... $10,646 $9,523
======== ======
</TABLE>
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ------
<S> <C> <C> <C>
Dividends from subsidiary......................................... $289 $317 $ 578
Operating expenses................................................ 20 73 64
---- ---- ------
Income before federal income tax and equity in undistributed
or excess distributed earnings or loss of subsidiary........ 269 244 514
Federal income tax benefit........................................ 4 25 20
---- ---- ------
Income before equity in undistributed or excess distributed
earnings or loss of subsidiary.............................. 273 269 534
Equity in undistributed or excess distributed earnings or loss of
subsidiary...................................................... (302) 64 897
---- ---- ------
Net income................................................... $(29) $333 $1,431
==== ==== ======
</TABLE>
F-42
<PAGE> 123
NORTH BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 14 -- NORTH BANK CORPORATION (PARENT COMPANY ONLY) CONDENSED FINANCIAL
INFORMATION (IN THOUSANDS) -- CONTINUED
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
1995 1994 1993
----- ----- -------
<S> <C> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES
Net income (loss).......................................... $ (29) $ 333 $ 1,431
Adjustments to reconcile net income to net cash from
operating activities
Equity in subsidiary's net (income)loss................. 13 (381) (1,475)
Increase (decrease) in other assets..................... 4 (13) (8)
----- ----- -------
Net cash from operating activities................. (12) (61) (52)
CASH FLOW FROM INVESTING ACTIVITIES
Increase (decrease) in advances to subsidiary.............. (45)
Dividends from subsidiary.................................. 289 317 578
----- ----- -------
Net cash from investing activities................. 289 317 533
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid to shareholders............................. (289) (288) (265)
Issuance of common stock................................... 9
Repurchases of common stock................................ (147)
----- ----- -------
Net cash from financing activities................. (280) (288) (412)
Net increase in cash and cash equivalents.................... (3) (32) 69
Cash at beginning of period................................ 37 69
----- ----- -------
Cash at end of year................................ $ 34 $ 37 $ 69
===== ===== =======
</TABLE>
NOTE 15 -- DISCLOSURES REGARDING FAIR VALUE OF FINANCIAL INSTRUMENTS (IN
THOUSANDS)
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments:
Cash and Short-Term Investments: For these short-term instruments, the
carrying amount is a reasonable estimate of fair value.
Securities: For securities, fair value is based upon market price quotes
from brokers utilizing pricing formulas.
Loans: The fair value of loans is estimated by discounting future cash
flows using the current rates at which similar loans would be made to borrowers
with similar credit ratings and for the same remaining maturities.
Deposit Liabilities: The fair value of demand deposits, savings accounts,
and certain money market deposits is the amount payable on demand at the
reporting date. The fair value of fixed-maturity certificates of deposit is
estimated by discounting future cash flows using the rates currently offered for
deposits of similar remaining maturities.
Long-Term Borrowings: The fair value of FHLB advances is estimated by
discounting future cash flows using rates currently offered for similar terms.
Accrued Interest Receivable/Payable: For these items, the carrying amount
is a reasonable estimate of fair value.
F-43
<PAGE> 124
NORTH BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 15 -- DISCLOSURES REGARDING FAIR VALUE OF FINANCIAL INSTRUMENTS (IN
THOUSANDS) -- CONTINUED
Commitments to Extend Credit and Standby Letters of Credit: The fair value
of commitments is estimated using the fees currently charged to enter similar
agreements, taking into account the remaining terms of the agreements and the
present creditworthiness of the counterparties. For fixed-rate loan commitments,
fair value also considers the difference between current levels of interest
rates and the committed rates. The fair value of letters of credit is based on
fees currently charged for similar agreements or on the estimated costs to
terminate them or otherwise settle the obligations with the counterparties at
the reporting date. The fair values associated with these financial instruments
are immaterial at December 31, 1995 and 1994.
The estimated fair values of the Corporation's financial instruments are as
follows:
<TABLE>
<CAPTION>
1995 1995
-------------------- --------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Financial assets
Cash and short-term investments................... $ 6,621 $ 6,621 $ 8,121 $ 8,121
Securities........................................ 48,665 48,665 57,087 55,257
Loans............................................. 90,331 90,159 81,833 80,308
Less: allowance for loan loss..................... (988) (988) (949) (949)
Accrued interest receivable....................... 1,102 1,102 1,010 1,010
Financial liabilities
Deposits.......................................... 131,765 132,267 123,765 124,121
Borrowings........................................ 9,000 9,000 20,828 20,328
Accrued interest payable.......................... 516 516 496 496
</TABLE>
NOTE 16 -- RESTRICTIONS ON SUBSIDIARY DIVIDENDS
Banking laws and regulations restrict the amount the Bank can transfer to
the Corporation in the form of cash dividends. At December 31, 1995, $3.6
million of retained earnings of the Bank was available for distribution to the
Corporation as dividends without prior regulatory approval. It is not the intent
of management to pay dividends in amounts which would reduce the capital of the
Bank to a level below that which is considered prudent by management and in
accordance with the guidelines of regulatory authorities.
NOTE 17 -- PENDING MERGER
In February 1996, the Corporation entered into a definitive agreement to be
acquired by Independent Bank Corporation of Ionia, Michigan (a publicly-traded
corporation). The purchase price is estimated to be $33 per share of North Bank
Corporation common stock. The acquisition is subject to both regulatory and
shareholder approval and is expected to be completed during the second quarter
of 1996.
F-44
<PAGE> 125
------------------------------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary...................... 4
Risk Factors............................ 9
Recent Developments..................... 15
Use of Proceeds......................... 16
Market for the Preferred Securities..... 16
Accounting Treatment.................... 16
Capitalization.......................... 17
Selected Consolidated Financial Data.... 18
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................ 19
Business................................ 34
Supervision and Regulation.............. 39
Description of Preferred Securities..... 46
Description of Subordinated
Debentures............................ 58
Book-Entry Issuance..................... 67
Description of Guarantee................ 69
Relationship Among the Preferred
Securities, the Subordinated
Debentures and the Guarantee.......... 71
Description of Capital Stock............ 73
Certain Federal Income Tax
Consequences.......................... 74
ERISA Considerations.................... 77
Underwriting............................ 78
Validity of Securities.................. 78
Experts................................. 79
Available Information................... 79
Incorporation of Certain Documents by
Reference............................. 80
Index to Consolidated Financial
Statements............................ F-1
</TABLE>
------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION AND
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY IBC
CAPITAL, THE COMPANY OR THE UNDERWRITER. NEITHER THE DELIVERY OF THIS PROSPECTUS
NOR ANY SALE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION
THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE
HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO ITS DATE. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR
A SOLICITATION OF AN OFFER TO BUY SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH
SUCH OFFER OR SOLICITATION IS UNLAWFUL.
------------------------------------------------------
------------------------------------------------------
600,000 PREFERRED SECURITIES
IBC CAPITAL FINANCE
9.25% CUMULATIVE TRUST PREFERRED SECURITIES
(LIQUIDATION AMOUNT $25 PER PREFERRED SECURITY)
FULLY AND UNCONDITIONALLY GUARANTEED, AS
DESCRIBED HEREIN, BY
INDEPENDENT BANK LOGO
------------------------
Prospectus
December 13, 1996
------------------------
STIFEL, NICOLAUS & COMPANY
INCORPORATED
------------------------------------------------------
