<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, 1997 or
/ / Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from to
------------- ------------
Commission file Number 0-7818
----------------------------------------------------------
INDEPENDENT BANK CORPORATION
- -------------------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
MICHIGAN 38-2032782
- ---------------------------------- -----------------------------
(State or other jurisdiction of (I.R.S. employer
incorporation) identification no.)
230 W. Main St., P.O. Box 491, Ionia, Michigan 48846
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (616) 527-9450
---------------------------
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $1.00 Par Value
- --------------------------------------------------------------------------------
(Title of class)
9.25% Cumulative Trust Preferred Securities, $25.00 Liquidation Amount
- --------------------------------------------------------------------------------
(Title of class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
-----
State the aggregate market value of the voting stock held by non-affiliates of
the Registrant. (For this purpose only, the affiliates of the Registrant have
been assumed to be the executive officers and directors of the Registrant and
their associates.)
Common Stock, $1.00 Par Value - $168,573,923
- --------------------------------------------------------------------------------
(Based on $40.25 per common share, the last reported sales price on the Nasdaq
National Market tier of the Nasdaq Stock Market on March 17, 1998. 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 - 4,621,631 shares at March 17, 1998
Documents incorporated by reference
Portions of the Registrant's definitive proxy statement, and appendix thereto
dated March 13, 1998, relating to its April 21, 1998 Annual Meeting of
Shareholders are incorporated by reference into Part II and Part III of this
form.
The Exhibit Index appears on Page 24
<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, general 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 and their respective
subsidiaries.
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, 1997:
<TABLE>
<CAPTION>
Main
Office Total Total
Bank Location Deposits Loans
---- -------- -------- -----
<S> <C> <C> <C>
Independent Bank Ionia $250,738,000 $241,808,000
Independent Bank
West Michigan Rockford 151,006,000 206,991,000
Independent Bank
South Michigan Leslie 111,126,000 126,799,000
Independent Bank
East Michigan Caro 191,139,000 190,334,000
</TABLE>
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.
On 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 selling and issuing 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 also
offer title insurance services through a separate subsidiary. 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 54 branch and 9 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 Branching Efficiency Act of 1994 (the "Riegle-Neal Act").
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>
1997 1996 1995
----- ----- ----
<S> <C> <C> <C>
Interest and fees on loans 76.6% 76.5% 76.1%
Other interest income 13.5 15.0 16.3
Non-interest income 9.9 8.5 7.6
----- ----- -----
100.0% 100.0% 100.0%
===== ===== =====
</TABLE>
As of December 31, 1997, the Registrant and the Banks had 507 full-time
employees and 201 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
<PAGE> 4
ITEM 1. BUSINESS (Continued)
General
Financial institutions and their holding companies are extensively regulated
under federal and state law. Consequently, the growth and earnings performance
of the Registrant and the Banks can be affected not only by management decisions
and general and local economic conditions, but also by the statutes administered
by, and the regulations and policies of, various governmental regulatory
authorities. The effect of such statutes, regulations and policies and any
changes thereto can be significant and cannot be predicted.
The system of supervision and regulation applicable to the Registrant and the
Banks establishes a comprehensive framework for their respective operations and
is intended primarily for the protection of the Federal Deposit Insurance
Corporation's (the "FDIC") deposit insurance funds, the depositors of the Banks,
and the public, rather than the shareholders of the Registrant. Federal law and
regulations, including provisions added by the Federal Deposit Insurance
Corporation Improvement Act of 1991 ("FDICIA") and regulations promulgated
thereunder, establish supervisory standards applicable to the lending activities
of the Banks, including internal controls, credit underwriting, loan
documentation, and loan-to-value ratios for loans secured by real property.
The Registrant
General. The Registrant is a bank holding company and, as such, is registered
with, and subject to regulation by, the Board of Governors of the Federal
Reserve System (the "Federal Reserve") under the Bank Holding Company Act, as
amended (the "BHCA"). Under the BHCA, the Registrant is subject to periodic
examination by the Federal Reserve, and is required to file periodic reports of
its operations and such additional information as the Federal Reserve may
require.
In accordance with Federal Reserve policy, a bank holding company is expected to
act as a source of financial strength to its subsidiary banks and to commit
resources to support the subsidiary banks in circumstances where the bank
holding company might not do so absent such policy. In addition, if the
Commissioner of the Michigan Financial Institutions Bureau (the "Commissioner")
deems a bank's capital to be impaired, the Commissioner may require a bank to
restore its capital by special assessment upon a bank holding company, as the
bank's sole shareholder. If the bank holding company were to fail to pay such
assessment, the directors of that bank would be required, under Michigan law, to
sell the shares of that bank stock owned by the bank holding company to the
highest bidder at either public or private auction and use the proceeds of the
sale to restore the bank's capital.
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 a bank holding company of any
voting shares of any bank which would result in the bank holding company's
direct or indirect ownership or control of more than 5% of any class of voting
shares of such bank, and any merger or consolidation of the bank holding company
with another bank holding company, will require the prior written approval of
the Federal Reserve under the BHCA. In acting on such applications, the Federal
Reserve must consider various statutory factors. 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.
3
<PAGE> 5
ITEM 1. BUSINESS (Continued)
In addition and subject to certain exceptions, the Change in the Bank Control
Act ("Control Act") and regulations promulgated thereunder by the Federal
Reserve, require any person acting directly or indirectly, or through or in
concert with one or more persons, to give the Federal Reserve 60 days' written
notice before acquiring control of a bank holding company. Transactions which
are presumed to constitute the acquisition of control include the acquisition of
any voting securities of a bank holding company having securities registered
under Section 12 of the Securities Exchange Act of 1934, as amended, if, after
the transaction, the acquiring person (or persons acting in
concert) owns, controls or holds with power to vote 25% or more of any class of
voting securities of the institution. The acquisition may not be consummated
subsequent to such notice if the Federal Reserve issues a notice within 60 days,
or within certain extensions of such period, disapproving the same.
The merger or consolidation of an existing bank subsidiary of a bank holding
company with another bank, or the acquisition by such a subsidiary of the assets
of another bank, or the assumption of the deposit and other liabilities by such
a subsidiary requires the prior written approval of the responsible Federal
depository institution regulatory agency under the Bank Merger Act, based upon a
consideration of statutory factors similar to those outlined above with respect
to the BHCA. In addition, in certain 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 Economic Growth and
Regulatory Paperwork Reduction Act of 1996 ("EGRPRA") streamlined 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. Subsidiary banks are subject to statutory restrictions on their
ability to pay dividends to a bank holding company. 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
4
<PAGE> 6
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
ITEM 1. BUSINESS (Continued)
enforcement powers over subsidiary 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.
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 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 Registrant does not have any holders of its preferred stock.
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, 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, 1997, each of the Banks' ratios exceeded minimum requirements
for the well-capitalized category. See note 16 to the 1997 consolidated
financial statements.
FDICIA requires the federal depository institution regulators to take prompt
corrective action with 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 indicated
by its capital position if the appropriate federal depository institution
regulatory agency determines the institution to be otherwise in an unsafe or
unsound condition or to be engaged in an unsafe or unsound practice.
5
<PAGE> 7
Commissioner Assessments. Michigan banks are required to pay supervisory fees to
the Commissioner to fund the operations of the Michigan Financial Institutions
Bureau. The amount of supervisory fees paid by a bank is based upon the bank's
total assets, as reported to the Commissioner.
ITEM 1. BUSINESS (Continued)
FICO Assessments. Pursuant to federal legislation enacted September 30, 1996,
the banks, as members of BIF, are subject to assessments to cover the payments
on outstanding obligations of the financing corporation ("FICO"). FICO was
created in 1987 to finance the recapitalization of the Federal Savings and Loan
Insurance Corporation, the predecessor to the FDIC's Savings Association
Insurance Fund (the "SAIF), which insures the deposits of thrift institutions.
Until January 1, 2000, the FICO assessments made against BIF members may not
exceed 20 percent of the amount of FICO assessments made against SAIF members.
Currently, SAIF members pay FICO assessments at a rate equal to approximately
0.063 percent of deposits, while BIF members pay FICO assessments at a rate
equal to approximately 0.013 percent of deposits. Between January 1, 2000, and
the maturity of the outstanding FICO obligations in 2019, BIF members and SAIF
members will share the cost of the interest on the FICO bonds on a pro rata
basis. It is estimated that FICO assessments during this period will be less
than 0.025 percent of deposits.
Dividends. Under Michigan law, 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.
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. 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 banks to their directors and officers, to directors and
officers of bank holding company's and their subsidiaries, to principal
shareholders of the Registrant, and to "related interests" of such directors,
officers and principal shareholders.
Safety and Soundness Standards. Pursuant to FDICIA the FDIC adopted guidelines
to 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
6
<PAGE> 8
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.
ITEM 1. BUSINESS (Continued)
Other. 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. The Riegle-Neal Act also 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 allowed individual states to "opt-out" of certain provisions of the
Riegle-Neal Act if appropriate legislation was enacted prior to June 1, 1997.
Michigan did not opt out of the Riegle-Neal Act, and now permits both U.S. and
non-U.S. banks to establish branch offices in Michigan. The Michigan Banking
Code permits, in appropriate circumstances and with the approval of the
Commissioner, (i) the acquisition of all or substantially all of the assets of a
Michigan-chartered bank by an FDIC-insured bank, savings bank, or savings and
loan association located in another state, (ii) the acquisition by a
Michigan-chartered bank of all or substantially all of the assets of an
FDIC-insured bank, savings bank or savings and loan association located in
another state, (iii) 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 by Michigan, (iv) the establishment by a foreign bank,
which has not previously designated any other state as its home state under the
International Banking Act of 1978, of branches located in Michigan, and (v) the
establishment or acquisition of branches in Michigan by FDIC-insured banks
located in other states, the District of Columbia or U.S. territories or
protectorates having laws permitting Michigan-chartered banks to establish
branches in such jurisdiction. Further, the Michigan Banking Code permits, upon
written notice to the Commissioner, (i) the acquisition by a Michigan-chartered
bank of one or more branches (not comprising all or substantially all of the
assets) of an FDIC-insured bank, savings bank or savings and loan association
located in another state, the District of Columbia, or a U.S. territory or
protectorate, (ii) the establishment by Michigan-chartered banks of branches
located in other states, the District of Columbia, or U.S. territories or
protectorates, and (iii) the consolidation of one or more Michigan-chartered
banks and FDIC-insured banks, savings banks or savings and loan associations
located in other states, with the resulting organization chartered by one of
such other states.
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, 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 for each of the years ended December 31,:
<TABLE>
<CAPTION>
1997 1996 1995
------------------------- ------------------------------- --------------------------------
Average Yield/ Average Yield/ Average Yield/
ASSETS Balance Interest Rate Balance Interest Rate Balance Interest Rate
- ------ ------- -------- ---- ------- -------- ---- ------- -------- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(dollars in thousands)
Loans--all domestic $689,166 $65,478 9.50% $510,434 $49,478 9.69% $382,644 $37,654 9.84%
Securities
Taxable 115,046 7,922 6.89 100,945 6,710 6.65 93,064 5,919 6.36
Tax-exempt 52,139 4,423 8.48 39,393 3,433 8.72 31,516 2,914 9.25
Other investments 13,145 999 7.60 13,946 971 6.96 6,153 421 6.84
-------- ------- -------- ------- -------- -------
Interest earning 869,496 78,822 9.07 664,718 60,592 9.12 513,377 46,908 9.14
assets -------- -------- ----
Cash and due from
banks 26,251 21,573 16,091
Other assets, net 41,395 21,038 14,115
-------- -------- --------
Total assets $937,142 $707,329 $543,583
======== ======== ========
LIABILITIES
Savings and NOW $331,959 8,480 2.55 $250,977 6,116 2.44 $217,721 5,515 2.53
Time deposits 263,046 14,134 5.37 187,117 10,022 5.36 141,292 6,955 4.92
Long-term debt 8,245 602 7.30 4,875 335 6.87
Other borrowings 187,519 11,559 6.16 144,703 8,340 5.76 89,048 5,430 6.10
-------- ------- -------- ------- -------- -------
Interest bearing
liabilities 790,769 34,775 4.40 587,672 24,813 4.22 448,061 17,900 4.00
------- ------- -------
Demand deposits 81,191 61,161 46,539
Other liabilities 9,444 8,597 5,296
Shareholders' equity 55,738 49,899 43,687
-------- -------- --------
Total liabilities and
shareholders'
equity $937,142 $707,329 $543,583
======== ======== ========
Net interest income $44,047 $35,779 $29,008
======= ======= =======
Net interest income as
a percent of
earning assets 5.07% 5.38% 5.65%
==== ==== ====
</TABLE>
(1) Average loans outstanding includes the daily average balance of
non-performing loans. Interest on loans does not include additional
interest of approximately $252,000, $183,000 and $199,000 for 1997, 1996
and 1995, 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 $4,001,000 in 1997, $3,331,000 in 1996 and $2,702,000 in 1995.
(2) Interest on tax-exempt securities has been adjusted to reflect preferential
taxation. The adjustment assumes a marginal tax rate of 35% in 1997 and 34%
in 1996 and 1995. 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>
1997 Compared to 1996 1996 Compared to 1995
---------------------------------- ----------------------------------
Volume Rate Net Volume Rate Net
------ ---- --- ------ ---- ---
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Increase (decrease) in interest income (1)
Loans--all domestic $ 17,000 $ (1,000) $ 16,000 $ 12,395 $ (571) $ 11,824
Taxable securities 964 248 1,212 516 275 791
Tax-exempt securities (2) 1,083 (93) 990 695 (176) 519
Other investments (58) 86 28 542 8 550
-------- -------- -------- -------- -------- --------
Total interest income 18,989 (759) 18,230 14,148 (464) 13,684
-------- -------- -------- -------- -------- --------
Increase (decrease) in interest expense (1)
Savings and NOW 2,056 308 2,364 817 (216) 601
Time deposits 4,080 32 4,112 2,412 655 3,067
Long-term debt 245 22 267 335 335
Other borrowings 2,607 612 3,219 3,223 (313) 2,910
-------- -------- -------- -------- -------- --------
Total interest expense 8,988 974 9,962 6,787 126 6,913
-------- -------- -------- -------- -------- --------
Net interest income $ 10,001 $ (1,733) $ 8,268 $ 7,361 $ (590) $ 6,771
======== ======== ======== ======== ======== ========
</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 35% in 1997 and 34%
in 1996 and 1995.
II. INVESTMENT PORTFOLIO
(A) The following table sets forth the book value of securities at December
31:
<TABLE>
<CAPTION>
1997 1996 1995
--------- -------- --------
(in thousands)
<S> <C> <C> <C>
Held to maturity
U.S. Government agencies $ 997 $ 1,484 $ 2,559
States and political subdivisions 18,353 21,192 20,142
Mortgage-backed securities 2,785 3,688 4,487
Other securities 390 390 718
-------- -------- -------
Total $ 22,525 $ 26,754 $27,906
======== ======== =======
Available for sale
U.S. Treasury $ 7,105 $ 27,722 $23,272
U.S. Government agencies 15,492 21,159 6,623
States and political subdivisions 26,849 21,854 9,290
Mortgage-backed securities 53,147 57,528 37,722
Other securities 8,176 8,589 10,646
-------- -------- -------
Total $110,769 $136,852 $87,553
======== ======== =======
</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, 1997 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 $ 997 7.53%
States and political
subdivisions $1,466 8.63% $12,139 9.45% $3,811 9.57% 937 9.09
Mortgage-backed securities --
guaranteed or issued by
U.S. Government agencies 469 7.29 1,886 7.45 430 8.83
Other securities 200 5.45 190 6.50
------ ------- ------ ------
Total $2,135 7.95% $14,215 9.01% $4,241 9.35% $1,934 8.20%
====== ======= ====== ======
Tax equivalent adjustment
for calculations of yield $44 $402 $128 $30
=== ==== ==== ===
Available for sale
U.S. Treasury $ 7,105 6.27%
U.S. Government agencies 1,000 6.00 $14,492 6.59%
States and political
subdivisions $1,433 8.20% 7,044 9.40 10,008 8.66 $ 8,364 8.26%
Mortgage backed securities
Guaranteed or issued by U.S.
Government agencies 1,944 7.57 34,765 7.17 2,717 6.90 8,337 7.18
Other mortgage-backed
securities 722 7.61 4,662 6.75
Other securities 5,201 6.68 2,975 6.88
------ ------- ------- -------
Total $4,099 7.75% $59,777 7.21% $27,217 7.33% $19,676 7.54%
====== ======= ======= =======
Tax equivalent adjustment
for calculations of yield $41 $232 $303 $242
=== ==== ==== ====
</TABLE>
The rates set forth in the tables above for obligations of state and political
subdivisions have been restated on a tax equivalent basis assuming a marginal
tax rate of 35% in 1997 and 34% in 1996 and 1995. 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 5.61% 3.02% 8.63%
1-5 years 6.14 3.31 9.45
5-10 years 6.22 3.35 9.57
After 10 years 5.91 3.18 9.09
Available for sale
Under 1 year 5.33% 2.87% 8.20%
1-5 years 6.11 3.29 9.40
5-10 years 5.63 3.03 8.66
After 10 years 5.37 2.89 8.26
</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>
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(in thousands)
<S> <C> <C> <C> <C> <C>
Loans held for sale $ 21,754 $ 11,583 $ 16,047 $ 5,933 $ 6,376
Real estate mortgage 416,689 331,150 225,900 166,794 136,579
Commercial and agricultural 199,098 164,304 108,879 103,984 91,655
Installment 128,391 114,250 83,265 65,947 54,033
-------- -------- -------- -------- --------
Total Loans $765,932 $621,287 $434,091 $342,658 $288,643
======== ======== ======== ======== ========
</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, 1997:
<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 $ 13,977 $ 27,932 $ 37,109 $ 79,018
Commercial and agricultural 95,574 88,305 15,219 199,098
-------- -------- -------- --------
Total $109,551 $116,237 $ 52,328 $278,116
======== ======== ======== ========
</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, 1997:
<TABLE>
<CAPTION>
Fixed Variable
Rate Rate Total
-------- -------- ------
(in thousands)
<S> <C> <C> <C>
Due after one but within five years $ 96,758 $19,479 $116,237
Due after five years 37,855 14,473 52,328
-------- ------- --------
Total $134,613 $33,952 $168,565
======== ======= ========
</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>
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(in thousands)
<S> <C> <C> <C> <C> <C>
(a) Loans accounted for on a
non-accrual basis (1, 2) $3,298 $1,711 $1,886 $2,052 $1,707
(b) Aggregate amount of loans
ninety days or more past due
(excludes loans in (a) above) 1,904 1,994 427 254 408
(c) Loans not included above which
are "troubled debt restructurings"
as defined in Statement of Financial
Accounting Standards No. 15 (2) 184 197 247 528 1,098
------ ------ ------ ------ ------
Total non-performing loans $5,386 $3,902 $2,560 $2,834 $3,213
====== ====== ====== ====== ======
</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 $442,000 would have been earned in 1997 had loans
in categories (a) and (c) remained at their original terms, however, only
$190,000 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 $1,000,000 at December 31,
1997. 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, 1997, 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, 1997, 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, 1997.
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>
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Loans outstanding at the end of
the year (net of unearned fees) $765,932 $621,287 $434,091 $342,658 $288,643
======== ======== ======== ======== ========
Average loans outstanding for
the year (net of unearned fees) $689,166 $510,434 $382,644 $294,968 $259,334
======== ======== ======== ======== ========
Balance of allowance for loan losses
at beginning of year $6,960 $5,243 $5,054 $5,053 $4,023
------ ------ ------ ------ ------
Loans charged-off
Real estate 78 24 24 14 38
Commercial and agricultural 262 66 113 311 306
Installment 1,285 1,046 575 546 370
----- ------ ------ ------ ------
Total loans charged-off 1,625 1,136 712 871 714
----- ------ ------ ------ ------
Recoveries of loans previously
charged-off
Real estate 1 8 28 6 11
Commercial and agricultural 149 138 115 151 156
Installment 435 294 122 242 164
--- ------ ------ --- ------
Total recoveries 585 440 265 399 331
--- ------ ------ --- ------
Net loans charged-off 1,040 696 447 472 383
Additions to allowance charged to
operating expense 1,750 1,233 636 473 657
Allowance on loans acquired 1,180 756
------ ------ ------ ------ ------
Balance at end of year $7,670 $6,960 $5,243 $5,054 $5,053
====== ====== ====== ====== ======
Net loans charged-off as a percent of
average loans outstanding for the year 0.15% 0.14% 0.12% 0.16% 0.15%
Allowance for loan losses as a
percent of loans outstanding at
the end of the year 1.00 1.12 1.21 1.48 1.75
</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>
1997 1996 1995
---- ---- ----
Percent Percent Percent
Allowance of Loans to Allowance of Loans to Allowance of Loans to
Amount Total Loans Amount Total Loans Amount Total Loans
-------------- ------------- -------------- ------------- -------------- -------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Commercial and
agricultural $2,200 26.4% $2,176 26.4% $1,612 25.8%
Real estate
mortgage 322 56.8 257 55.2 162 55.0
Installment 892 16.8 834 18.4 597 19.2
Unallocated 4,256 3,693 2,872
------ ----- ------ ----- ------ -----
Total $7,670 100.0% $6,960 100.0% $5,243 100.0%
====== ===== ====== ===== ====== =====
<CAPTION>
1994 1993
---- ----
Percent Percent
Allowance of Loans to Allowance of Loans to
Amount Total Loans Amount Total Loans
-------------- ------------- -------------- -------------
(dollars in thousands)
<S> <C> <C> <C> <C>
Commercial and
agricultural $1,655 30.3% $2,222 31.8%
Real estate
mortgage 177 50.4 270 49.5
Installment 474 19.3 464 18.7
Unallocated 2,748 2,097
----- ----- ------ -----
Total $5,054 100.0% $5,053 100.0%
====== ===== ====== =====
</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>
1997 1996 1995
---- ---- ----
Average Average Average
Balance Rate Balance Rate Balance Rate
------- ---- ------- ---- ------- ----
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Non-interest bearing demand $ 81,191 $ 61,161 $ 46,539
Savings and NOW 331,959 2.55% 250,977 2.44% 217,721 2.53%
Time deposits 263,046 5.37 187,117 5.36 141,292 4.92
-------- -------- --------
Total $676,196 3.34% $499,255 3.23% $405,552 3.08%
======== ======== ========
</TABLE>
The following table summarizes time deposits in amounts of $100,000 or more
by time remaining until maturity as of December 31, 1997:
<TABLE>
<CAPTION>
(in thousands)
<S> <C>
Three months or less $24,375
Over three through six months 5,267
Over six months through one year 14,026
Over one year 8,937
-------
Total $52,605
=======
</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>
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net income as a percent of
Average common equity 16.01% 15.74% 15.59% 15.22% 15.21%
Average total assets 0.95 1.11 1.25 1.25 1.33
Dividends declared per share as a
percent of net income per share 36.79 36.76 37.20 34.78 25.58
Average shareholders' equity as a percent
of average total assets 5.95 7.05 8.04 8.22 8.72
</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 69 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, 1997.
First elected
as an officer of
Name (Age) Position with Registrant the registrant
- ---------- ------------------------ --------------
Charles C. Van Loan (50) President, Chief Executive December, 1984
Officer and Director
William R. Kohls (40) Executive Vice President and May, 1985
Chief Financial Officer
Jeffrey A. Bratsburg (54) President and Chief Executive 1985
Officer - Independent Bank
West Michigan
Edward B. Swanson (44) President and Chief Executive 1989
Officer - Independent Bank
South Michigan
Michael M. Magee, Jr. (42) President and Chief Executive 1993
Officer - Independent Bank
Ronald L. Long (38) President and Chief Executive 1993
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 Officer of each 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-32 of
the Appendix to the Registrant's definitive proxy statement, dated March 13,
1998, relating to the April 21, 1998 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-12 of the Appendix to the Registrant's definitive proxy
statement, dated March 13, 1998, relating to the April 21, 1998 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
13, 1998, relating to the April 21, 1998 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 7a. Quantitative and Qualitative Disclosures About Market Risk.
Asset/liability management. As a financial intermediary, the Registrant must
manage interest rate risk created by differences in the pricing characteristics
of the Banks' assets and funding sources. Options embedded in certain financial
instruments, including caps on adjustable-rate loans as well as borrowers'
rights to prepay fixed rate loans also entail interest rate risk.
The asset/liability management efforts of the Registrant 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. Management employs
simulation analyses to monitor the Banks' risk profiles and assess potential
changes in the Banks' net interest income and market value of portfolio equity
that may result from changes in interest rates. Such analyses further
incorporate assumptions relating to changes in the prepayment rates of certain
assets and liabilities. The magnitude of changes in net interest income and the
market value of portfolio equity under various levels of parallel market
interest rate changes is monitored by the asset/liability committees of the
Registrant and the Banks. During the year ended December 31, 1997, the changes
in net interest income and the market value of portfolio equity associated with
such changes in interest rates were within the policy limits established by the
Banks.
Derivative financial instruments may be employed to reduce the cost of alternate
funding sources while managing the Banks' exposure to changes in interest rates.
Interest rate caps, with a notional amount of $28,000,000, establish a maximum
cost of 6.97% on the associated short-term and variable rate borrowings, while
allowing borrowing costs to decline if market rates decrease. Interest rate
collars, with a notional amount of $10,000,000, establish a maximum cost of
6.42% and a minimum rate of 5.71% on the associated short-term and variable
rate borrowings.
Management's evaluation of various opportunities and alternate balance sheet
strategies carefully consider the likely impact on the Banks' risk profile as
well as the anticipated contribution to earnings. The marginal cost of alternate
funds is a principal consideration in the implementation of the Banks' balance
sheet management strategies, but such evaluations further consider interest rate
and liquidity risk as well as other relevant factors.
18
<PAGE> 20
PART II.
Management has determined that the retention of 15- and 30-year fixed rate
mortgages is generally inconsistent with its goal to maintain profitable
leverage or the Banks' interest-rate risk profiles. Accordingly, the majority of
such loans are sold to mitigate exposure to changes in interest rates.
Generally, adjustable-rate and balloon real estate mortgage loans may be
profitable funded within established risk parameters and retention of such loans
has been a principal focus of the Banks' balance sheet management strategies.
The following table sets forth pricing characteristics of financial instruments
at December 31, 1997.
<TABLE>
<CAPTION>
YEARS FAIR
1 2 3 4 5 5+ TOTAL VALUE YIELD
--------------------------------------------------------------------------------------------------
ASSETS(1,2) (dollars in thousands
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans and loans held
for sale $397,809 $ 94,224 $82,741 $69,101 $26,313 $ 95,744 $765,932 $775,400 8.94%
Taxable securities 26,785 19,289 10,082 7,248 1,246 35,931 100,581 100,600 6.90
Tax-exempt securities 2,338 6,382 6,068 2,638 2,259 25,517 45,202 46,000 8.67
-------- -------- ------- ------- ------- -------- --------
Interest earning assets 426,932 119,895 98,891 78,987 29,818 157,192 911,715
-------- -------- ------- ------- ------- --------
Non-interest earning
assets 72,102
--------
Total assets $983,817
========
LIABILITIES AND SHARHOLDERS' EQUITY
Demand, savings and
NOW(3) 143,244 32,890 32,448 32,070 32,004 155,484 $428,140 $428,100 2.03%
Time deposits 176,794 58,117 18,430 8,519 5,001 5,479 272,340 274,000 5.47
Other borrowings 158,231 26,059 10,895 17,250 212,435 214,400 6.17
-------- -------- ------- ------- ------- -------- --------
Total deposits and other
borrowings 478,269 117,066 61,773 40,589 37,005 178,213 912,915
-------- -------- ------- ------- ------- --------
Shareholders' equity and
other liabilities 70,902
Total liabilities and --------
shareholders' equity $983,817
========
Caps and collars (38,000) 24,000 6,000 6,000 2,000
RATE SENSITIVITY GAP AND RATIOS
Gap for period $(13,337) $(21,171) $31,118 $32,398 $(9,187) $(21,021)
======== ======== ======= ======= ======= ========
Cumulative gap $(13,337) $(34,508) $(3,390) $29,008 $19,821 $ (1,200)
======== ======== ======= ======= ======= ========
Ratio of rate-sensitive
assets to rate-sensitive
liabilities for period 97.0% 85.0% 145.9% 169.5% 76.0% 88.2%
Cumulative ratio of rate-
sensitive assets to rate-
sensitive liabilities 97.0 94.1 99.5 104.2 106.0 99.9
</TABLE>
(1) The information presented is a static analysis that does not consider
potential changes in pricing characteristics given
changes in interest rates and other influences that are beyond the control
of the Registrant. As a result, certain assets and liabilities may mature
or reprice in other periods or at different volumes.
(2) The analysis incorporates Management's assumptions for prepayments on
installment and real estate mortgage loans as well as mortgage-backed
securities.
(3) Non-maturity deposit repricing assumptions consider the estimated life of
the account along with Management's ability to set interest rates.
19
<PAGE> 21
PART II.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following consolidated financial statements of the Registrant and the
independent auditor's report are set forth on pages A-13 through A-31 of the
Appendix to the Registrant's definitive proxy statement, dated March 13, 1998,
relating to the April 21, 1998 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, 1997 and 1996
Consolidated Statements of Operations for the years ended
December 31, 1997, 1996 and 1995
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995
Consolidated Statements of Shareholders' Equity
for the years ended December 31, 1997, 1996 and 1995
Notes to Consolidated Financial Statements
Independent Auditor's Report
The supplementary data required by this item set forth under the caption
"Quarterly Financial Data" on page A-32 of the Appendix to the Registrant's
definitive proxy statement, dated March 13, 1998, relating to the April 21, 1998
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.
The portions of the Appendix to the Registrant's definitive proxy statement,
dated March 13, 1998, relating to the April 21, 1998 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 13, 1998, relating to the
April 21, 1998 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.
20
<PAGE> 22
PART III.
ITEM 11. EXECUTIVE COMPENSATION
The information set forth under the captions "Summary Compensation Table",
"Option Grants in 1997" and "Aggregated Stock Option Exercises in 1997 and Year
End Option Values" on pages 8 through 9 of the Registrant's definitive proxy
statement, dated March 13, 1998, relating to the April 21, 1998 Annual Meeting
of Shareholders (as filed with the commission) is incorporated herein by
reference. Information under the caption "Committee Report on Executive
Compensation" on pages 6 through 7 of the definitive proxy statement is not
incorporated by reference herein and is not deemed to be filed with the
Securities and Exchange Commission.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information set forth under the captions "Voting Securities and Record
Date", "Election of Directors" and "Securities Ownership of Management" on pages
1, 2 and 8, respectively, of the Registrant's definitive proxy statement, dated
March 13, 1998, relating to the April 21, 1998 Annual Meeting of Shareholders
(as filed with the commission) is incorporated herein by reference. Information
under the captions "Shareholder Return Performance Graph" and "Committee Report
on Executive Compensation" on pages 5 through 7 of the definitive proxy
statement is not incorporated by reference herein and is not deemed to be filed
with the Securities and Exchange Commission.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information set forth under the caption "Transactions Involving Management"
on page 10 of the Registrant's definitive proxy statement, dated March 13, 1998,
relating to the April 21, 1998 Annual Meeting of Shareholders (as filed with the
commission) is incorporated herein by reference.
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 13, 1998, relating to the April 21, 1998 Annual Meeting
of Shareholders (filed as exhibit 13 to this report on Form 10-K.)
2. Financial Statement Schedules
Not applicable
3. Exhibits (Numbered in accordance with Item 601 of Regulation S-K)
The Exhibit Index is located on the final page of this report on
Form 10-K.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the fourth quarter of the
year ended December 31, 1997.
21
<PAGE> 23
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 17, 1998.
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.
----------------------
22
<PAGE> 24
EXHIBIT INDEX
Exhibit number and description
EXHIBITS FILED HEREWITH
13 Appendix to the Registrant's definitive proxy statement, dated March 13,
1998, relating to the April 21, 1998 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 22).
27 Financial Data Schedule
EXHIBITS INCORPORATED BY REFERENCE
3.1 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).
3.2 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).
23
<PAGE> 25
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).
EXHIBIT INDEX (Continued)
10.1 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).
10.2 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).
10.3 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).
10.4 Non-Employee Director Stock Option Plan, as amended, approved by the
Registrant's shareholders at its April 15, 1997 Annual Meeting
(incorporated herein by reference to Exhibit 4 to the Registrant's Form
S-8 Registration Statement dated July 28, 1997, filed under registration
No. 333-32269).
10.5 Employee Stock Option Plan, as amended, approved by the Registrant's
shareholders at its April 15, 1997 Annual Meeting (incorporated herein by
reference to Exhibit 4 to the Registrant's Form S-8 Registration Statement
dated July 28, 1997, filed under registration No. 333-32267).
10.6 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).
10.7 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).
24
<PAGE> 1
EXHIBIT 13
APPENDIX
- --------------------------------------------------------------------------------
Independent Bank Corporation is a bank holding company with
total assets of $984 million and a market capitalization of
approximately $205 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-02
Selected Consolidated Financial Data A-12
Independent Auditor's Report A-13
Consolidated Financial Statements A-14
Notes to Consolidated Financial Statements A-18
Quarterly Data A-32
Shareholder Information A-33
Executive Officers and Directors A-33
A-1
<PAGE> 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 certain 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 its subsidiary
banks (the "Banks"). This section should be read in conjunction with the
consolidated financial statements and the supplemental financial data contained
elsewhere in this appendix.
RESULTS OF OPERATION
SUMMARY OF RESULTS. Net income increased by 13.7% to $8,924,000 during
1997. A year earlier, net income increased by 15.3% to $7,852,000 from
$6,810,000 in 1995. These increases are principally the result of increases in
net interest income and non-interest income. Such increases in the Company's
revenues were, however, partially offset by increases in non-interest expense,
including the amortization of intangible assets, and federal income tax expense.
<TABLE>
<CAPTION>
KEY PERFORMANCE RATIOS
YEAR ENDED DECEMBER 31,
1997 1996 1995
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income to
Average equity 16.01% 15.74% 15.59%
Average assets 0.95 1.11 1.25
Income per share
Basic $1.95 $1.74 $1.52
Diluted 1.93 1.73 1.51
</TABLE>
The increase in the Company's return on average equity and the decline in
its return on average assets principally reflects Management's efforts to
maintain profitable financial leverage. Consistent with that goal, in 1996 the
Company acquired the outstanding capital stock of North Bank Corporation ("NBC")
and one of the Banks purchased eight branch offices of First of America Bank -
Michigan, N.A. ("FoA Offices"). (See "1996 Acquisitions and financing.") The
Banks' balance sheet management strategies that rely on alternate sources of
funds also enhance the Company's return on average equity at the expense of its
return on average assets. (See "Capital resources.")
1996 ACQUISITIONS AND FINANCING. The Company acquired NBC effective May 31,
1996, and on December 13, 1996, one of the Banks purchased the FoA Offices.
These acquisitions (the "1996 Acquisitions") were financed with a $17.0 million
unsecured credit facility (the "Credit Facility") and the issuance of $17.25
million of non-convertible, cumulative trust preferred securities (the
"Preferred Securities"). Collectively, the 1996 Acquisitions and related
financing have had a substantive impact on the Company's results of operations.
(See "Capital resources.")
NBC was acquired for cash consideration totaling $15.8 million. On the
effective date of the transaction, NBC's assets and shareholders' equity totaled
$152.0 million and $9.5 million, respectively, and the Company recorded $7.5
million of goodwill. The FoA Offices had deposits totaling $121.9 million, and
the acquiring Bank recorded intangible assets totaling $8.8 million. The Bank
also purchased loans totaling $22.1 million as well as certain real and personal
property. Net cash proceeds from the transaction totaled $90.5 million.
TAX EQUIVALENT NET INTEREST INCOME. Double-digit increases in the Company's
tax equivalent net interest income during 1997 and 1996 reflect increases in
average earning assets that accompanied the 1996 Acquisitions as well as the
implementation of the Banks' balance sheet management strategies. Tax equivalent
net interest income increased by 23% to $44,047,000 in 1997 and by 23% to
$35,779,000 in 1996 from $29,008,000 in 1995. Average earning assets increased
by 31% to $869,496,000 in 1997 and by 29% to $664,718,000 in 1996 from
$513,377,000 in 1995.
A-2
<PAGE> 3
<TABLE>
<CAPTION>
AVERAGE 1997 1996 1995
-------------------------------------------------------------------------------------------
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) $ 689,166 $ 65,478 9.50% $ 510,434 $ 49,478 9.69% $ 382,644 $ 37,654 9.84%
Taxable securities 115,046 7,922 6.89 100,945 6,710 6.65 93,064 5,919 6.36
Tax-exempt securities (2) 52,139 4,423 8.48 39,393 3,433 8.72 31,516 2,914 9.25
Other investments 13,145 999 7.60 13,946 971 6.96 6,153 421 6.84
--------- --------- --------- --------- --------- --------
Interest earning assets 869,496 78,822 9.07 664,718 60,592 9.12 513,377 46,908 9.14
Cash and due from banks 26,251 --------- 21,573 --------- 16,091 --------
Other assets, net 41,395 21,038 14,115
--------- --------- ---------
Total assets $ 937,142 $ 707,329 $ 543,583
========= ========= =========
LIABILITIES
Savings and NOW $ 331,959 8,480 2.55 $ 250,977 6,116 2.44 $ 217,721 5,515 2.53
Time deposits 263,046 14,134 5.37 187,117 10,022 5.36 141,292 6,955 4.92
Long-term debt 8,245 602 7.30 4,875 335 6.87
Other borrowings 187,519 11,559 6.16 144,703 8,340 5.76 89,048 5,430 6.10
--------- --------- --------- --------- --------- --------
Interest bearing liabilities 790,769 34,775 4.40 587,672 24,813 4.22 448,061 17,900 4.00
Demand deposits 81,191 --------- 61,161 --------- 46,539 --------
Other liabilities 9,444 8,597 5,296
Shareholders' equity 55,738 49,899 43,687
--------- --------- ---------
Total liabilities and
shareholders' equity $ 937,142 $ 707,329 $ 543,583
========= ========= =========
Net interest income $ 44,047 $ 35,779 $ 29,008
========= ========= =========
Net interest income
as a percent of
earning assets 5.07% 5.38% 5.65%
===== ===== =====
</TABLE>
(1) Interest on loans includes net origination fees totaling $4,001,000,
$3,331,000 and $2,702,000 in 1997, 1996 and 1995, respectively.
(2) Interest on tax-exempt securities has been adjusted to reflect preferential
taxation. The adjustment assumes a marginal tax rate of 35% in 1997 and 34%
in 1996 and 1995. For purposes of analysis, tax-exempt loans are included in
tax-exempt securities.
The 1996 Acquisitions account for approximately 80% of the $204,778,000
increase in average earning assets during 1997. Management attributes the
remainder of the increase in average earning asset to the Banks' balance sheet
management strategies. A year earlier, NBC and the balance sheet management
strategies each accounted for approximately 50% of the $151,341,000 increase in
average earning assets.
<TABLE>
<CAPTION>
CHANGE IN TAX EQUIVALENT 1997 COMPARED TO 1996 1996 COMPARED TO 1995
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 $17,000 $(1,000) $16,000 $12,395 $(571) $11,824
Taxable securities 964 248 1,212 516 275 791
Tax-exempt securities (2) 1,083 (93) 990 695 (176) 519
Other investments (58) 86 28 542 8 550
-----------------------------------------------------------------
Total interest income 18,989 (759) 18,230 14,148 (464) 13,684
-----------------------------------------------------------------
Increase (decrease) in interest expense (1)
Savings and NOW 2,056 308 2,364 817 (216) 601
Time deposits 4,080 32 4,112 2,412 655 3,067
Long-term debt 245 22 267 335 335
Other borrowings 2,607 612 3,219 3,223 (313) 2,910
-----------------------------------------------------------------
Total interest expense 8,988 974 9,962 6,787 126 6,913
-----------------------------------------------------------------
Net interest income $10,001 $(1,733) $8,268 $7,361 $(590) $6,771
=================================================================
</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 35% in 1997 and 34%
in 1996 and 1995.
A-3
<PAGE> 4
Tax equivalent net interest income was equal to 5.07% of average earning
assets during 1997 compared to 5.38% and 5.65% in 1996 and 1995, respectively.
Management attributes the majority of the decline to the 1996 Acquisitions,
including the cost of the related non-equity financing. (See "Capital
resources.") The marginal cost of alternate sources of funds that have been
employed to implement the Banks' balance sheet management strategies have also
contributed to the decline in tax equivalent net interest income as a percent of
average earning assets. The impact of the non-equity financing and the use of
alternate sources of funds has, however, been partially offset by an increase in
loans as a percent of average earning assets.
<TABLE>
<CAPTION>
COMPOSITION OF AVERAGE EARNING ASSETS YEAR ENDED DECEMBER 31,
AND INTEREST PAYING LIABILITIES 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
As a percent of average earning assets
Loans-all domestic 79.26% 76.79% 74.53%
Other earning assets 20.74 23.21 25.47
---------------------------
Average earning assets 100.00% 100.00% 100.00%
===========================
Savings and NOW 38.18% 37.76% 42.41%
Time deposits 30.25 28.15 27.52
Other borrowings and long-term debt 22.51 22.50 17.35
---------------------------
Average interest bearing liabilities 90.94% 88.41% 87.28%
===========================
Earning asset ratio 92.78% 93.98% 94.44%
Free-funds ratio 9.06 11.59 12.72
</TABLE>
PROVISION FOR LOAN LOSSES. Management's assessment of the allowance for
loan losses is based on the aggregate amount and composition of the loan
portfolios, as well as an evaluation of specific commercial and agricultural
loans, historical loss experience and the level of non-performing and impaired
loans. This assessment is further supplemented by Management's subjective
assessment of general and local economic conditions. (See "Asset quality.")
The provision for loan losses totaled $1,750,000 in 1997 compared to
$1,233,000 and $636,000 in 1996 and 1995, respectively. The $517,000 increase in
the provision for loan losses during 1997 principally reflects the $134,474,000
increase in total loans, excluding loans held for sale ("Portfolio Loans"). A
year earlier, Management elected to fund additional provisions to the allowance
for loan losses based upon the application of the Company's allocation
methodology to loans associated with the NBC acquisition.
NON-INTEREST INCOME. Non-interest income totaled $8,515,000 in 1997
compared to $5,552,000 and $3,766,000 in 1996 and 1995, respectively.
Approximately 32% and 28% of the $2,963,000 increase in non-interest income
during 1997 relates to the 1996 Acquisitions and net gains on asset sales,
respectively. Revenues associated with deposit account promotions and the Banks'
title insurance agency also contributed to the increase in non-interest income.
During 1996, an increase in net gains on the sale of real estate mortgage
loans accounted for 64% of the $1,786,000 increase in non-interest income.
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 during 1996.
<TABLE>
<CAPTION>
NON-INTEREST INCOME YEAR ENDED DECEMBER 31,
1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service charges on deposit accounts $ 3,128,000 $ 2,267,000 $ 1,919,000
Net gains (losses) on asset sales
Real estate mortgage loans 2,270,000 1,871,000 728,000
Securities 273,000 (162,000) (120,000)
Title insurance commissions and fees 585,000 40,000
Real estate mortgage loan servicing 532,000 412,000 371,000
Other 1,727,000 1,124,000 868,000
------------------------------------------
Total non-interest income $ 8,515,000 $ 5,552,000 $ 3,766,000
==========================================
</TABLE>
Net gains on the sale of real estate mortgage loans totaled $2,270,000
during 1997 compared to $1,871,000 in 1996 and $728,000 in 1995. Management
attributes the increase in net gains relative to the volume of loans sold
principally to an increase in the capitalization of related servicing rights as
well as an increase in the portion of loans sold that have been underwritten
pursuant to government guarantees. The increase in the amount of servicing
rights capitalized is attributed to a decline in interest rates during 1997 and
a corresponding decrease in estimated prepayment rates on real estate mortgage
loans. In addition to an increase in aggregate loans sold, Management attributes
approximately 45% of the $1,143,000 increase in net gains during 1996 to the
sale and/or capitalization of related servicing rights as well as an increase in
loans underwritten pursuant to government guarantees.
A-4
<PAGE> 5
<TABLE>
<CAPTION>
NET GAINS ON THE SALE OF REAL ESTATE YEAR ENDED DECEMBER 31,
MORTGAGE LOANS 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Real estate mortgage loans originated $272,200,000 $227,600,000 $163,500,000
Real estate mortgage loan sales 114,500,000 108,700,000 52,000,000
Real estate mortgage loan servicing rights sold 24,200,000 37,900,000 19,700,000
Net gains on the sale of real estate mortgage loans 2,270,000 1,871,000 728,000
Net gains as a percent of real estate mortgage loan sales 1.98% 1.72% 1.40%
</TABLE>
The volume of loans sold is dependent upon the Banks' ability to originate
real estate mortgage loans as well as the demand for fixed-rate obligations.
(See "Asset/liability management.") Net gains on real estate mortgage loans are
also dependent upon economic and competitive factors as well as the Banks'
ability to effectively manage exposure to changes in interest rates.
The Banks realized net gains on the sale of securities available for sale
totaling $273,000 during 1997 compared to net losses of $162,000 and $120,000
during 1996 and 1995, respectively. Future gains and losses will be dependent
upon the Banks' asset/liability 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 $36,845,000 in 1997
compared to $27,861,000 and $21,702,000 in 1996 and 1995, respectively. Salaries
and benefits, the largest component of non-interest expense, totaled $20,280,000
in 1997 compared to $15,685,000 in 1996 and $12,163,000 in 1995.
<TABLE>
<CAPTION>
NON-INTEREST EXPENSE YEAR ENDED DECEMBER 31,
1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Salaries $13,409,000 $10,280,000 $8,005,000
Performance-based compensation and benefits 3,877,000 3,106,000 2,351,000
Other benefits 2,994,000 2,299,000 1,807,000
---------------------------------------
Salaries and benefits 20,280,000 15,685,000 12,163,000
Occupancy, net 2,786,000 2,042,000 1,548,000
Furniture and fixtures 2,245,000 1,864,000 1,345,000
Amortization of intangible assets 1,523,000 583,000 273,000
Computer processing 1,340,000 1,063,000 818,000
Advertising 1,329,000 827,000 344,000
Communications 1,280,000 1,007,000 791,000
Supplies 1,019,000 804,000 561,000
Loan and collection 939,000 663,000 1,030,000
Other 4,104,000 3,323,000 2,829,000
---------------------------------------
Total non-interest expense $36,845,000 $27,861,000 $21,702,000
=======================================
</TABLE>
Management estimates that the 1996 Acquisitions account for approximately
55% of the $4,595,000 increase in salaries and benefits and approximately 60% of
the increase in total non-interest expense during 1997. A year earlier, the NBC
acquisition accounted for 35% of the increases in salaries and benefits and 45%
of the increase in total non-interest expense.
The Company and each of the Banks maintain compensation plans that provide
incentives for superior performance. In addition to commissions and cash
incentive awards, performance-based compensation plans include the Employee
Stock Ownership Plan, the Employee Stock Option Plan and the Incentive Share
Grant Plan. Management believes that these equity-based plans help align the
interests of the Company's officers and employees with those of its
shareholders. Performance-based compensation comprised nearly 20% of salaries
and benefits during 1997, 1996 and 1995. Performance-based compensation
accounted for 17% and 21% of the increases in salaries and benefits during 1997
and 1996, respectively.
Operation of the Banks' title insurance agency as well as marketing costs
related to certain deposit account promotions also contributed to the increase
in non-interest expense during 1997. 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 also contributed to the increase
in non-interest expense during 1996. Costs associated with the origination of
real estate mortgage loans contributed to increases in total non-interest
expense during both 1997 and 1996.
A-5
<PAGE> 6
FINANCIAL CONDITION
SUMMARY. Total assets increased to $983.8 million at December 31, 1997,
from $888.6 million a year earlier. A $134.5 million increase in Portfolio
Loans, principally residential real estate loans, accounts for the $95.2 million
increase in total assets.
In addition to cash proceeds from the FoA Offices, the Banks have relied on
other borrowings and brokered certificates of deposit ("Brokered CDs") to fund
the increase in total loans. The use of such alternate funding sources,
principally advances from the Federal Home Loan Bank (the "FHLB") complements
the Banks' relatively stable base of core deposits. (See "Deposits and
borrowings.") The Banks also utilized proceeds from the sale or maturity of
securities to fund a portion of the increase in total loans.
SECURITIES. The Banks maintain 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. The sale of securities
available for sale is dependent upon Management's assessment of reinvestment
opportunities and the Banks' asset/liability management needs.
(See "Non-interest income.")
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.
<TABLE>
<CAPTION>
SECURITIES AMORTIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Securities Available for Sale
December 31, 1997 $108,231,000 $2,775,000 $237,000 $110,769,000
December 31, 1996 135,290,000 1,870,000 308,000 136,852,000
Securities Held to Maturity
December 31, 1997 $ 22,525,000 $ 838,000 $ 9,000 $ 23,354,000
December 31, 1996 26,754,000 929,000 38,000 27,645,000
</TABLE>
In view of the relatively flat U.S. Treasury yield curve and the general
decline in market yields relative to the cost of alternate sources of funds,
Management has liquidated a portion of the Banks' securities portfolios. (See
"Asset/liability management.") The Banks sold securities available for sale with
an aggregate market value of $59,727,000 in 1997, compared to $18,145,000 and
$14,054,000 in 1996 and 1995, respectively. The Banks realized net gains of
$273,000 in 1997 compared to net losses of $162,000 and $120,000 in 1996 and
1995, respectively, on such sales.
LOAN PORTFOLIOS. Portfolio Loans increased by 22% to $744.2 million at
December 31, 1997, from $609.7 million a year earlier. Residential real estate
mortgage loans, including home equity loans and other junior mortgages, account
for approximately 55% of the $134.5 million increase in total loans.
<TABLE>
<CAPTION>
LOAN PORTFOLIO COMPOSITION DECEMBER 31,
1997 1996
- -----------------------------------------------------------------------------------
<S> <C> <C>
Real estate
Residential first mortgages $328,968,000 $275,660,000
Residential home equity and other junior mortgages 55,987,000 35,673,000
Construction and land development 62,721,000 49,017,000
Other 134,058,000 92,253,000
Consumer 91,723,000 90,284,000
Commercial 48,576,000 45,013,000
Agricultural 22,145,000 21,804,000
---------------------------
Total loans $744,178,000 $609,704,000
===========================
</TABLE>
Management believes that the Company's decentralized structure provides the
Banks with important advantages in serving the credit needs of the principal
lending markets. Although the Management and Board of Directors of each Bank
retain authority and responsibility for credit decisions, each of the Banks has
adopted uniform underwriting standards. Further, the Company's loan committee as
well as the centralization of commercial loan credit services and loan review
functions promote compliance with such established underwriting standards. The
centralization of retail loan services also provides for consistent service
quality and facilitates compliance with consumer protection laws and
regulations.
A-6
<PAGE> 7
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. The Banks also deployed a portion of the cash proceeds
from the FoA Offices by purchasing $29.8 million in seasoned pools of
residential real estate mortgage loans from unaffiliated lenders during 1997.
Non-accrual loans totaled $3.3 million at December 31, 1997, compared to
$1.7 million and $1.9 million at December 31, 1996 and 1995, respectively. Total
non-performing loans at those same dates were $5.4 million, $3.9 million and
$2.6 million, respectively.
<TABLE>
<CAPTION>
NON-PERFORMING ASSETS DECEMBER 31,
1997 1996 1995
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Non-accrual loans $3,298,000 $1,711,000 $1,886,000
Loans 90 days or more past due and still accruing interest 1,904,000 1,994,000 427,000
Restructured loans 184,000 197,000 247,000
--------------------------------------
Total non-performing loans 5,386,000 3,902,000 2,560,000
Other real estate 331,000 730,000 760,000
--------------------------------------
Total non-performing assets $5,717,000 $4,632,000 $3,320,000
======================================
As a percent of Portfolio Loans
Non-performing loans 0.72% 0.64% 0.61%
Non-performing assets 0.77 0.76 0.79
Allowance for loan losses as a percent of Portfolio Loans 1.03 1.14 1.25
Allowance for loan losses as a percent of non-performing loans 142 178 205
</TABLE>
An agricultural credit that was purchased in conjunction with the FoA
Offices accounts for nearly 40% of the $1.6 million increase in non-accrual
loans during 1997, of which management does not anticipate a material impact on
the Company's financial condition or results of operation. The 1996 Acquisitions
account for the $1.3 million increase in non-performing loans, principally loans
90 days or more past due and still accruing interest, during 1996.
<TABLE>
<CAPTION>
ALLOWANCE FOR LOAN LOSSES YEAR ENDED DECEMBER 31,
1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of period $6,960,000 $5,243,000 $5,054,000
Allowance on loans acquired 1,180,000
Provision charged to operating expense 1,750,000 1,233,000 636,000
Recoveries credited to allowance 585,000 440,000 265,000
Loans charged against allowance (1,625,000) (1,136,000) (712,000)
------------------------------------------
Balance at end of period $7,670,000 $6,960,000 $5,243,000
==========================================
Net loans charged against the allowance to average Portfolio Loans 0.15% 0.14% 0.12%
</TABLE>
Loans charged against the allowance for loan losses, net of recoveries
("Net Losses"), were $1,040,000 during 1997, compared to $696,000 in 1996 and
$447,000 in 1995. In addition to an increase in Portfolio Loans, a portion of
the increase can be attributed to the 1996 Acquisitions. Net Losses on loans
that were acquired in conjunction with the 1996 Acquisitions totaled
approximately $495,000 and $153,000 in 1997 and 1996, respectively.
<TABLE>
<CAPTION>
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES DECEMBER 31,
1997 1996 1995
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Commercial and agricultural $2,200,000 $2,176,000 $1,612,000
Real estate mortgage 322,000 257,000 162,000
Installment 892,000 834,000 597,000
Unallocated 4,256,000 3,693,000 2,872,000
--------------------------------------
Total $7,670,000 $6,960,000 $5,243,000
======================================
Allocated allowance as a percent of total allowance 44.5% 46.9% 45.2%
</TABLE>
A-7
<PAGE> 8
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 to specific loans and loan portfolios. At December 31,
1997, the unallocated portion of the allowance for loan losses was equal to
55.5% of the total allowance compared to 53.1% and 54.8% at December 31, 1996
and 1995, respectively.
DEPOSITS AND BORROWINGS. Deposits totaled $700.5 million at December 31,
1997, and include Brokered CDs totaling $14.4 million. A year earlier, deposits
totaled $672.5 million. Federal funds purchased and other borrowed funds totaled
$195.2 million at December 31, 1997, compared to $137.0 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 limits the ability to materially increase retail deposits
without adversely impacting the weighted-average cost of core deposits.
Accordingly, the use of alternate funding sources is an integral component of
the Banks' balance sheet management strategies.
Management believes that such alternate sources of funds, including
advances from the FHLB and Brokered CDs, complements the Banks' stable base of
core deposits and may further reduce exposure to depositors' options to withdraw
funds prior to maturity. In addition to the Banks' interest rate risk profile
and liquidity needs, Management's evaluation of funding strategies considers the
relative cost and collateral requirements associated with the use of alternate
sources of funds. (See "Asset/liability management.")
DERIVATIVE FINANCIAL INSTRUMENTS
<TABLE>
<CAPTION>
NOTIONAL AVERAGE CAP FLOOR ANNUAL AMORTIZED FAIR
TYPE AMOUNT MATURITY STRIKE STRIKE COST COST VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest rate caps $28,000 2.3 years 6.71% 0.26% $ 168 $ 87
Interest rate collars 10,000 2.7 years 6.42 5.71% (10)
</TABLE>
Derivative financial instruments may be employed to reduce the cost of
alternate funding sources while managing the Banks' exposure to changes in
interest rates. Interest rate caps establish a maximum cost of 6.97% on the
associated short-term and variable rate borrowings, while allowing borrowing
costs to decline if market rates decrease. Premiums paid to establish these
positions totaled $246,000 of which $67,000 was amortized as interest expense
during 1997. Premiums are amortized over the life of the agreements. Interest
rate collars establish a maximum cost of 6.42% and a minimum rate of 5.71% on
the associated short-term or variable rate borrowings. There are no premiums
associated with the Banks' interest-rate collars.
CAPITAL RESOURCES. Management recognizes that the ability to maintain
financial leverage is critical to its mission to create value for the Company's
shareholders. To profitably deploy capital within existing markets, the Banks
have implemented balance sheet management strategies that combine effective loan
origination efforts with disciplined funding strategies. Management believes
that acquisitions, including the 1996 Acquisitions, are also consistent with its
goal to create shareholder value.
The Company's cost of capital is also a crucial factor in creating
shareholder value and, therefore, Management funded the 1996 Acquisitions with
the Credit Facility and by issuing the Preferred Securities. The Preferred
Securities are presented within the liability section of the consolidated
balance sheets as guaranteed preferred beneficial interests in Company's
subordinated debentures. Although the Board of Governors of the Federal Reserve
has approved the use of such cumulative preferred stock instruments as Tier 1
capital for bank holding companies, the Preferred Securities are not considered
equity under generally accepted accounting principles. The quarterly
distributions paid on the Preferred Securities are included in interest expense
and are deductible for federal income tax purposes.
Management's efforts to effectively manage the Company's capital resources
have had an adverse impact on certain financial ratios, including tax equivalent
net interest income as a percent of average earning assets and its return on
average assets. Management nonetheless believes that such efforts to maintain
financial leverage have made important contributions to the Company's return on
average equity and its earnings per share.
<TABLE>
<CAPTION>
CAPITAL RATIOS DECEMBER 31,
1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Equity capital 6.05% 5.83%
Average shareholders equity to average assets 5.95 7.05
Tier 1 leverage (tangible equity capital) 6.02 5.72
Tier 1 risk-based capital 8.76 9.01
Total risk-based capital 9.91 10.26
</TABLE>
Shareholders' equity totaled $59.5 million at December 31, 1997. The $7.7
million increase from $51.8 million at December 31, 1996, reflects the retention
of earnings and the issuance of common stock pursuant to various equity-based
incentive compensation plans. An increase in net unrealized gains on securities
available for sale also contributed to the increase in shareholders' equity.
A-8
<PAGE> 9
ASSET/LIABILITY MANAGEMENT. As a financial intermediary, the Company must
manage interest rate risk that may be created by differences in the pricing
characteristics of the Banks' assets and funding sources. Options embedded in
certain financial instruments, including caps on adjustable-rate loans as well
as borrowers' rights to prepay fixed rate loans also entail interest rate risk.
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. Management employs
simulation analyses to monitor the Banks' risk profiles and assess potential
changes in the Banks' net interest income and market value of portfolio equity
that may result from changes in interest rates. Such analyses further
incorporate assumptions relating to changes in the prepayment rates of certain
assets and liabilities.
Management's evaluation of various opportunities and alternate balance
sheet strategies carefully consider the likely impact on the Banks' risk profile
as well as the anticipated contribution to earnings. The marginal cost of
alternate funds is a principal consideration in the implementation of the Banks'
balance sheet management strategies, but such evaluations further consider
interest rate and liquidity risk as well as other relevant factors.
Management has determined that the retention of 15- and 30-year fixed rate
mortgages is generally inconsistent with its goal to maintain profitable
leverage or the Banks' interest-rate risk profiles. Accordingly, the majority of
such loans are sold to mitigate exposure to changes in interest rates.
Generally, adjustable-rate and balloon real estate mortgage loans may be
profitably funded within established risk parameters and retention of such loans
has been a principal focus of the Banks' balance sheet management strategies.
(See "Non-interest income.")
Management has further determined, given the general decline in security
yields relative to the cost of alternate sources of funds, that retention of
certain low yielding securities was inconsistent with its goals. Accordingly,
the Banks liquidated a portion of the portfolios and the sale proceeds have been
used to partially fund the increase in loans.
<TABLE>
<CAPTION>
PRICING CHARACTERISTICS OF DECEMBER 31, 1997
FINANCIAL INSTRUMENTS DAYS YEARS
--------------------- ------------------------- FAIR
0 - 180 181-365 1 - 5 5+ TOTAL VALUE YIELD
- ------------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS (1, 2)
Loans and loans held for sale $ 259,679 $ 138,130 $ 272,379 $ 95,744 $ 765,932 $ 775,400 8.94%
Taxable securities 18,172 8,613 37,865 35,931 100,581 100,600 6.90
Tax-exempt securities 1,106 1,232 17,347 25,517 45,202 46,000 8.67
----------------------------------------------------------------
Interest earning assets 278,957 147,975 327,591 157,192 911,715
--------------------------------------------------
Non-interest earning assets 72,102
---------
Total assets $ 983,817
=========
LIABILITIES AND SHAREHOLDERS' EQUITY(1)
Demand, savings and NOW (3) 104,506 38,738 129,412 155,484 $ 428,140 $ 428,100 2.03%
Time deposits 116,449 60,345 90,067 5,479 272,340 274,000 5.47
Other borrowings 117,231 41,000 36,954 17,250 212,435 214,400 6.17
----------------------------------------------------------------
Total deposits and other borrowings 338,186 140,083 256,433 178,213 912,915
Shareholders' equity and other liabilities -------------------------------------------------- 70,902
Total liabilities and ---------
shareholders' equity $ 983,817
Caps and collars (38,000) 38,000 =========
RATE SENSITIVITY GAP AND RATIOS
Gap for period $ (21,229) $ 7,892 $ 33,158 $ (21,021)
==================================================
Cumulative gap $ (21,229) $ (13,337) $ 19,821 $ (1,200)
Ratio of rate-sensitive assets to ==================================================
rate-sensitive liabilities for period 92.9% 105.6% 111.3% 88.2%
Cumulative ratio of rate-sensitive assets
to rate-sensitive liabilities 92.9 97.0 102.7 99.9
</TABLE>
(1) The information presented is a static analysis that does not consider
potential changes in pricing characteristics given a change in interest
rates.
(2) The analysis incorporates Management's assumptions for prepayments on
installment and real estate mortgage loans as well as mortgage-backed
securities.
(3) Non-maturity deposit repricing assumptions consider the estimated life of
the account along with Management's ability to set interest rates.
A-9
<PAGE> 10
YEAR 2000. Management has appointed a committee that has evaluated the
likely impact of the Year 2000 issue on the operating systems of the Company and
the Banks. Based on its continuing evaluation, the committee does not anticipate
material expenditures to ensure that these systems are compliant.
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS. The Financial Accounting
Standards Board adopted Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income," (SFAS #130) and Statement of Financial
Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and
Related Information," (SFAS #131) in June of 1997.
SFAS #130 establishes standards for reporting and displaying comprehensive
income and its components, including but not limited to unrealized gains or
losses on securities available for sale, in the financial statements. This
statement is effective for both interim and annual periods beginning after
December 15, 1997, with earlier application permitted.
SFAS #130 will require reclassification of all prior period amounts.
SFAS #131 establishes standards for the way that public entities report
information about operating segments in financial statements. This statement is
effective for both interim and annual periods beginning after December 31, 1997,
with restatement of prior period information required. The adoption of this
statement is not expected to have a material impact on the Company's reporting
disclosures.
A-10
<PAGE> 11
A-11
<PAGE> 12
SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1997 1996 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------
(dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS
Interest income $ 77,414 $ 59,485 $ 45,982 $ 37,820 $ 34,370
Interest expense 34,775 24,813 17,900 12,585 12,305
--------------------------------------------------------
Net interest income 42,639 34,672 28,082 25,235 22,065
Provision for loan losses 1,750 1,233 636 473 657
Non-interest income 8,515 5,552 3,766 3,101 3,898
Non-interest expense 36,845 27,861 21,702 19,503 17,535
--------------------------------------------------------
Income before federal income tax expense 12,559 11,130 9,510 8,360 7,771
Federal income tax expense 3,635 3,278 2,700 2,329 2,165
--------------------------------------------------------
Net income $ 8,924 $ 7,852 $ 6,810 $ 6,031 $ 5,606
========================================================
PER COMMON SHARE DATA (1)
Net income (2)
Basic $ 1.95 $ 1.74 $ 1.52 $ 1.33 $ 1.24
Diluted 1.93 1.73 1.51 1.32 1.24
Cash dividends declared 0.71 0.64 0.57 0.46 0.32
Book value 12.98 11.50 10.51 8.97 8.62
SELECTED BALANCES
Assets $983,817 $888,597 $590,147 $516,211 $482,027
Loans and loans held for sale 765,932 621,287 434,091 342,658 288,643
Allowance for loan losses 7,670 6,960 5,243 5,054 5,053
Deposits 700,480 672,534 411,624 409,471 423,620
Shareholders' equity 59,516 51,836 47,025 40,311 39,049
Long-term debt 5,000 7,000 2,750
SELECTED RATIOS
Tax-equivalent net interest income
to average earning assets 5.07% 5.38% 5.65% 5.88% 5.85%
Net income to
Average common equity 16.01 15.74 15.59 15.22 15.21
Average assets 0.95 1.11 1.25 1.25 1.33
Dividend payment ratio 36.54 36.53 36.80 34.62 25.54
Average shareholders' equity to average assets 5.95 7.05 8.04 8.22 8.72
Tier 1 leverage (tangible equity capital) ratio 6.02 5.72 7.47 7.76 7.61
Non-performing loans to Portfolio Loans 0.72 0.64 0.61 0.84 1.14
</TABLE>
(1) Per share data has been adjusted for a three-for-two stock split in 1997 and
5% stock dividends in 1997, 1996 and 1995.
(2) Statement of Financial Accounting Standards No. 128, "Earnings Per Share,"
effective during 1997, has been retroactively applied. (See note 10 to
consolidated financial statements.)
A-12
<PAGE> 13
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,
1997 and 1996, 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, 1997. 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, 1997 and 1996, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1997, in conformity with generally accepted
accounting principles.
As discussed in notes 1 and 5 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 No. 122, "Accounting for Mortgage Servicing Rights," in
1996.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Lansing, Michigan
February 2, 1998
A-13
<PAGE> 14
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
DECEMBER 31,
1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and Cash Equivalents
Cash and due from banks $ 30,371,000 $ 40,631,000
Federal funds sold 10,000,000
------------------------------
Total Cash and Cash Equivalents 30,371,000 50,631,000
------------------------------
Securities available for sale 110,769,000 136,852,000
Securities held to maturity (fair value of $23,354,000 at December 31, 1997 and
$27,645,000 at December 31, 1996) 22,525,000 26,754,000
Federal Home Loan Bank stock, at cost 12,489,000 11,076,000
Loans held for sale 21,754,000 11,583,000
Loans
Commercial and agricultural 199,098,000 164,304,000
Real estate mortgage 416,689,000 331,150,000
Installment 128,391,000 114,250,000
------------------------------
Total Loans 744,178,000 609,704,000
Allowance for loan losses (7,670,000) (6,960,000)
------------------------------
Net Loans 736,508,000 602,744,000
Property and equipment, net 21,067,000 18,462,000
Accrued income and other assets 28,334,000 30,495,000
------------------------------
Total Assets $ 983,817,000 $ 888,597,000
==============================
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Non-interest bearing $ 88,546,000 $ 84,671,000
Savings and NOW 339,594,000 327,627,000
Time 272,340,000 260,236,000
------------------------------
Total Deposits 700,480,000 672,534,000
Federal funds purchased 28,000,000 1,700,000
Other borrowings 167,185,000 135,294,000
Guaranteed preferred beneficial interests in Company's subordinated debentures 17,250,000 17,250,000
Accrued expenses and other liabilities 11,386,000 9,983,000
------------------------------
Total Liabilities 924,301,000 836,761,000
------------------------------
Commitments and contingent liabilities
Shareholders' Equity
Preferred stock, no par value-200,000 shares authorized; none issued or
outstanding
Common stock, $1.00 par value-14,000,000 shares authorized;
issued and outstanding: 4,586,733 shares at December 31, 1997 and 2,861,535
shares at December 31, 1996 4,587,000 2,862,000
Capital surplus 30,011,000 23,230,000
Retained earnings 23,243,000 24,713,000
Net unrealized gain on securities available for sale, net of related tax effect 1,675,000 1,031,000
------------------------------
Total Shareholders' Equity 59,516,000 51,836,000
------------------------------
Total Liabilities and Shareholders' Equity $ 983,817,000 $ 888,597,000
==============================
</TABLE>
See notes to consolidated financial statements
A-14
<PAGE> 15
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $ 65,830,000 $ 49,768,000 $ 37,861,000
Securities available for sale 9,023,000 6,337,000 2,692,000
Securities held to maturity
Taxable 356,000 1,209,000 3,227,000
Tax-exempt 1,206,000 1,200,000 1,781,000
Other investments 999,000 971,000 421,000
-------------------------------------------
Total Interest Income 77,414,000 59,485,000 45,982,000
-------------------------------------------
INTEREST EXPENSE
Deposits 22,614,000 16,138,000 12,470,000
Other borrowings 12,161,000 8,675,000 5,430,000
-------------------------------------------
Total Interest Expense 34,775,000 24,813,000 17,900,000
-------------------------------------------
Net Interest Income 42,639,000 34,672,000 28,082,000
Provision for loan losses 1,750,000 1,233,000 636,000
-------------------------------------------
Net Interest Income After Provision for Loan Losses 40,889,000 33,439,000 27,446,000
-------------------------------------------
NON-INTEREST INCOME
Service charges on deposit accounts 3,128,000 2,267,000 1,919,000
Net gains (losses) on asset sales
Real estate mortgage loans 2,270,000 1,871,000 728,000
Securities 273,000 (162,000) (120,000)
Other income 2,844,000 1,576,000 1,239,000
-------------------------------------------
Total Non-interest Income 8,515,000 5,552,000 3,766,000
-------------------------------------------
NON-INTEREST EXPENSE
Salaries and employee benefits 20,280,000 15,685,000 12,163,000
Occupancy, net 2,786,000 2,042,000 1,548,000
Furniture and fixtures 2,245,000 1,864,000 1,345,000
Other expenses 11,534,000 8,270,000 6,646,000
-------------------------------------------
Total Non-interest Expense 36,845,000 27,861,000 21,702,000
-------------------------------------------
Income Before Federal Income Tax 12,559,000 11,130,000 9,510,000
Federal income tax expense 3,635,000 3,278,000 2,700,000
-------------------------------------------
Net Income $ 8,924,000 $ 7,852,000 $ 6,810,000
===========================================
Income per common share
Basic $ 1.95 $ 1.74 $ 1.52
===========================================
Diluted $ 1.93 $ 1.73 $ 1.51
===========================================
Cash dividends declared per common share $ 0.71 $ 0.64 $ 0.57
===========================================
</TABLE>
See notes to consolidated financial statements
A-15
<PAGE> 16
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Income $ 8,924,000 $ 7,852,000 $ 6,810,000
-----------------------------------------------
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH
FROM OPERATING ACTIVITIES
Proceeds from sales of loans held for sale 116,803,000 110,593,000 51,976,000
Disbursements for loans held for sale (124,704,000) (101,786,000) (54,262,000)
Provision for loan losses 1,750,000 1,233,000 636,000
Deferred federal income tax credit (352,000) (230,000) (1,208,000)
Deferred loan fees 640,000 334,000 109,000
Depreciation, amortization of intangible assets and premiums and
accretion of discounts on securities and loans 4,204,000 2,759,000 2,247,000
Net gains on sales of real estate mortgage loans (2,270,000) (1,871,000) (728,000)
Net (gains) losses on sales of securities (273,000) 162,000 120,000
(Increase) decrease in accrued income and other assets 638,000 (7,906,000) 286,000
Increase in accrued expenses and other liabilities 1,950,000 356,000 2,587,000
-----------------------------------------------
Total Adjustments (1,614,000) 3,644,000 1,763,000
-----------------------------------------------
Net Cash from Operating Activities 7,310,000 11,496,000 8,573,000
-----------------------------------------------
CASH FLOW FROM INVESTING ACTIVITIES
Proceeds from the sale of securities available for sale 59,727,000 18,145,000 14,054,000
Proceeds from the maturity of securities available for sale 4,053,000 16,385,000
Proceeds from the maturity of securities held to maturity 4,713,000 3,015,000 13,920,000
Principal payments received on securities available for sale 11,643,000 9,601,000 1,347,000
Principal payments received on securities held to maturity 799,000 694,000 5,116,000
Purchases of securities available for sale (51,035,000) (60,396,000) (732,000)
Purchases of securities held to maturity (295,000) (19,423,000)
Portfolio loans made to customers, net of principal payments received (108,968,000) (80,233,000) (88,906,000)
Acquisition of bank, less cash received 9,478,000
Acquisition of branch offices, less cash received 89,864,000 13,949,000
Portfolio loans purchased (29,758,000) (5,603,000)
Principal payments on portfolio loans purchased 2,572,000 270,000
Capital expenditures (5,038,000) (3,709,000) (1,642,000)
-----------------------------------------------
Net Cash from Investing Activities (111,292,000) (2,784,000) (62,317,000)
-----------------------------------------------
CASH FLOW FROM FINANCING ACTIVITIES
Net increase (decrease) in total deposits 27,946,000 7,468,000 (12,273,000)
Net increase (decrease) in short-term borrowings 16,237,000 (13,300,000) (347,000)
Proceeds from Federal Home Loan Bank advances 115,954,000 63,000,000 104,000,000
Payments of Federal Home Loan Bank advances (72,000,000) (55,000,000) (41,000,000)
Proceeds from long-term debt 10,000,000
Retirement of long-term debt (2,000,000) (1,000,000)
Proceeds from issuance of guaranteed preferred beneficial
interests in Company's subordinated debentures 16,220,000
Dividends paid (3,186,000) (2,736,000) (2,392,000)
Proceeds from issuance of common stock 771,000 59,000 138,000
Repurchase of common stock (893,000)
-----------------------------------------------
Net Cash from Financing Activities 83,722,000 24,711,000 47,233,000
-----------------------------------------------
Net Increase (Decrease) in Cash and Cash Equivalents (20,260,000) 33,423,000 (6,511,000)
Cash and Cash Equivalents at Beginning of Period 50,631,000 17,208,000 23,719,000
-----------------------------------------------
Cash and Cash Equivalents at End of Period $ 30,371,000 $ 50,631,000 $ 17,208,000
===============================================
Cash paid during the period for
Interest $ 35,049,000 $ 23,736,000 $ 17,604,000
Income taxes 3,743,000 3,890,000 3,110,000
Transfer of loans to other real estate 431,000 996,000 555,000
Transfer of portfolio loans to held for sale 10,000,000 7,100,000
Transfer of securities held to maturity to available for sale 52,601,000
</TABLE>
See notes to consolidated financial statements
A-16
<PAGE> 17
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, 1995 $ 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, $0.57 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, $0.64 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 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
Net income for 1997 8,924,000 8,924,000
Cash dividends declared, $0.71 per share (3,261,000) (3,261,000)
5% stock dividend 217,000 6,895,000 (7,133,000) (21,000)
Issuance of 62,520 shares of common stock 62,000 1,340,000 1,402,000
Three-for-two stock split 1,446,000 (1,454,000) (8,000)
Net change in unrealized gain on
securities available for sale, net of
$332,000 of related tax effect 644,000 644,000
----------------------------------------------------------------------------------
Balances at December 31, 1997 $ 4,587,000 $ 30,011,000 $ 23,243,000 $ 1,675,000 $ 59,516,000
==================================================================================
</TABLE>
A-17
<PAGE> 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' branches and loan production
offices. 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 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 characteristics used by the Banks include interest rate, term and type.
The Company adopted Statement of Financial Accounting Standards No. 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities," ("SFAS #125") on January 1, 1997. The adoption of SFAS #125 did
not have a material impact on the Company's financial statements.
SECURITIES - The Company classifies 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.
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.
A-18
<PAGE> 19
ALLOWANCE FOR LOAN LOSSES - Some loans will 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 the aggregate amount and composition of
the loan portfolios, as well as an evaluation of specific commercial and
agricultural loans, historical loss experience and the level of non-performing
and impaired 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 losses which occur. Collection efforts may
continue and future recoveries may occur after a loan is charged against the
allowance.
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 an impaired loan 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 $331,000 and $730,000 at December 31,
1997 and 1996, 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 $7,708,000 and $8,289,000 as of December 31, 1997 and
1996, respectively. Other intangible assets are amortized using both
straight-line and accelerated methods over 12 to 15 years. Other intangibles
amounted to $9,340,000 and $10,056,000 as of December 31, 1997 and 1996,
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, 1997, 158,076 shares of common stock were
reserved for issuance under the Incentive Share Grant Plan, 28,066 shares of
common stock were reserved for issuance under the dividend reinvestment plan and
505,695 shares of common stock were reserved for issuance under stock option
plans.
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 1996 and 1995 financial
statements have been reclassified to conform with the 1997 presentation.
A-19
<PAGE> 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 period presented. The following pro-forma results for the year
ended December 31, 1996, 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
- -------------------------------------------------------------------------------
(unaudited)
<S> <C>
Total revenue $ 70,200,000
Net income 7,600,000
Earnings per share
Basic 1.69
Diluted 1.67
</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 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.
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 $5,504,000 in 1997 and $4,316,000 in
1996. 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>
1997
U.S. Treasury $ 7,028,000 $ 77,000 $ 7,105,000
U.S. Government agencies 14,819,000 673,000 15,492,000
Mortgage-backed securities 52,581,000 797,000 $ 231,000 53,147,000
Obligations of states and political subdivisions 25,695,000 1,160,000 6,000 26,849,000
Other securities 8,108,000 68,000 8,176,000
--------------------------------------------------------------------
Total $ 108,231,000 $2,775,000 $ 237,000 $ 110,769,000
====================================================================
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
====================================================================
</TABLE>
A-20
<PAGE> 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>
1997
U.S. Government agencies $ 997,000 $ 3,000 $ 1,000,000
Mortgage-backed securities 2,785,000 13,000 $ 9,000 2,789,000
Obligations of states and political subdivisions 18,353,000 822,000 19,175,000
Other securities 390,000 390,000
------------------------------------------------------------------
Total $ 22,525,000 $ 838,000 $ 9,000 $ 23,354,000
==================================================================
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
==================================================================
</TABLE>
The amortized cost and approximate fair value of securities at December 31,
1997, 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 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 $ 1,423,000 $ 1,433,000 $ 1,666,000 $ 1,681,000
Maturing after one year but within five years 19,950,000 20,350,000 12,329,000 12,817,000
Maturing after five years but within ten years 23,313,000 24,500,000 3,811,000 4,057,000
Maturing after ten years 10,462,000 10,837,000 1,934,000 2,010,000
--------------------------------------------------------------------
55,148,000 57,120,000 19,740,000 20,565,000
Mortgage-backed securities 52,581,000 53,147,000 2,785,000 2,789,000
Other securities 502,000 502,000
--------------------------------------------------------------------
Total $ 108,231,000 $ 110,769,000 $ 22,525,000 $ 23,354,000
====================================================================
</TABLE>
A summary of proceeds from the sale of securities available for sale realized
gains and losses follows:
<TABLE>
<CAPTION>
REALIZED REALIZED
PROCEEDS GAINS LOSSES
- ---------------------------------------------------------------------------------------------------------------------------
<C> <C> <C> <C>
1997 $ 59,727,000 $ 354,000 $ 81,000
1996 18,145,000 42,000 204,000
1995 14,054,000 8,000 128,000
</TABLE>
Securities with a book value of $31,660,000 and $14,882,000 at December 31,
1997 and 1996, 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,
1997 or 1996.
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.
A-21
<PAGE> 22
NOTE 5 - LOANS
An analysis of the allowance for loan losses for the years ended December
31 follows:
<TABLE>
<CAPTION>
1997 1996 1995
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of period $ 6,960,000 $ 5,243,000 $ 5,054,000
Allowance on loans acquired 1,180,000
Provision charged to operating expense 1,750,000 1,233,000 636,000
Recoveries credited to allowance 585,000 440,000 265,000
Loans charged against allowance (1,625,000) (1,136,000) (712,000)
-----------------------------------------------
Balance at end of period $ 7,670,000 $ 6,960,000 $ 5,243,000
===============================================
</TABLE>
Loans are presented net of deferred income of $2,408,000 at December
31, 1997, and $1,768,000 at December 31, 1996. Loans on non-accrual status, 90
days or more past due and still accruing interest, or restructured amounted to
$5,386,000, $3,902,000 and $2,560,000 at December 31, 1997, 1996 and 1995,
respectively. If these loans had continued to accrue interest in accordance
with their original terms, approximately $442,000, $288,000, and $263,000 of
interest income would have been realized in 1997, 1996 and 1995, respectively.
Interest income realized on these loans was approximately $190,000, $105,000
and $64,000 in 1997, 1996 and 1995, respectively.
Impaired loans totaled approximately $2,800,000, $3,800,000 and $3,200,000
at December 31, 1997, 1996 and 1995, respectively. The Banks' average investment
in impaired loans was approximately $3,300,000, $2,500,000 and $2,300,000 in
1997, 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 1997, 1996 and 1995 was approximately
$165,000, $130,000 and $70,000, respectively. Certain impaired loans with a
balance of approximately $1,300,000, $2,300,000 and $700,000 had specific
allocations of the allowance for loan losses calculated in accordance with SFAS
#114 totaling approximately $200,000, $500,000 and $250,000 at December 31,
1997, 1996 and 1995, respectively.
The Banks capitalized approximately $583,000 and $370,000 of servicing
rights relating to loans that were originated and sold during the years ended
December 31, 1997 and 1996, respectively. Amortization of capitalized servicing
rights during those years was $131,000 and $56,000, respectively. The fair value
of capitalized servicing rights approximated the book value of $764,000 at
December 31, 1997, therefore no valuation allowance relating to impairment was
considered necessary. The capitalized servicing rights relate to approximately
$129,000,000 of loans sold and serviced at December 31, 1997.
At December 31, 1997, 1996 and 1995, the Banks serviced loans totaling
approximately $245,000,000, $181,000,000 and $124,000,000, respectively, for the
benefit of third parties.
NOTE 6 - PROPERTY AND EQUIPMENT
A summary of property and equipment at December 31 follows:
<TABLE>
<CAPTION>
1997 1996
- ------------------------------------------------------------------------------------
<S> <C> <C>
Land $ 3,067,000 $ 2,969,000
Buildings 18,182,000 15,109,000
Equipment 13,242,000 11,511,000
-------------------------------
34,491,000 29,589,000
Accumulated depreciation and amortization (13,424,000) (11,127,000)
-------------------------------
Property and equipment, net $ 21,067,000 $ 18,462,000
===============================
</TABLE>
NOTE 7 - DEPOSITS
A summary of interest expense on deposits for the years ended December 31
follows:
<TABLE>
<CAPTION>
1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Savings and NOW $ 8,480,000 $ 6,116,000 $ 5,515,000
Time deposits under $100,000 11,997,000 8,718,000 6,072,000
Time deposits of $100,000 or more 2,137,000 1,304,000 883,000
------------------------------------------------
Total $ 22,614,000 $ 16,138,000 $ 12,470,000
================================================
</TABLE>
Aggregate time certificates of deposit and other time deposits in
denominations of $100,000 or more amounted to $52,605,000, $31,053,000, and
$19,497,000 at December 31, 1997, 1996 and 1995, respectively.
A-22
<PAGE> 23
Maturities of certificates of deposit at December 31, 1997 follow:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<C> <C>
1998 $176,794,000
1999 61,118,000
2000 20,430,000
2001 8,519,000
2002 and thereafter 5,479,000
------------
Total $272,340,000
============
</TABLE>
NOTE 8 - OTHER BORROWINGS
A summary of other borrowings at December 31 follows:
<TABLE>
<CAPTION>
1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Advances from Federal Home Loan Bank $ 145,954,000 $ 111,000,000
Notes payable 12,000,000 14,000,000
U.S. Treasury demand notes 1,450,000 1,858,000
Repurchase agreements 7,772,000 8,424,000
Other 9,000 12,000
----------------------------------
Total $ 167,185,000 $ 135,294,000
==================================
</TABLE>
Advances from the Federal Home Loan Bank ("FHLB") at December 31, 1997 and
1996, 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. Interest expense on advances amounted to $7,877,000,
$6,757,000 and $3,836,000 for the years ending December 31, 1997, 1996 and 1995,
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,
1997, the Banks were in compliance with the FHLB stock ownership requirements.
Maturities and weighted average interest rates at December 31 follow:
<TABLE>
<CAPTION>
1997 1996
AMOUNT RATE AMOUNT RATE
- ---------------------------------------------------------------------------------------------------------------------------
Fixed rate advances
<S> <C> <C> <C> <C>
1997 $ 46,000,000 5.92%
1998 $ 42,000,000 5.97% 36,000,000 5.98
1999 26,059,000 5.98 8,000,000 6.07
2000 10,895,000 6.03
----------------------------------------------------------
Total fixed rate advances 78,954,000 5.98 90,000,000 5.96
----------------------------------------------------------
Variable rate advances
1997 12,000,000 5.47
1998 46,000,000 5.74 9,000,000 5.52
1999 5,000,000 5.83
2000 16,000,000 5.70
----------------------------------------------------------
Total variable rate advances 67,000,000 5.74 21,000,000 5.49
----------------------------------------------------------
Total advances $ 145,954,000 5.87% $ 111,000,000 5.87%
=========================================================
</TABLE>
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, 1997,
the term note had an unpaid principal balance of $7,000,000 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 at December 31, 1997 follow:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
1998 $ 7,000,000
1999 2,000,000
2000 2,000,000
2001 1,000,000
------------
Total $ 12,000,000
============
</TABLE>
A-23
<PAGE> 24
NOTE 9 - GUARANTEED PREFERRED BENEFICIAL INTERESTS
IN COMPANY'S SUBORDINATED DEBENTURES
On December 13, 1997, 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.
The Preferred Securities are subject to mandatory redemption at the
liquidation preference, in whole or in part, upon repayment of the subordinated
debentures at maturity or their earlier redemption. 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. The subordinated debentures are also redeemable 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 - EARNINGS PER SHARE
The Company adopted Statement of Financial Accounting Standards No. 128,
"Earnings Per Share," ("SFAS #128") effective December 31, 1997. SFAS #128
replaced primary earnings per share ("Primary") and fully diluted earnings per
share ("Fully Diluted") with basic earnings per share ("Basic") and diluted
earnings per share ("Diluted"). This statement requires a dual presentation and
reconciliation of Basic and Diluted. Basic, unlike Primary, excludes any
dilution from common stock equivalents, while Diluted, like Fully Diluted,
reflects the potential dilution of all common stock equivalents.
A reconciliation of basic and diluted earnings per share for the years
ended December 31 follows:
<TABLE>
<CAPTION>
1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------------
Basic earnings per share
<S> <C> <C> <C>
Net income $ 8,924,000 $ 7,852,000 $ 6,810,000
===============================================
Shares outstanding 4,574,000 4,503,000 4,483,000
===============================================
Per share amount $ 1.95 $ 1.74 $ 1.52
===============================================
Diluted earnings per share
Net income $ 8,924,000 $ 7,852,000 $ 6,810,000
===============================================
Shares outstanding 4,574,000 4,503,000 4,483,000
Effect of dilutive securities - stock options 53,000 39,000 24,000
-----------------------------------------------
4,627,000 4,542,000 4,507,000
===============================================
Per share amount $ 1.93 $ 1.73 $ 1.51
===============================================
</TABLE>
NOTE 11 - FEDERAL INCOME TAX
The composition of federal income tax expense for the years ended December
31 follows:
<TABLE>
<CAPTION>
1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current $ 3,987,000 $ 3,508,000 $ 3,908,000
Deferred (352,000) (230,000) (1,208,000)
-----------------------------------------------
Federal income tax expense $ 3,635,000 $ 3,278,000 $ 2,700,000
===============================================
</TABLE>
A-24
<PAGE> 25
A reconciliation of federal income tax expense to the amount computed by
applying the statutory federal income tax rate of 35% in 1997 and 34% in 1996
and 1995, to income before federal income tax for the years ended December 31
follows:
<TABLE>
<CAPTION>
1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory rate applied to income before federal income tax $ 4,396,000 $ 3,784,000 $ 3,233,000
Tax-exempt interest income (906,000) (698,000) (587,000)
Amortization of goodwill 226,000 150,000 54,000
Other, net (81,000) 42,000
-----------------------------------------------
Federal income tax expense $ 3,635,000 $ 3,278,000 $ 2,700,000
===============================================
</TABLE>
The deferred federal income tax benefit of $352,000, $230,000 and
$1,208,000 in 1997, 1996 and 1995, respectively, 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>
1997 1996
- -----------------------------------------------------------------------------------------------------------------------------------
Deferred tax assets
<S> <C> <C>
Allowance for loan losses $ 1,965,000 $ 1,534,000
Deferred compensation 778,000 691,000
Purchase discounts 376,000 427,000
Deferred loan fees 218,000 316,000
Deferred credit life premiums 125,000 145,000
Other 683,000 836,000
----------------------------
Gross deferred tax assets 4,145,000 3,949,000
----------------------------
Deferred tax liabilities
Unrealized gain on securities available for sale 863,000 531,000
Fixed assets 327,000 483,000
----------------------------
Gross deferred tax liabilities 1,190,000 1,014,000
----------------------------
Net deferred tax assets $ 2,955,000 $ 2,935,000
============================
</TABLE>
NOTE 12 - EMPLOYEE BENEFIT PLANS
The Company maintains stock option plans for certain employees of the
Company and subsidiaries and for non-employee directors of the Company. An
aggregate of 571,430 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.
On January 1, 1996, the Company adopted Statement of Financial
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 1997
and 1996 was obtained using the Black Scholes options pricing model. A summary
of the assumptions used and values obtained follows:
<TABLE>
<CAPTION>
1997 1996
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Expected dividend yield 2.86% 3.64%
Risk free interest rate 6.76 6.53
Expected life 5 years 5 years
Expected volatility .14414 .16262
Per share weighted-average fair value $4.65 $2.95
</TABLE>
A-25
<PAGE> 26
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 estimated fair value of
options at the grant date:
<TABLE>
<CAPTION>
1997 1996
- ----------------------------------------------------------------------------------------------------------------------------------
Net income
<S> <C> <C>
As reported $ 8,924,000 $ 7,852,000
Pro-forma 8,747,000 7,762,000
Net income per share
Basic
As reported $ 1.95 $ 1.74
Pro-forma 1.91 1.72
Diluted
As reported $ 1.93 $ 1.73
Pro-forma 1.89 1.71
</TABLE>
A summary of outstanding stock option grants and transactions follows:
<TABLE>
<CAPTION>
NUMBER AVERAGE
OF EXERCISE
SHARES PRICE
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Outstanding at January 1, 1995 102,449 $ 10.73
Granted 41,675 14.33
Exercised (13,284) 10.30
Forfeited (1,736) 14.11
-------------------------
Outstanding at December 31, 1995 129,104 11.89
Granted 46,222 17.28
Exercised (5,209) 11.42
Forfeited (1,736) 17.23
-------------------------
Outstanding at December 31, 1996 168,381 13.33
Granted 57,566 24.60
Exercised (45,503) 10.55
-------------------------
Outstanding at December 31, 1997 180,444 $ 17.63
=========================
</TABLE>
At December 31, 1997, the range of exercise prices of outstanding options
was $11.52 to $24.60.
The Company has a 401(k) and an employee stock ownership plan covering
substantially all full-time employees of the Company and subsidiaries. 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, 1997, 1996 and 1995,
$1,157,000, $850,000 and $704,000 respectively, was expensed for these
retirement plans.
Officers of the Company and subsidiaries 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, 1997, 1996 and 1995,
amounts expensed for all incentive plans totaled $1,338,000, $1,026,000, and
$876,000, respectively.
The Company also provides certain health care and life insurance programs
to substantially all full-time employees. These insurance programs are available
to retired employees at their expense.
NOTE 13 - 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 derivatives. 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-26
<PAGE> 27
A summary of financial instruments with off-balance sheet risk at December
31 follows:
<TABLE>
<CAPTION>
1997 1996
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Financial instruments whose risk is represented by contract amounts
Commitments to extend credit $ 85,738,000 $ 58,827,000
Standby letters of credit 2,793,000 2,182,000
Interest rate derivative financial instruments
Interest rate cap agreements
Notional amount $ 28,000,000 $ 9,000,000
Strike 6.71% 7.00%
Weighted average maturity 2.3 years 2.3 years
Amortized cost $ 168,000 $ 83,000
Fair value 87,000 70,000
Interest rate collar agreements
Notional amount $ 10,000,000
Cap strike 6.42%
Floor strike 5.71
Weighted average maturity 2.7 years
Fair value $ (10,000)
</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 14 - 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 1997 and 1996.
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>
1997 1996
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Balance at beginning of period $ 3,944,000 $ 4,687,000
New loans and advances 3,481,000 3,413,000
Repayments (3,961,000) (4,156,000)
-------------------------------
Balance at end of period $ 3,464,000 $ 3,944,000
===============================
</TABLE>
NOTE 15 - OTHER OPERATING EXPENSES
Other operating expenses for the years ended December 31 follow:
<TABLE>
<CAPTION>
1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Amortization of intangible assets $ 1,523,000 $ 583,000 $ 273,000
Computer processing 1,340,000 1,063,000 818,000
Advertising 1,329,000 827,000 344,000
Communications 1,280,000 1,007,000 791,000
Supplies 1,019,000 804,000 561,000
Loan and collection 939,000 663,000 1,030,000
State taxes 824,000 638,000 537,000
Other 3,280,000 2,685,000 2,292,000
---------------------------------------------------
Total $ 11,534,000 $ 8,270,000 $ 6,646,000
===================================================
</TABLE>
A-27
<PAGE> 28
NOTE 16 - 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, 1997, 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 $30,900,000. 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>
1997
Total capital to risk-weighted assets
Consolidated $ 66,332,000 9.91% $ 53,561,000 8.00% $ 66,951,000 10.00%
Independent Bank 25,409,000 10.76 18,887,000 8.00 23,608,000 10.00
Independent Bank West Michigan 17,122,000 10.56 12,975,000 8.00 16,218,000 10.00
Independent Bank South Michigan 11,815,000 10.97 8,619,000 8.00 10,774,000 10.00
Independent Bank East Michigan 18,129,000 11.41 12,711,000 8.00 15,889,000 10.00
Tier 1 capital to risk-weighted assets
Consolidated $ 58,662,000 8.76% $ 26,781,000 4.00% $ 40,171,000 6.00%
Independent Bank 22,693,000 9.61 9,443,000 4.00 14,165,000 6.00
Independent Bank West Michigan 15,240,000 9.40 6,487,000 4.00 9,731,000 6.00
Independent Bank South Michigan 10,467,000 9.72 4,310,000 4.00 6,464,000 6.00
Independent Bank East Michigan 16,540,000 10.41 6,356,000 4.00 9,533,000 6.00
Tier 1 capital to average assets
Consolidated $ 58,662,000 6.13% $ 38,286,000 4.00% $ 47,857,000 5.00%
Independent Bank 22,693,000 6.75 13,456,000 4.00 16,820,000 5.00
Independent Bank West Michigan 15,240,000 6.77 9,006,000 4.00 11,258,000 5.00
Independent Bank South Michigan 10,467,000 6.87 6,098,000 4.00 7,622,000 5.00
Independent Bank East Michigan 16,540,000 6.91 9,568,000 4.00 11,960,000 5.00
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
</TABLE>
A-28
<PAGE> 29
NOTE 17 - FAIR VALUES OF FINANCIAL INSTRUMENTS
Most of the Company's assets and liabilities are considered financial
instruments. Many of these financial instruments lack an available trading
market and 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
methodology that is considered suitable for each category of financial
instrument. For instruments 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>
1997 1996
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 $ 30,400 $ 30,400 $ 40,600 $ 40,600
Federal funds sold 10,000 10,000
Securities available for sale 110,800 110,800 136,900 136,900
Securities held to maturity 23,400 22,500 27,600 26,800
Net loans and loans held for sale 767,700 758,300 618,000 614,300
LIABILITIES
Deposits with no stated maturity $ 428,100 $ 428,100 $ 412,300 $ 412,300
Deposits with stated maturity 274,000 272,300 262,000 260,200
Other borrowings 214,400 212,400 136,600 137,000
</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.
A-29
<PAGE> 30
NOTE 18 - INDEPENDENT BANK CORPORATION (PARENT COMPANY ONLY) FINANCIAL
INFORMATION
Presented below are condensed financial statements for the parent company.
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF FINANCIAL CONDITION DECEMBER 31,
1997 1996
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 3,394,000 $ 2,974,000
Investment in subsidiaries 85,080,000 81,057,000
Other assets 3,304,000 2,116,000
--------------------------------
Total Assets $ 91,778,000 $ 86,147,000
================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Notes payable $ 12,000,000 $ 14,000,000
Subordinated debentures 17,783,000 17,783,000
Other liabilities 2,479,000 2,528,000
Shareholders' equity 59,516,000 51,836,000
--------------------------------
Total Liabilities and Shareholders' Equity $ 91,778,000 $ 86,147,000
================================
</TABLE>
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF OPERATIONS YEAR ENDED DECEMBER 31,
1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING INCOME
Dividends from subsidiaries $ 7,400,000 $ 4,425,000 $ 4,500,000
Management fees from subsidiaries and other income 6,755,000 5,073,000 4,248,000
---------------------------------------------------
Total Operating Income 14,155,000 9,498,000 8,748,000
---------------------------------------------------
OPERATING EXPENSES
Interest expense 2,542,000 546,000
Administrative and other expenses 7,871,000 6,348,000 5,226,000
---------------------------------------------------
Total Operating Expenses 10,413,000 6,894,000 5,226,000
---------------------------------------------------
Income Before Federal Income Tax and Undistributed Net Income
of Subsidiaries 3,742,000 2,604,000 3,522,000
Federal income tax credit 1,188,000 568,000 320,000
---------------------------------------------------
Income Before Equity in Undistributed Net Income of Subsidiaries 4,930,000 3,172,000 3,842,000
Equity in undistributed net income of subsidiaries 3,994,000 4,680,000 2,968,000
---------------------------------------------------
Net Income $ 8,924,000 $ 7,852,000 $ 6,810,000
===================================================
</TABLE>
A-30
<PAGE> 31
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF CASH FLOWS YEAR ENDED DECEMBER 31,
1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Income $ 8,924,000 $ 7,852,000 $ 6,810,000
---------------------------------------------------
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 437,000 336,000 297,000
(Increase) decrease in other assets (203,000) 426,000 (604,000)
Increase in other liabilities 478,000 688,000 599,000
Equity in undistributed net income of subsidiaries (3,994,000) (4,680,000) (2,968,000)
---------------------------------------------------
Total Adjustments (3,282,000) (3,230,000) (2,676,000)
---------------------------------------------------
Net Cash from Operating Activities 5,642,000 4,622,000 4,134,000
---------------------------------------------------
CASH FLOW FROM INVESTING ACTIVITIES
Purchase of securities available for sale (23,000)
Capital expenditures (807,000) (1,110,000) (127,000)
Investment in subsidiaries (31,352,000)
Proceeds from sale of property and equipment 36,000
---------------------------------------------------
Net Cash from Investing Activities (807,000) (32,485,000) (91,000)
---------------------------------------------------
CASH FLOW FROM FINANCING ACTIVITIES
Proceeds from short-term borrowings 5,000,000
Proceeds from long-term debt 10,000,000
Proceeds from issuance of subordinated debentures 16,753,000
Repayment of long-term debt (2,000,000) (1,000,000)
Dividends paid (3,186,000) (2,736,000) (2,392,000)
Proceeds from issuance of common stock 771,000 59,000 138,000
Repurchase of common stock (893,000)
---------------------------------------------------
Net Cash from Financing Activities (4,415,000) 28,076,000 (3,147,000)
---------------------------------------------------
Net Increase in Cash and Cash Equivalents 420,000 213,000 896,000
Cash and Cash Equivalents at Beginning of Period 2,974,000 2,761,000 1,865,000
---------------------------------------------------
Cash and Cash Equivalents at End of Period $ 3,394,000 $ 2,974,000 $ 2,761,000
===================================================
</TABLE>
A-31
<PAGE> 32
QUARTERLY SUMMARY
<TABLE>
<CAPTION>
REPORTED SALE PRICES OF COMMON SHARES CASH DIVIDENDS
1997 1996 DECLARED
----------------------------------------------------------------------------------------
HIGH LOW CLOSE HIGH LOW CLOSE 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
First quarter $25.00 $21.25 $24.25 $17.13 $15.75 $17.00 $ .18 $ .16
Second quarter 27.88 24.00 27.25 17.75 16.50 17.13 .18 .16
Third quarter 31.88 27.13 31.00 18.38 17.13 17.63 .18 .16
Fourth quarter 40.50 31.38 40.50 22.38 17.75 21.63 .19 .17
</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 16 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,
- ----------------------------------------------------------------------------------------------------------------------------------
(unaudited)
<S> <C> <C> <C> <C>
1997
Interest income $ 17,846,000 $ 19,155,000 $ 20,001,000 $ 20,412,000
Net interest income 9,877,000 10,477,000 11,004,000 11,281,000
Provision for loan losses 321,000 321,000 461,000 647,000
Income before income tax expense 3,004,000 3,077,000 3,199,000 3,279,000
Net income 2,134,000 2,194,000 2,275,000 2,321,000
Net income per common share
Basic $ .46 $ .48 $ .50 $ .51
Diluted .46 .48 .49 .50
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
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
Basic $ .41 $ .43 $ .44 $ .46
Diluted .41 .43 .44 .45
</TABLE>
A-32
<PAGE> 33
SHAREHOLDER INFORMATION
HOW TO ORDER FORM 10-K
Shareholders may obtain, without charge, a copy of Form 10-K, the 1997
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 21, 1998, 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 up to $2,500
per quarter are also permitted. A prospectus is available by writing to the
Company's Chief Financial Officer.
MARKET MAKERS
Registered market makers at December 31, 1997 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
<TABLE>
<S><C>
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, Independent Bank Corporation
DIRECTORS
Keith E. Bazaire, President, Carter's Food Center, Inc., Retail Grocer, Charlotte
Terry L. Haske, President, 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
</TABLE>
A-33
<PAGE> 1
EXHIBIT 21
INDEPENDENT BANK CORPORATION
Subsidiaries of the Registrant
<TABLE>
<CAPTION>
State of Incorporation
----------------------
<S> <C>
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
</TABLE>
<PAGE> 1
[KPMG PEAT MARWICK LLP LETTERHEAD]
EXHIBIT 23
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. 333-32267 and 333-32269) on Forms S-8 of
Independent Bank Corporation of our report dated February 2, 1998, relating to
the consolidated statements of financial condition of Independent Bank
Corporation and subsidiaries as of December 31, 1997, and 1996, 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, 1997, which report
is incorporated by reference in the December 31, 1997 annual report on Form 10-K
of Independent Bank Corporation.
/s/ KPMG Peat Marwick LLP
East Lansing, Michigan
March 13, 1998
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 30,371
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 110,769
<INVESTMENTS-CARRYING> 22,525
<INVESTMENTS-MARKET> 23,354
<LOANS> 744,178
<ALLOWANCE> 7,670
<TOTAL-ASSETS> 983,817
<DEPOSITS> 700,480
<SHORT-TERM> 190,185
<LIABILITIES-OTHER> 11,386
<LONG-TERM> 22,250
0
0
<COMMON> 4,587
<OTHER-SE> 54,929
<TOTAL-LIABILITIES-AND-EQUITY> 983,817
<INTEREST-LOAN> 65,830
<INTEREST-INVEST> 10,585
<INTEREST-OTHER> 999
<INTEREST-TOTAL> 77,414
<INTEREST-DEPOSIT> 22,614
<INTEREST-EXPENSE> 34,775
<INTEREST-INCOME-NET> 42,639
<LOAN-LOSSES> 1,750
<SECURITIES-GAINS> 273
<EXPENSE-OTHER> 36,845
<INCOME-PRETAX> 12,559
<INCOME-PRE-EXTRAORDINARY> 12,559
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,924
<EPS-PRIMARY> 1.93
<EPS-DILUTED> 1.93
<YIELD-ACTUAL> 5.07
<LOANS-NON> 3,298
<LOANS-PAST> 1,904
<LOANS-TROUBLED> 184
<LOANS-PROBLEM> 2,800
<ALLOWANCE-OPEN> 6,960
<CHARGE-OFFS> 1,625
<RECOVERIES> 585
<ALLOWANCE-CLOSE> 7,670
<ALLOWANCE-DOMESTIC> 3,414
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 4,256
</TABLE>
