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