SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
x | | |
þ | | Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2012 or |
for the fiscal year endedDecember 31, 2009
or
o | | |
o | | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from ___________ to ___________ |
for the transition period fromto
Commission file number0-7818| Commission file number | 0-7818 | |
INDEPENDENT BANK CORPORATION
(Exact name of Registrant as specified in its charter)
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| MICHIGAN | | 38-2032782 |
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| (State or other jurisdiction of incorporation) | | (I.R.S. employer identification no.) |
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| 230 W. Main St., P.O. Box 491, Ionia, Michigan | | 48846 |
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| (Address of principal executive offices) | | (Zip Code) |
Registrant’s telephone number, including area code (616) 527-9450
Registrant's telephone number, including area code | (616) 527-5820 |
Securities registered pursuant to Section 12(b) of the Act:
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Common Stock, $1.00No Par Value | | NASDAQ |
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(Title of class) | | (Name of Exchange) |
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8.25% Cumulative Trust Preferred Securities | | NASDAQ |
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| (Title of class) | | (Name of Exchange) |
| 8.25% Cumulative Trust Preferred Securities | | NASDAQ |
| (Title of class) | | (Name of Exchange) |
Securities registered pursuant to Section 12(g) of the Act: None.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yeso Noþx
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yeso Noþx
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.
Yesþx Noo
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yesx No o Noo
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’sRegistrant'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.o
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.
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| Large accelerated filero | | Accelerated filero | | Non-accelerated filero | | Smaller reporting companyCompany þx |
| | | | (Do not check if a smaller reporting company) | | |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b of the Exchange Act).
Yeso Noþx
The aggregate market value of common stock held by non-affiliates of the Registrant as of June 30, 2009,2012, was $30,670,000.$20,699,847.
The number of shares outstanding of the Registrant’sRegistrant's common stock as of February 26, 2010March 12, 2013 was 24,032,177.9,424,996.
Documents incorporated by reference
Portions of our definitive proxy statement, and annual report, to be delivered to shareholders in connection with the April 27, 201023, 2013 Annual Meeting of Shareholders are incorporated by reference into Part I, Part II, Part III, and Part IIIIV of this Form 10-K.
The Exhibit Index appears on Pages 38-3942-44
FORWARD-LOOKING STATEMENTS
Discussions and statements in this Annual Report on Form 10-K that are not statements of historicalfact, including, without limitation, statements that include terms such as “will,” “may,” “should,” “believe,” “expect,” “forecast,” “anticipate,” “estimate,” “project,” “intend,” “likely,” “optimistic” and “plan,” and statements about future or projected financial and operating results, plans, projections, objectives, expectations, and intentions and other statements that are not historical facts, are forward-looking statements. Forward-looking statements include, but are not limited to, descriptions of plans and objectives for future operations, products or services; projections of our future revenue, earnings or other measures of economic performance; forecasts of credit losses and other asset quality trends; predictions as to our bank’s ability to maintain certain regulatory capital standards; our expectation that we will have sufficient cash on hand to meet expected obligations during 2013; and descriptions of steps we may take to improve our capital position. These forward-looking statements express management’sour current expectations, forecasts of future events, or long-term goals and, by their nature, are subject to assumptions, risks, and uncertainties. Although management believeswe believe that the expectations, forecasts, and goals reflected in these forward-looking statements are reasonable, actual results could differ materially for a variety of reasons, including, the risks and uncertainties detailed under “Risk Factors” set forth below. The key risks are summarized as follows:among others:
| | •· | | If we are unableour ability to successfully raise new equity capitaleffect a conversion of our outstanding preferred stock held by the U.S. Treasury into our common stock, exit the Troubled Asset Relief Program (“TARP”) and otherwise implement our capital restoration plan, it will be extremely difficult for us to withstand current economic conditions and any further deterioration in our loan portfolio;plan; |
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| | •· | | Futurethe failure of assumptions underlying the establishment of and provisions made to our allowance for loan losses could exceed the reserves we maintain for such losses; |
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| | •· | | Economic conditionsthe timing and pace of an economic recovery in Michigan are worse in many cases than national economic conditions and the ability of the Michigan economy to recover, and the pace of such recovery, is expected to have a material impact on our future financial success; |
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| • | | ConditionsUnited States in general, including regional and local real estate markets are expected to have a material impact on our future financial success;markets; |
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| | •· | the ability of our bank to remain well-capitalized; |
| | Current turmoil· | the failure of assumptions underlying our estimate of probable incurred losses from vehicle service contract payment plan counterparty contingencies, including our assumptions regarding future cancellations of vehicle service contracts, the value to us of collateral that may be available to recover funds due from our counterparties, and our ability to enforce the contractual obligations of our counterparties to pay amounts owing to us; |
| · | further adverse developments in the vehicle service contract industry has increased industry; |
| · | potential limitations on our ability to access and rely on wholesale funding sources; |
| · | the credit risk and reputation risk forthat sales of our subsidiary, Mepco Finance Corporation, have led and may continue to lead to significant losses for Mepco, and will contribute tocommon stock could trigger a decreasereduction in the average earning assetsamount of Mepco, which has historically operated at a profit and decreased the size of the lossesnet operating loss carryforwards that we have incurred in recent periods;may be able to utilize for income tax purposes; |
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| | •· | | Legislative and regulatory changes could increase our expenses, decrease our income, and otherwise have a negative impact on our results of operations; |
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| • | | Our use of wholesale funding sources exposes us to liquidity risk and potential earnings volatility; |
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| • | | Thethe continued services of our management team are critical as we work through our asset quality issuesteam; and |
| · | implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act or other new legislation, which may have significant effects on us and the implementationfinancial services industry, the exact nature and extent of our capital restoration plan, yet our ability to compensate our executives is subject to restrictions that do not apply to many of our competitors; |
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| • | | Media reports regarding ongoing bank failures and any negative publicity regarding our capital position could result in our loss of core deposits; |
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| • | | Our capital raising initiatives will result in significant dilution to our current shareholders; |
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| • | | Implementation of our capital restoration plan could result in the U.S. Treasury or another large investor owning a significant percentage of our common stock, and such investor’s interests couldwhich cannot be different than the interests of our smaller shareholders; |
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| • | | Our common stock may be delisted from the Nasdaq Global Stock Market; |
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| • | | We have suspended all quarterly payments on our preferred stock and our trust preferred securities and we do not know if or when such payments will resume; |
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| • | | We are currently prohibited from paying cash dividends on our common stock and will, for the foreseeable future, be subject to material restrictions on our ability to pay cash dividends; |
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| • | | The liquidity and market price of our common stock may be materially and adversely affected by our current financial condition and the capital raising initiatives we are pursuing.determined at this time. |
You are urged
This list provides examples of factors that could affect the results described by forward-looking statements contained in this Annual Report on Form 10-K, but the list is not intended to readbe all inclusive. The risk factors disclosed in Part I – Item 1A below include all known risks our management believes could materially affect the “Risk Factors” section below carefully andresults described by forward-looking statements in this report. However, those risks may not rely onbe the above summary.
In addition, other factors not currently anticipated may also materially and adversely affect ouronly risks we face. Our results of operations, cash flows, financial position, and prospects.prospects could also be materially and adversely affected by additional factors that are not presently known to us, that we currently consider to be immaterial, or that develop after the date of this report. We cannot assure you that our future results will meet expectations. While we believe the forward-looking statements in this Annual Report on Form 10-Kreport are reasonable, you should not place undue reliance on any forward-looking statement. In addition, these statements speak only as of the date made. We do not undertake, and expressly disclaim, any obligation to update or alter any statements, whether as a result of new information, future events, or otherwise, except as required by applicable law.
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PART I
ITEM 1.BUSINESS
Independent Bank Corporation was incorporated under the laws of the State of Michigan on September 17, 1973, for the purpose of becoming a bank holding company. We are registered under the Bank Holding Company Act of 1956, as amended, and own the outstanding stock of Independent Bank (the “Bank”"bank") which is organized under the laws of the State of Michigan. During 2007, we consolidated our existing four bank charters into one.
Aside from the stock of our Bank,bank, we have no other substantial assets. We conduct no business except for the collection of dividends from our Bankbank and the payment of dividends to our shareholders.shareholders and the payment of interest on subordinated debentures. Currently we are not paying any dividends on our common stock or preferred stock and are deferring interest on our subordinated debentures. Certain employee retirement plans (including employee stock ownership and deferred compensation plans) as well as health and other insurance programs have been established by us. The costs of these plans are borne by our subsidiaries.
We have no material patents, trademarks, licenses or franchises except the corporate franchise of our Bankbank which permits it to engage in commercial banking pursuant to Michigan law.
Our Bank’sbank's main office location is Ionia, Michigan and it had total loans (excluding loans held for sale) and total deposits of $2.299$1.419 billion and $2.566$1.780 billion, respectively, at December 31, 2009.2012.
Our Bankbank transacts business in the single industry of commercial banking. Most of our Bank’sbank's offices provide full-service lobby and drive-thru services in the communities they serve. Automatic teller machines are also provided at most locations.
Our Bank’sbank's activities cover all phases of banking, including checking and savings accounts, commercial lending, direct and indirect consumer financing, mortgage lending and safe deposit box services. Our Bank’s mortgage lending activities are primarily conducted through a separate mortgage bank subsidiary. Mepco Finance Corporation, a subsidiary of our Bank,bank, acquires (on a full recourse basis) and services payment plans used by consumers to purchase vehicle service contracts and similar products provided and administered by third parties. In addition, our Bankbank offers title insurance services through a separate subsidiary and provides investment and insurance services through a third party agreement with PrimeVest FinancialCetera Investment Services Inc.LLC. Our Bankbank does not offer trust services. Our principal markets are the rural and suburban communities across Lower Michigan that are served by our Bank’sbank's branch network. Our Bankbank serves its markets through its main office and a total of 10572 branches, 42 drive-thru facilities and 53 loan production offices. The ongoing economic stress in Michigan has adversely impacted many of our markets which is manifested in higher levels of loan defaults and lower demand for credit.
Our Bankbank competes with other commercial banks, savings banks, credit unions, mortgage banking companies, securities brokerage companies, insurance companies, and money market mutual funds. Many of these competitors have substantially greater resources than we do and offer certain services that we do not currently provide. Such competitors may also have greater lending limits than our Bank.bank. In addition, non-bank competitors are generally not subject to the extensive regulations applicable to us.
Price (the interest charged on loans and/or paid on deposits) remains a principal means of competition within the financial services industry. Our Bankbank also competes on the basis of service and convenience in 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 revenue for the three most recent years are as follows:
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| | | 2009 | | 2008 | | 2007 | | | 2012 | | | 2011 | | | 2010 | |
| Interest and fees on loans | | | 71.8 | % | | | 80.0 | % | | | 74.8 | % | | | 57.5 | % | | | 68.4 | % | | | 64.5 | % |
| Other interest income | | 4.5 | | 7.3 | | 7.7 | | | | 3.5 | | | | 2.6 | | | | 3.0 | |
| Non-interest income | | 23.7 | | 12.7 | | 17.5 | | | | 39.0 | | | | 29.0 | | | | 32.5 | |
| | | | | | | | | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % |
| | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % | |
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As of December 31, 2009,2012, we had 1,034755 full-time employees and 297179 part-time employees.
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ITEM 1.BUSINESS (Continued)| ITEM 1. | BUSINESS (Continued) |
Recent Developments
On December 18,
Since 2009, the Board of Directors of our subsidiary Bank adopted resolutions requiring our Bank to achieve certain minimum capital ratios. Set forth below are the actual capital ratios of our subsidiary Bank as of December 31, 2009, the minimum capital ratios imposed by our Bank’s Board, and the minimum ratios necessary to be considered “well capitalized” under federal regulatory standards:
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| | | Actual as of | | Ratios Established | | Required to be |
| | | 12/31/09 | | by Bank’s Board | | Well Capitalized |
| Total Capital to Risk-Weighted Assets | | | 10.36 | % | | | 11.0 | % | | | 10.0 | % |
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| Tier 1 Capital to Average Total Assets | | | 6.72 | % | | | 8.0 | % | | | 5.0 | % |
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Although our Bank’s regulatory capital ratios remain at levels above federal regulatory “well capitalized” standards, because of the losses we have incurred in recent quarters, our elevated levels of non-performing loans and other real estate, and the ongoing economic stress in Michigan, our Bank’s Board has determined that we should maintain capital in excess of such levels and has, by resolution, established the minimum ratios set forth above. These resolutions were adopted in conjunction with discussions with our Bank’s federal and state regulators and in response to issues highlighted in the most recent exam report issued by the Federal Reserve Board, our Bank’s primary federal regulator. We may not rescind or materially modify any of these resolutions without notice to the federal and state bank regulators.
Beginning in December of 2009, we exercised our right to defer all quarterly paymentsbeen focused on the outstanding trust preferred securities issued by our trust subsidiaries and all quarterly dividends payable on the preferred stock we issued to the United States Department of Treasury (“UST”) in December of 2008. We have also stopped paying any cash dividend on our common stock. These actions will preserve cash at IBC as we do not expect Independent Bank, our Bank subsidiary, to be able to pay any cash dividends in the near term.
In addition, we held a special meeting of shareholders on January 29, 2010, pursuant to which our shareholders approved (i) an amendment to our Articles of Incorporation to increase the number of shares of common stock our Board of Directors is authorized to issue, (ii) our issuance of shares of our common stock in exchange for certain of our trust preferred securities and in exchange for the preferred shares held by the UST, and (iii) an option exchange program pursuant to which our employees (excluding our “named executive officers” and excluding any directors) are eligible to exchange underwater options for new options at approximately a value-for-value exchange.
In connection with the stock option exchange program described in the preceding paragraph, we will file a Schedule TO with the SEC and will provide holders of eligible options with written materials explaining the terms and timing of the program. Persons who are eligible to participate in the stock option exchange program should read these written materials carefully when they become available because they will contain important information about the stock option exchange program. When filed, persons can obtain the tender offer statement and other filed documents for free by visiting the SEC’s Web site at www.sec.gov or by visiting the Investor Relations tab of the Company’s web site at www.IndependentBank.com.
In January of 2010, our Board of Directors adopted a Capital Restoration Plan (the “Capital Plan”) that outlines certain actions to be pursued in order to strengthen our capital position. Due to recent events affecting the national economy and particularly the Michigan economy, we believe that additional capital is necessary to maintain and strengthenstrengthening our capital base asin the effectsface of these events impact our business over the coming months and years.generally weak economic conditions. Our Bankbank began to experience rising levels of non-performing loans and higher provisions for loan losses in 2006. Our Bank remained profitable through2006 as the second quarterMichigan economy experienced economic stress ahead of 2008. However, since the third quarter of 2008, our Bank has incurred six consecutive quarterly losses, which have pressured its capital ratios.national trends. In response to these difficult market conditions and the significant losses continuing economic stress in Michigan, and elevated levels of non-performing assets,that we incurred from 2008 through 2011 that reduced our Board adopted the Capital Plan. The Capital Plan documents our objectives for increasingcapital, we have taken steps or initiated actions designed to increase our capital ratios, improve our operations and augment our liquidity.
In 2009, we retained financial and legal advisors to assist us in reviewing our capital alternatives. We also took steps at that time to preserve our capital, including discontinuing cash dividends on our common stock and exercising our right to defer all quarterly distributions on our outstanding trust preferred securities and the various methodspreferred stock we issued to be employedthe U.S. Department of the Treasury (the “Treasury”) pursuant to reach these objectives.
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ITEM 1.BUSINESS (Continued)
The primary objective of our Capital Plan is to achieve and thereafter maintain the minimum capital ratios adopted byTroubled Asset Relief Program (“TARP”). In December 2009, the Board of Directors of our subsidiary bank on December 18, 2009,adopted resolutions requiring our bank to achieve certain minimum capital ratios. The minimum ratios established by our bank's Board are higher than the minimum ratios necessary to be considered well-capitalized under federal regulatory standards, which we considered prudent given our elevated levels of non-performing assets and setthe continuing economic stress in Michigan. Set forth above.below are the minimum capital ratios imposed by our bank’s Board and the minimum ratios necessary to be considered well-capitalized under federal regulatory standards:
| | | Independent Bank - Actual as of December 31, 2012 | | | Minimum Ratios Established by Our Board | | | Required to be Well-Capitalized | |
| Total Capital to Risk-Weighted Assets | | 14.95% | | | 11.00% | | | 10.00% | |
| Tier 1 Capital to Average Total Assets | | 8.26% | | | 8.00% | | | 5.00% | |
In January 2010, our Board of Directors adopted a capital restoration plan (the “Capital Plan”) that documented our objectives and plans for meeting these ratios. The three primary initiatives of our Capital Plan outlines three primary transactions that are being or will be pursued in order to meet those capital ratios, as follows:were:
| | · | First, in Decemberthe conversion of 2009, we made a proposalour 72,000 shares of Series A Fixed Rate Cumulative Perpetual Preferred Stock, with an original liquidation preference of $1,000 per share (“Series A Preferred Stock”) issued to the USTTreasury under the Capital Purchase Program (“CPP”) of TARP into shares of our common stock; |
| · | an offer to exchange shares of our common stock for our outstanding trust preferred securities; and |
| · | a public offering of our common stock for cash. |
In anticipation of pursuing these capital initiatives, we engaged independent third parties to perform a review (“stress test”) on our commercial and retail loan portfolios to confirm that the similar analyses we performed internally were reasonable and did not materially understate our projected loan losses. Based on the conclusions of these reviews, which were completed in January 2010, we determined that we did not need to modify our projections used for purposes of our Capital Plan.
To date, we have made progress on a number of initiatives to advance the Capital Plan:
| · | On January 29, 2010, we held a special shareholder meeting at which our shareholders approved (1) an increase in the number of shares of common stock we are authorized to issue from 60 million to 500 million, (2) the conversion of the preferred stock held by the Treasury into shares of our common stock, (3) the issuance of shares of our common stock in exchange for upour outstanding trust preferred securities, and (4) an option exchange program pursuant to which our employees (excluding directors and certain executive officers) were able to exchange underwater options for new options at approximately a value-for-value exchange. This option exchange was completed in March 2010. |
| ITEM 1. | BUSINESS (Continued) |
| · | On April 16, 2010, we closed an Exchange Agreement with the entireTreasury pursuant to which the Treasury exchanged $72 million in aggregate liquidation value of CPP preferredour Series A Preferred Stock, plus approximately $2.4 million in accrued but unpaid dividends on such shares, held byinto 74,426 shares of our Series B Fixed Rate Cumulative Mandatorily Convertible Preferred Stock, with an original liquidation preference of $1,000 per share (“Series B Convertible Preferred Stock”). As part of this exchange, we also amended and restated the UST. Since makingterms of the proposal, we have continuedWarrant issued to supply the UST with additional informationTreasury in December 2008 to assist it in evaluating our proposal. Negotiations with the UST are ongoing. |
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| | Second, we intend to offer to issuepurchase 346,154 shares of our common stock in exchange for outstandingorder to adjust the initial exercise price of the Warrant to be equal to the conversion price applicable to the Series B Convertible Preferred Stock. |
The shares of Series B Convertible Preferred Stock are convertible into shares of our common stock. Subject to the receipt of applicable approvals, the Treasury has the right to convert the Series B Convertible Preferred Stock into our common stock at any time. We have the right to compel a conversion of the Series B Convertible Preferred Stock into our common stock at any time provided the following conditions are met:
| (1) | we receive appropriate approvals from the Board of Governors of the Federal Reserve System (the "Federal Reserve"); |
| (2) | at least $40 million aggregate liquidation amount of our trust preferred securities issued byare exchanged for shares of our trust subsidiaries. If completed, this exchange offer would result in a reduction in our obligation to make quarterly distributions to holders of trust preferred securities and would result in an increase to our tangible common shareholders’ equity. We expect to commence this exchange offer as soon as our registration statement filed with the SEC has been declared effective.stock; |
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| | (3) | Third, afterwe complete a new cash equity raise of not less than $100 million on terms acceptable to the completion ofTreasury in its sole discretion (other than with respect to the price offered per share); and |
| (4) | we make any required anti-dilution adjustments to the rate at which the Series B Convertible Preferred Stock is converted into our common stock. |
| · | On June 23, 2010, we completed the exchange offer for trust preferred securities described in the preceding paragraph, and subject to market conditions, we currently intend to raise additional capital in a public offeringof an aggregate of 5,109,125 newly issued shares of our common stock for cash,$41.4 million in which we currently intendaggregate liquidation amount of our outstanding trust preferred securities and $2.3 million of accrued and unpaid interest. This transaction satisfied one of the conditions to seekour ability to raise gross proceedscompel a conversion of between $50 million and $150 million.the Series B Convertible Preferred Stock held by the Treasury. |
| · | On August 31, 2010, we effected a reverse stock split of our issued and outstanding common stock. Pursuant to this reverse split, each 10 shares of our common stock issued and outstanding immediately prior to the reverse split was converted into 1 share of our common stock. We conducted this reverse split primarily as a means to maintain our share price above $1.00 per share in order to continue to meet Nasdaq listing standards. All share or per share information included in this Annual Report on Form 10-K has been retroactively restated to reflect the effects of the reverse split. |
We filed a registration statement (including a preliminary prospectus and related exchange offer materials) on Form S-4 withhave taken steps toward the SEC on January 27, 2010, in connection withadvancement of the final phase of our proposed offer to issueCapital Plan, an offering of our common stock for cash, but have not commenced such offering. The offering has currently been delayed while we reevaluate our strategic alternatives in consultation with our financial advisors and the U.S. Treasury. In particular, we are evaluating the merits of a smaller capital raise with a goal of preserving the potential future use of our net deferred tax asset, which totaled approximately $65.1 million as of December 31, 2012, and on which we had established a full valuation allowance. As of December 31, 2012, we met both of the target capital ratios set forth in our Capital Plan.
In addition to the forgoing, on July 7, 2010 we executed an Investment Agreement and Registration Rights Agreement with Dutchess Opportunity Fund, II, LP (“Dutchess”) for the sale of shares of our common stock. These agreements serve to establish an equity line facility as a contingent source of liquidity at the parent company level. Pursuant to the Investment Agreement, Dutchess committed to purchase up to $15.0 million of our common stock over a 36-month period ending November 1, 2013. We have the right, but no obligation, to draw on this equity line facility from time to time during such 36-month period by selling shares of our common stock to Dutchess. The sales price is at a 5% discount to the market price of our common stock at the time of the draw (as such market price is determined pursuant to the terms of the Investment Agreement). Through December 31, 2012, we have sold a total of 1.230 million shares (0.453 million shares, 0.433 million shares and 0.345 million shares during 2012, 2011 and 2010, respectively) of our common stock to Dutchess under this equity line for total net proceeds of approximately $3.2 million. As of December 31, 2012 we have shareholder approval to sell approximately 2.8 million additional shares under this equity line. Based on our closing stock price on December 31, 2012, additional funds available under the Investment Agreement totaled approximately $9.7 million at December 31, 2012.
| ITEM 1. | BUSINESS (Continued) |
On December 7, 2012 we sold 21 branches to another financial institution (the “Branch Sale”). The branches sold included six branch locations in the Battle Creek, Michigan market area and 15 branch locations in Northeast Michigan.
The Branch Sale resulted in the transfer of approximately $403.1 million of deposits in exchange for our receipt of a deposit premium of approximately $11.5 million. We also sold approximately $48.0 million of loans at a discount of 1.75% and premises and equipment totaling approximately $8.1 million. The Branch Sale also resulted in our transfer of $336.1 million of cash to the purchaser. We recorded a net gain on the Branch Sale of approximately $5.4 million. This gain is net of an allocation of $2.6 million of existing core deposit intangibles, a $2.5 million loss on the sale of premises and equipment, a $0.2 million loss on the sale of loans and $0.8 million in transaction and other related net costs.
During the third quarter of 2012 we adopted a plan to close or consolidate nine branch offices. Seven of the nine branch offices were closed in November 2012. The remaining two branch offices will be closed during the first half of 2013. As of year end 2012, six of the nine branches had been sold (or otherwise disposed).
On October 25, 2011, the respective Boards of Directors of the holding company and our bank entered into a Memorandum of Understanding (the "MOU") with the Federal Reserve and the Michigan Office of Financial and Insurance Regulation (the "OFIR"). The MOU largely duplicates certain of our outstanding trust preferred securities,the provisions in the Board resolutions described above. This registration statementabove, but also has not yet become effective. Before any person decides whether to participate in such exchange offer (if and when it is commenced by us), the preliminary prospectus in that registration statement and the other documentsfollowing specific requirements:
| ● | Submission of a joint revised capital plan by November 30, 2011 to maintain sufficient capital at the holding company on a consolidated basis and at the bank on a stand-alone basis; |
| ● | Submission of quarterly progress reports regarding disposition plans for any assets in excess of $1.0 million that are in ORE, are 90 days or more past due, are on our "watch list," or were adversely classified in our most recent examination; |
| ● | Enhanced reporting and monitoring at Mepco regarding risk management and the internal classification of assets; and |
| ● | Enhanced interest rate risk modeling practices. |
We believe we have filed with the SEC and may file with the SEC prior to commencementmet all of the exchange offer should be read for more complete information about IBC and the exchange offer. You may obtain these documents for free by visiting the SEC’s Web site at www.sec.gov or by visiting the Investor Relations tabrequirements of the Company’s web site at www.IndependentBank.com.MOU.
Supervision and Regulation
The following is a summary of certain statutes and regulations affecting us. 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 us and our Bank.bank.
General
Financial institutions and their holding companies are extensively regulated under federal and state law. Consequently, our growth and earnings performance can be affected not only by management decisions and general and local economic conditions, but also by the statutes administered by, and the regulations and policies of, various governmental regulatory authorities. Those authorities include, but are not limited to, the Board of Governors of the Federal Reserve, System (the “Federal Reserve”), the Federal Deposit Insurance Corporation (the “FDIC”"FDIC"), the Michigan Office of Financial and Insurance Regulation (the “OFIR”),OFIR, the Internal Revenue Service, and state taxing authorities. The effect of such statutes, regulations and policies and any changes thereto can be significant and cannot necessarily be predicted.
Federal and state laws and regulations generally applicable to financial institutions and their holding companies regulate, among other things, the scope of business, investments, reserves against deposits, capital levels, lending activities and practices, the nature and amount of collateral for loans, the establishment of branches, mergers, consolidations and dividends. The system of supervision and regulation applicable to us establishes a comprehensive framework for our operations and is intended primarily for the protection of the FDIC’sFDIC's deposit insurance funds, our depositors, and the public, rather than our shareholders.
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| ITEM 1. | BUSINESS (Continued) |
Federal law and regulations establish supervisory standards applicable to the lending activities of our Bank,bank, including internal controls, credit underwriting, loan documentation and loan-to-value ratios for loans secured by real property.
Regulatory Developments
Emergency Economic Stabilization Act of 2008.2008. On October 3, 2008, Congress enacted the Emergency Economic Stabilization Act of 2008 (“EESA”("EESA"). The EESA enables the federal government, under terms and conditions developed by the Secretary of the UST,Treasury, to insure troubled assets, including mortgage-backed securities, and collect premiums from participating financial institutions. The EESA includes, among other provisions: (a) the $700 billion Troubled Assets Relief Program (“TARP”)(TARP), under which the Secretary of the USTTreasury is authorized to purchase, insure, hold, and sell a wide variety of financial instruments, particularly those that are based on or related to residential or commercial mortgages originated or issued on or before March 14, 2008; and (b) an increase in the amount of deposit insurance provided by the FDIC. Both of these specific provisions are discussed below.
Troubled Assets Relief Program (TARP).Under TARP, the USTTreasury authorized a voluntary capital purchase program (“CPP”)Capital Purchase Program (CPP) to purchase senior preferred shares of qualifying financial institutions that elected to participate. Participating companies must adopt certain standards for executive compensation, including (a) prohibiting “golden parachute”"golden parachute" payments (as defined in the EESA) to senior executive officers; (b) requiring recovery of any compensation paid to senior executive officers based on criteria that is later proven to be materially inaccurate; and (c) prohibiting incentive compensation that encourages unnecessary and excessive risks that threaten the value of the financial institution. The terms of the CPP also limit certain uses of capital by the issuer, including repurchases of company stock and increases in dividends.
On December 12, 2008, we participated in the CPP and issued $72 million in capital to the USTTreasury in the form of non-voting cumulative preferred stockSeries A Preferred Stock that payspaid cash dividends at the rate of 5% per annum for the first five years,through February 14, 2014, and then pays cash dividends at the rate of 9% per annum thereafter. In addition, the USTTreasury received a warrantWarrant to purchase 3,461,538346,154 shares of our common stock at a price of $3.12$31.20 per share. OfAs described above, on April 16, 2010, we closed on an exchange transaction with the total proceeds, $68.4Treasury in which the Treasury accepted our newly issued shares of Series B Convertible Preferred Stock in exchange for the entire $72 million was initially allocated to the preferred stock and $3.6 million was allocated to the warrant (included in capital surplus) based on the relative fairaggregate liquidation value of each.the shares of Series A Preferred Stock, plus the value of all accrued and unpaid dividends on such shares of Series A Preferred Stock (approximately $2.4 million). The exercise price forshares of Series B Convertible Preferred Stock have an aggregate liquidation amount equal to $74,426,000.
With the warrant was determined based on the averageexception of closing pricesbeing convertible into shares of our common stock, during the 20-trading day period ended November 20, 2008,terms of the last trading day priorSeries B Convertible Preferred Stock are substantially similar to the dateterms of the UST approved our participation inSeries A Preferred Stock that were exchanged. The Series B Convertible Preferred Stock qualifies as Tier 1 regulatory capital, subject to limitations, and is entitled to cumulative dividends quarterly at a rate of 5% per annum through February 14, 2014, and 9% per annum thereafter. The Series B Convertible Preferred Stock is non-voting, other than class voting rights on certain matters that could adversely affect the CPP. The warrant is exercisable, in whole or in part, over a term of 10 years.
The securities purchase agreement, dated December 12, 2008, pursuant to which the securities issued to the UST under the CPP were sold, limits the payment ofSeries B Convertible Preferred Stock. If dividends on our common stock; limits our ability to repurchase sharesthe Series B Convertible Preferred Stock have not been paid for an aggregate of common stock (with certain exceptions); grantssix quarterly dividend periods or more, whether consecutive or not, the holders of the preferredSeries B Convertible Preferred Stock, voting together with holders of any then outstanding voting parity stock, have the warrantright to elect two additional directors at our next annual meeting of shareholders or at a special meeting of shareholders called for that purpose. These directors would be elected annually and serve until all accrued and unpaid dividends on the Series B Convertible Preferred Stock have been paid. Because we have deferred dividends on the Series B Convertible Preferred Stock for at least six quarterly dividend periods, the Treasury currently has the right to elect two directors to our board. At this time, in lieu of electing such directors, the Treasury requested us to allow (and we agreed) an observer to attend our Board of Directors meetings beginning in the third quarter of 2011. The Treasury continues to retain the right to elect two directors as described above.
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The Treasury (and any subsequent holder of the shares) has the right to convert the Series B Convertible Preferred Stock into our common stock at any time, subject to the receipt of any applicable approvals. We have the right to compel a conversion of the Series B Convertible Preferred Stock into our common stock if the following conditions are met:
| ● | we receive appropriate approvals from the Federal Reserve; |
| ● | at least $40 million aggregate liquidation amount of trust preferred securities have been exchanged for our common stock; |
| ● | we complete a new cash equity raise of not less than $100 million on terms acceptable to the Treasury in its sole discretion (other than with respect to the price offered per share); and |
| ● | we make any required anti-dilution adjustments to the rate at which the Series B Convertible Preferred Stock is converted into our common stock. |
If converted by the Treasury (or any subsequent holder) or by us pursuant to either of the above-described conversion rights, each share of Series B Convertible Preferred Stock (liquidation amount of $1,000 per share) will convert into a number of shares of our common stock equal to a fraction, the numerator of which is $750 and the denominator of which is $7.234, referred to as the "conversion rate," provided that such conversion rate will be subject to certain anti-dilution adjustments. If converted by the holder or by us pursuant to either of the above-described conversion rights, as of December 31, 2012, the Series B Convertible Preferred Stock and accrued and unpaid dividends would have been convertible into approximately 10.7 million shares of our common stock. This conversion rate will be subject to certain anti-dilution adjustments that may result in a greater number of shares being issued to the holder of the Series B Convertible Preferred Stock.
Unless earlier converted by the Treasury (or any subsequent holder) or by us as described above, the Series B Convertible Preferred Stock will convert into shares of our common stock on a mandatory basis on April 16, 2017. In any such mandatory conversion, each share of Series B Convertible Preferred Stock (liquidation amount of $1,000 per share) will convert into a number of shares of our common stock equal to a fraction, the numerator of which is $1,000 and the denominator of which is the market price of our common stock at the time of such mandatory conversion (as such market price is determined pursuant to the terms of the Series B Convertible Preferred Stock).
At the time any shares of Series B Convertible Preferred Stock are converted into our common stock, we will be required to pay all accrued and unpaid dividends on the Series B Convertible Preferred Stock being converted in cash or, at our option, in shares of our common stock, in which case the number of shares to be issued under the warrant certain registration rights; and subjects uswill be equal to the executive compensation limitations includedamount of accrued and unpaid dividends to be paid in common stock divided by the EESA. Beginning in November 2009, we suspended quarterlymarket price of our common stock at the time of conversion (as such market price is determined pursuant to the terms of the Series B Convertible Preferred Stock). Accrued and unpaid dividends on the Series B Convertible Preferred Stock totaled approximately $10.7 million at December 31, 2012.
The maximum number of shares of our common stock that may be issued upon conversion of all Series B Convertible Preferred Stock (including any accrued dividends) is 14.4 million, unless we receive shareholder approval to issue a greater number of shares.
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The Series B Convertible Preferred Stock may be redeemed by us, subject to the approval of the Federal Reserve, at any time, in an amount up to the cash proceeds (minimum of approximately $18.6 million) from qualifying equity offerings of common stock (plus any net increase to our retained earnings after the original issue date). If we exercise this right to redeem the Series B Convertible Preferred Stock, the redemption price will be the greater of (a) the $1,000 liquidation amount per share plus any accrued and unpaid dividends and (b) the product of the applicable conversion rate (as described above) and the average of the market prices per share of our common stock (as such market price is determined pursuant to the terms of the Series B Convertible Preferred Stock) over a 20 trading day period beginning on the trading day immediately after we give notice of redemption to the holder (plus any accrued and unpaid dividends). In any redemption, we must redeem at least 25% of the number of Series B Convertible Preferred Stock shares originally issued to the Treasury, unless fewer of such shares are then outstanding (in which case all of the Series B Convertible Preferred Stock must be redeemed). In addition to the terms of the Series B Preferred Stock discussed above, the UST updated its Frequently Asked Questions regarding the Capital Purchase Program (“CPP”) as of March 1, 2012 to permit any CPP participant to repay its investment, in part, subject to a minimum repayment of the greater of (i) 5% of the aggregate liquidation amount of the preferred stock issued to the UST or (ii) $100,000. Under this updated guidance, we could repay a minimum of approximately $3.7 million, subject to the approval of the Board of Governors of the Federal Reserve System, in order to preserve capital. As a resultpartial redemption of this suspensionthe Series B Preferred Stock.
In connection with such exchange transaction, we also amended and restated the terms of dividends, we are currently prohibited from paying any dividends on our common stock until all accrued and unpaid dividends have been paid on the preferred stockWarrant issued to the UST. Even after all such accrued dividends have been paid,Treasury in December 2008 to adjust the securities purchase agreement we entered into with the UST prohibits us from paying more than a $0.01 per share quarterly dividend without the prior approvalinitial exercise price of the UST untilWarrant to be equal to the earlier of December 12, 2011,initial conversion price applicable to the date we redeem all of such preferred stock from the UST, or the date the UST transfers all such preferred stock to a transferee that is not affiliated with the UST.Series B Convertible Preferred Stock described above.
Federal Deposit Insurance Coverage.Coverage. The EESA temporarily raised the limit on federal deposit insurance coverage from $100,000 to $250,000 per depositor, and on May 20, 2009,the Dodd-Frank Wall Street Reform and Consumer Protection Act passed in 2010 (the "Dodd-Frank Act") made this temporary increase in the insurance limit was extended until December 31, 2013. Separate from the EESA, inpermanent. In October 2008, the FDIC also announced the Temporary Liquidity Guarantee Program. Under one component of this program, the Transaction Account Guarantee Program (TAGP), the FDIC temporarily providesprovided unlimited coverage for noninterestnon-interest bearing transaction deposit accounts (as defined in the TAGP) for participating institutions that did not opt out. This temporary coverage expired on December 31, 2010; however, the Dodd-Frank Act extended protection similar to that provided under the TAGP through June 30, 2010.
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ITEM 1.BUSINESS (Continued)December 31, 2012.
Financial Stability Plan. On February 10, 2009, the USTTreasury announced the Financial Stability Plan (“FSP”("FSP"), which is a comprehensive set of measures intended to shore up the U.S. financial system and earmarks the balance of the unused funds originally authorized under the EESA. The major elements of the FSP include: (i) a capital assistance program that willto invest in convertible preferred stock of certain qualifying institutions, (ii) a consumer and business lending initiative to fund new consumer loans, small business loans and commercial mortgage asset-backed securities issuances, (iii) a new_public-privatenew public-private investment fund that willintended to leverage public and private capital with public financing to purchase up to $500 billion to $1 trillion of legacy “toxic assets”"toxic assets" from financial institutions, and (iv) assistance for homeowners by providing up to $75 billion to reduce mortgage payments and interest rates and establishing loan modification guidelines for government and private programs.
Financial institutions receiving assistance under the FSP going forward will be subject to higher transparency and accountability standards, including restrictions on dividends, acquisitions and executive compensation and additional disclosure requirements. We cannot predict at this time the effect that the FSP may have on us or our business, financial condition or results of operations.
American Recovery and Reinvestment Act of 2009. On February 17, 2009, Congress enacted the American Recovery and Reinvestment Act of 2009 (“ARRA”("ARRA"). In enacting the ARRA, Congress intended to provide a stimulus to the U.S. economy in light of the significant economic downturn. The AARAARRA includes federal tax cuts, expansion of unemployment benefits and other social welfare provisions, and numerous domestic spending efforts in education, healthcare and infrastructure. The ARRA also includes numerous non-economic recovery related items, including a limitation on executive compensation in federally-aided financial institutions, including banks that have received or will receive assistance under TARP.
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will be(including our bank) is subject to the following restrictions and standards throughout the period in which any obligation arising from financial assistance provided under TARP remains outstanding:
| | • | · | Limits on compensation incentives for risk-taking by senior executive officers; |
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| | • | · | Requirement of recovery of any compensation paid based on inaccurate financial information; |
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| | • | · | Prohibition on “golden"golden parachute payments”payments" (as defined in the AARA)ARRA); |
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| | • | · | Prohibition on compensation plans that would encourage manipulation of reported earnings to enhance the compensation of employees; |
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| | • | · | Establishment of board compensation committees by publicly-registered TARP recipients comprised entirely of independent directors, for the purpose of reviewing employee compensation plans; |
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| | • | · | Prohibition on bonuses, retention awards, and incentive compensation, except for payments of long-term restricted stock; and |
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| | • | · | Limitation on luxury expenditures. |
In addition, TARP recipients will beare required to permit a separate, non-binding shareholder vote to approve the compensation of executives. The chief executive officer and chief financial officer of each TARP recipient will beare required to provide a written certification of compliance with these standards to the SEC.
The foregoing is a summary of requirements to be included in standards to be established by the Secretary of the UST.
Homeowner Affordability and Stability Plan. On February 18, 2009, President Obama announced the Homeowner Affordability and Stability Plan (“HASP”("HASP"). The HASP is intended to support a recovery in the housing market and ensure that workers can continue to pay off their mortgages through the following elements:
| | •· | | AccessProvide access to low-cost refinancing for responsible homeowners suffering from falling home prices; |
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| | • | · | A $75 billion homeowner stability initiative to prevent foreclosure and help responsible families stay in their homes; and |
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| | • | · | Support of low mortgage rates by strengthening confidence in Fannie Mae and Freddie Mac. |
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ITEM 1.BUSINESS (Continued)
In addition, the U.S. Government, the Federal Reserve, the UST, the FDIC and other governmental and regulatory bodies have taken, or may be considering taking, other actions to address the financial crisis. There can be no assurance, however, as to the actual impact of these actionsThe Treasury has issued extensive guidance on the financial marketsscope and mechanics of various components of HASP. We continue to monitor these developments and assess their potential impact on our business.
Dodd-Frank Act. On July 21, 2010, the President signed the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) in law. This federal law includes the following:
| · | the creation of the Consumer Financial Protection Bureau with power to promulgate and, with respect to financial institutions with more than $10 billion in assets, enforce consumer protection laws; |
| · | the creation of the Financial Stability Oversight Council chaired by the Secretary of the Treasury with authority to identify institutions and practices that might pose a systemic risk to the U.S. economy; |
| · | provisions affecting corporate governance and executive compensation of all companies whose securities are registered with the SEC; |
| · | a provision that broadens the base for FDIC insurance assessments and permanently increases FDIC deposit insurance to $250,000; |
| · | a provision under which interchange fees for debit cards of issuers with at least $10 billion in assets are set by the Federal Reserve under a restrictive "reasonable and proportional cost" per transaction standard; |
| · | a provision that requires bank regulators to set minimum capital levels for bank holding companies that are at least as strong as those required for their insured depository subsidiaries, subject to a grandfather clause for financial institutions with less than $15 billion in assets as of December 31, 2009; and |
| · | new restrictions on how mortgage brokers and loan originators may be compensated. |
The Dodd-Frank Act has had (and we expect it will continue to have) a significant impact on the banking industry, including our organization.
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Future Legislation. Various other legislative and regulatory initiatives, including proposals to overhaul the banking regulatory system, are from time to time introduced in Congress and state legislatures, as well as regulatory agencies. Such future legislation regarding financial institutions may change banking statutes and our operating environment in substantial and unpredictable ways, and could increase or decrease the cost of doing business, limit or expand permissible activities or affect the competitive balance depending on whether any such potential legislation is introduced and enacted. The nature and extent of future legislative and regulatory changes affecting financial institutions is very unpredictable. We cannot determine the ultimate effect that any such potential legislation, if enacted, would have upon our financial condition or results of operations.
Independent Bank Corporation
General.
We are a bank holding company and, as such, are registered with, and subject to regulation by, the Federal Reserve under the Bank Holding Company Act, as amended (the “BHCA”"BHCA"). Under the BHCA, we are subject to periodic examination by the Federal Reserve and are required to file periodic reports of operations and such additional information as the Federal Reserve may require.
In accordance with
Federal Reserve policy ahistorically has required bank holding company is expectedcompanies to act as a source of financial strength to its subsidiary bankstheir bank subsidiaries and to commit capital and financial resources to support those subsidiaries. The Dodd-Frank Act codified this policy as a statutory requirement. Such support may be required by the subsidiary banks in circumstances where the bank holding companyFederal Reserve at times when we might otherwise determine not do so absent such policy.to provide it.
In addition, if the OFIR deems a bank’sbank's capital to be impaired, the OFIR may require a bank to restore its capital by special assessment upon a bank holding company, as the bank’sbank's sole shareholder. If the bank holding company failed to pay such assessment, the directors of that bank would be required, under Michigan law, to sell the shares of 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’sbank'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’scompany'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.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’scompany'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 including the effect of the proposed transaction on competition in relevant geographic and product markets, and each party’sparty's financial condition, managerial resources, and record of performance under the Community Reinvestment Act.
In addition and subject to certain exceptions, the Change in the Bank Control Act (“("Control Act”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’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 10% 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 acquisition.
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 Federal Reserve under the BHCA and/or OFIR under Michigan banking laws, may be required.
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ITEM 1.BUSINESS (Continued)| ITEM 1. | BUSINESS (Continued) |
With certain limited exceptions, the BHCA prohibits any bank holding company from engaging, either directly or indirectly through a subsidiary, in any activity other than managing or controlling banks unless the proposed non-banking activity is one that the Federal Reserve has determined to be so closely related to banking as to be a proper incident thereto. Under current Federal Reserve regulations, such permissible non-banking activities include such things as mortgage banking, equipment leasing, securities brokerage, and consumer and commercial finance company operations. Well-capitalized and well-managed bank holding companies may, however, engagede novoin certain types of non-banking activities without prior notice to, or approval of, the Federal Reserve, provided that written notice of the new activity is given to the Federal Reserve within 10 business days after the activity is commenced. If a bank holding company wishes to engage in a non-banking activity by acquiring a going concern, prior notice and/or prior approval will be required, depending upon the activities in which the company to be acquired is engaged, the size of the company to be acquired and the financial and managerial condition of the acquiring bank holding company.
Eligible bank holding companies that elect to operate as financial holding companies may engage in, or own shares in companies engaged in, a wider range of nonbanking activities, including securities and insurance activities and any other activity that the Federal Reserve, Board, in consultation with the Secretary of the Treasury, determines by regulation or order is financial in nature, incidental to any such financial activity or complementary to any such financial activity and does not pose a substantial risk to the safety or soundness of depository institutions or the financial system generally. The Bank Holding Company ActBHCA generally does not place territorial restrictions on the domestic activities of non-bank subsidiaries of bank or financial holding companies. As of the date of this filing, weWe have not applied for approval to operate as a financial holding company and have no current intention to doof doing so.
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’sReserve's capital guidelines establish the following minimum regulatory capital requirements for bank holding companies: (i) a leverage capital requirement expressed as a percentage of total assets, and (ii) a risk-based requirement expressed as a percentage of total risk-weighted assets. The leverage capital requirement consists of a minimum ratio of Tier 1 capital (which consists principally of shareholders’shareholders' equity) to total assets of 3% for the most highly rated companies with minimum requirements of 4% to 5% for all others. 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.
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.
Included in our Tier 1 capital as of December 31, 2012, is $41.9$47.7 million of trust preferred securities (classified on our balance sheet as “Subordinated debentures”"Subordinated debentures"). The Federal Reserve Board has issued rules regarding trust preferred securities as a component of the Tier 1 capital of bank holding companies. The aggregate amount of trust preferred securities and certain other capital elements is limited to 25 percent of Tier 1 capital elements, net of goodwill (net of any associated deferred tax liability). The amount of trust preferred securities and certain other elements in excess of the limit could be included in the Tier 2 capital, subject to restrictions. The provisions of the Dodd-Frank Act imposed additional limitations on the ability to include trust preferred securities as Tier 1 capital; however, these additional limitations do not apply to our outstanding trust preferred securities.
The Federalfederal bank regulatory agencies are required 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.
On June 4, 2012, the Board of Governors of the Federal Reserve System issued Notices of Proposed Rulemaking (“NPR”) – Enhancements to the Regulatory Capital Requirements (the “Proposed New Capital Requirements”). These Proposed New Capital Requirements, if adopted as outlined in the NPR, would have a material impact on the banking industry, including our organization. In general the Proposed New Capital Requirements would significantly increase the need for Tier 1 common equity capital and substantially impact the calculation of risk-weighted assets.
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Dividends. Most of our revenues are received in the form of dividends paid by our Bank.bank. Thus, our ability to pay dividends to our shareholders is indirectly limited by statutory restrictions on the ability of our Bankbank to pay dividends, as discussed below. Further, in a policy statement, the Federal Reserve has expressed its view that a bank holding company experiencing earnings weaknesses should not pay cash dividends exceeding its net income or which can only be funded in ways that weaken the bank holding company’scompany's financial health, such as by borrowing. Additionally, the Federal Reserve possesses enforcement powers over bank holding companies and their non-bank subsidiaries to prevent or remedy actions that represent unsafe or unsound practices or violations of applicable statutes and regulations. Among these powers is the ability to proscribe the payment of dividends by banks and bank
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ITEM 1.BUSINESS (Continued)
holding companies. The “prompt"prompt corrective action”action" provisions of federal law and regulation authorizes the Federal Reserve to restrict the amount of dividends that an insured bank can pay which fails to meet specified capital levels.
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.
Finally,
Because we have suspended all dividends on the shares of the Series B Convertible Preferred Stock and all quarterly payments on our outstanding trust preferred securities, we are currently prohibited from paying any cash dividends on our common stock must be paidstock. In addition, in accordance with the terms and restrictionsDecember of the CPP. Beginning in November 2009, we suspended quarterly dividends on the preferred stock issued to the UST pursuant to the CPP. As a resultour Board of this suspension of dividends, we are currently prohibitedDirectors adopted resolutions that prohibit us from paying any dividends on our common stock until all accrued and unpaid dividends have been paid onwithout, in each case, the preferred stock issued to the UST. Even after all such accrued dividends have been paid, the consentprior written approval of the UST will be required for us to declare or pay any dividend or make any distribution on common stock other than (i) regular quarterly cash dividends of not more than $0.01 per share, as adjusted for any stock split, stock dividend, reverse stock split, reclassification or similar transaction, (ii) dividends payable solely in shares of our common stock,Federal Reserve and (iii) dividends or distributions of rights or junior stock in connection with any shareholders’ rights plan. The restrictions set forth in the preceding sentence apply until the earlier of December 12, 2011, the date we redeem all of such preferred stock from the UST, or the date the UST transfers all such preferred stock to a transferee that is not affiliated with the UST.OFIR.
Federal Securities Regulation. Our common stock is registered with the Securities and Exchange Commission (‘SEC’)SEC under the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended (the “Exchange Act”"Exchange Act"). We are therefore subject to the information, proxy solicitation, insider trading and other restrictions and requirements of the SEC under the Exchange Act. The Sarbanes-Oxley Act of 2002 provides for numerous changes to the reporting, accounting, corporate governance and business practices of companies as well as financial and other professionals who have involvement with the U.S. public markets.
Our Bank
General.Our Independent Bank is a Michigan banking corporation, is a member of the Federal Reserve System, and its deposit accounts are insured by the Deposit Insurance Fund (“DIF”("DIF") of the FDIC. As a member of the Federal Reserve System and a Michigan chartered bank, our Bankbank is subject to the examination, supervision, reporting and enforcement requirements of the Federal Reserve Board as its primary federal regulator and OFIR as the chartering authority for Michigan banks. These agencies and the federal and state laws applicable to our Bankbank and its operations extensively regulate various aspects of the banking business including, among other things, permissible types and amounts of loans, investments and other activities, capital adequacy, branching, interest rates on loans and on deposits, the maintenance of non-interest bearing reserves on deposit accounts, and the safety and soundness of banking practices.
Deposit Insurance.As an FDIC-insured institution, our Bankbank is required to pay deposit insurance premium assessments to the FDIC. Under the FDIC’sFDIC's risk-based assessment system for deposit insurance premiums, all insured depository institutions are placed into one of four categories (Risk Categories I, II, III, and assessed insurance premiumsIV), based primarily on their level of capital and supervisory evaluations.
The FDIC is required to establish
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Historically, assessment rates for insured depository institutions at levels that will maintaindeposit insurance premiums have been largely based on the DIF at a Designated Reserve Ratio (DRR) selected byrisk category of the institution and the amount of its deposits. However, the Dodd-Frank Act passed in 2010 required the FDIC within a range of 1.15% to 1.50%. The FDIC is allowed to manage the pace at which the reserve ratio varies within this range. The DRR is currently established at 1.25%.
Under the FDIC’s prevailing rate schedule,establish rules setting insurance premium assessments are made and adjusted based on risk. Premiums are assessed and collected quarterly by the FDIC. Beginning asan institution's total assets minus its tangible equity instead of the second quarter of 2009, banks in the lowest risk category paid an initial base rate ranging from 12 to 16 basis points (calculated as an annual rate against the bank’s deposit base) for insurance premiums, with certain potential adjustments based on certain risk factors affecting the bank. That base rate is subject to increase to 45 basis points for banks that pose significant supervisory concerns, with certain potential adjustments based on certain risk factors affecting the bank.
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ITEM 1.BUSINESS (Continued)
FDIC insurance assessments could continue to increase in the future due to continued depletion of the DIF.
deposits. On May 22, 2009,February 7, 2011, the FDIC adopted a final rule imposingunder which, effective for assessments for the second quarter of 2011 and payable at the end of September 2011, the initial base assessment rate for institutions in Risk Category I (generally, well-capitalized institutions with a CAMELS composite rating of 1 or 2) is set at an annual rate of between 5 and 9 basis point specialpoints. The initial base assessment rate for institutions in Risk Categories II, III, and IV is set at annual rates of 14, 23, and 35 basis points, respectively, and the initial base assessment rate for institutions with at least $10 billion in assets and certain "highly complex institutions" is set at an annual rate of between 5 and 35 basis points. These initial base assessment rates are adjusted to determine an institution's final assessment rate based on eachits brokered deposits and unsecured debt. In addition, the rates are subject to a depository institution debt adjustment, which is meant to offset the benefit received by institutions that issue long-term, unsecured liabilities when those liabilities are held by other insured depository institution’s assets minusinstitutions. However, institutions may exclude from the unsecured debt amount used in calculating the depository institution debt adjustment an amount equal to no more than 3% of their Tier 1 capitalcapital. Total base assessment rates after adjustments, other than the depository institution debt adjustment, range from 2.5 to 9 basis points for Risk Category I, 9 to 24 basis points for Risk Category II, 18 to 33 basis points for Risk Category III, 30 to 45 basis points for Risk Category IV, and 2.5 to 45 basis points for institutions with at least $10 billion in assets and certain "highly complex institutions."
On December 15, 2010, the FDIC established 2.0% as the Designated Reserve Ratio ("DRR"), that is, the ratio of June 30, 2009. This special assessment (which totaled $1.4 million for our Bank) was paid onthe DIF to insured deposits. The FDIC adopted a plan under which it will meet the statutory minimum DRR of 1.35% by September 30, 2009.2020, the deadline imposed by the Dodd-Frank Act. The Dodd-Frank Act requires the FDIC may impose additional special assessments under certain circumstances.to partially offset the effect of the increase in the DRR on institutions with assets less than $10 billion.
During the fourth quarter of 2009, we prepaid estimated quarterly deposit insurance premium assessments to the FDIC for periods through the fourth quarter of 2012. These estimated quarterly deposit insurance premium assessments were based on projected deposit balances over the assessment periods. The prepaid deposit insurance premium assessments totaled $22.0$9.4 million at December 31, 20092012 and will behave been expensed over the assessment period (through the fourth quarter of 2012). The actual expense over the assessment periods may be different fromwas significantly lower than this prepaid amount due to various factors, including variances in actual deposit balances and the assessment base and rates used during each assessment period. We would expect to receive a return of the overpayment of our prepaid assessment from the FDIC during the second quarter of 2013.
In addition, in 2008, the Bankbank elected to participate in the FDIC’sFDIC's Transaction Account Guarantee Program (TAGP)., which required us to pay an additional assessment to the FDIC. Under the TAGP, funds in non-interest bearing transaction accounts, in interest-bearing transaction accounts with an interest rate of 0.50%0.25% or less (after June 30, 2010), and in Interest on Lawyers Trust Accounts (IOLTA) will havehad a temporary (until June 30, 2010) unlimited guarantee from the FDIC. This temporary coverage expired on December 31, 2010. The coverageDodd-Frank Act extended protection similar to that provided under the TAGP is in additionthrough December 31, 2012 for only non-interest bearing transaction accounts. This coverage applied to all insured depository institutions, and there was no separate fromFDIC assessment for the coverage available under the FDIC’s general deposit insurance rules which insure accounts up to $250,000. Participation in the TAGP requires the payment of additional insurance premiums to the FDIC.insurance.
FICO Assessments.Assessments. Our Bank,bank, as a member of the DIF, is subject to assessments to cover the payments on outstanding obligations of the Financing Corporation (“FICO”("FICO"). FICO was created to finance the recapitalization of the Federal Savings and Loan Insurance Corporation, the predecessor to the FDIC’sFDIC's Savings Association Insurance Fund which was created to insure the deposits of thrift institutions and was merged with the Bank Insurance Fund into the newly formed DIF in 2006. From now until the maturity of the outstanding FICO obligations in 2019, DIF 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 approximately 0.011%0.006% of deposits.average tangible assets.
OFIR Assessments.Assessments. Michigan banks are required to pay supervisory fees to the OFIR to fund their operations. The amount of supervisory fees paid by a bank is based upon the bank’sbank's total assets.
| ITEM 1. | BUSINESS (Continued) |
Capital Requirements.The Federal Reserve has established the following minimum capital standards for state-chartered, FDIC-insured member banks, such as our Bank:bank: a leverage requirement consisting of a minimum ratio of Tier 1 capital to total assets of 3% for the most highly-rated banks with minimum requirements of 4% to 5% for all others, and a risk-based capital requirement consisting of a minimum ratio of total capital to total risk-weighted assets of 8%, at least one-half of which must be Tier 1 capital. Tier 1 capital consists principally of shareholders’shareholders' equity. These capital requirements are minimum requirements. Higher capital levels will be required if warranted by the particular circumstances or risk profiles of individual institutions. For example, Federal Reserve regulations provide that higher capital may be required to take adequate account of, among other things, interest rate risk and the risks posed by concentrations of credit, nontraditional activities, or securities trading activities.
10
ITEM 1.BUSINESS (Continued)
Federal law provides the federal banking regulators with broad power to take prompt corrective action to resolve the problems of undercapitalized institutions. The extent of the regulators’regulators' powers depends on whether the institution in question is “well"well capitalized,” “adequately" "adequately capitalized,” “undercapitalized,” “significantly" "undercapitalized," "significantly undercapitalized,”" or “critically"critically undercapitalized.”" Federal regulations define these capital categories as follows:
| | | | Total Risk-Based Capital Ratio | | | |
| | Total | | Tier 1 | | |
| | Risk-Based | | Risk-Based | | |
| | Capital Ratio | | Capital Ratio | | Leverage Ratio |
| 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 |
At December 31, 2009,2012, our Bank’sbank's ratios exceeded minimum requirements for the well-capitalized category. In conjunction with its discussions with federal and state regulators,December 2009, the Board of Directors of our Bankbank adopted resolutions in December of 2009 requiring our Bankbank to achieve minimum capital ratios that are higher than the minimum requirements described in the Federal Reserve’sReserve's capital guidelines. As of December 31, 2012 our bank has met all of the higher minimum capital ratios established by our Board of Directors. See “Recent Developments”"Recent Developments" above for more information. Our Bank currently does not meet these higher capital ratios.
Depending upon the capital category to which an institution is assigned, the regulators’regulators' corrective powers include: requiring the submission of a capital restoration plan; placing limits on asset growth and restrictions on activities; requiring the institution to issue additional capital stock (including additional voting stock) or to be acquired; restricting transactions with affiliates; restricting the interest rates the institution may pay on deposits; ordering a new election of directors of the institution; requiring that senior executive officers or directors be dismissed; prohibiting the institution from accepting deposits from correspondent banks; requiring the institution to divest certain subsidiaries; prohibiting the payment of principal or interest on subordinated debt; and ultimately, appointing a receiver for the institution.
In general, a depository institution may be reclassified to a lower category than is indicated by its capital levels 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. This could include a failure by the institution, following receipt of a less-than-satisfactory rating on its most recent examination report, to correct the deficiency.
Dividends.
Dividends. Under Michigan law, banks are restricted as to the maximum amount of dividends they may pay on their common stock. Our Bankbank may not pay dividends except out of its net income after deducting its losses and bad debts. 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.
As a member of the Federal Reserve System, our Bankbank is required to obtain the prior approval of the Federal Reserve Board for the declaration or payment of a dividend if the total of all dividends declared in any year will exceed the total of (a) the Bank’sbank's retained net income (as defined by federal regulation) for that year,plus(b) the Bank’sbank's retained net income for the preceding two years.
| ITEM 1. | BUSINESS (Continued) |
Federal law also generally prohibits a depository institution from making any capital distribution (including payment of a dividend) or paying any management fee to its holding company if the depository institution would thereafter be undercapitalized. In addition, the Federal Reserve may prohibit the payment of dividends by a bank if such payment is determined, by reason of the financial condition of the bank, to be an unsafe and unsound banking practice or if the bank is in default of payment of any assessment due to the FDIC.
In addition to these restrictions, in December of 2009, the Board of Directors of our Bankbank adopted resolutions that prohibit our Bankbank from paying any dividends to our holding company without the prior written approval of the Federal Reserve and the OFIR. See “Recent Developments”"Recent Developments" above for more information.
11
ITEM 1.BUSINESS (Continued)
Insider Transactions.Our Bankbank is subject to certain restrictions imposed by the Federal Reserve Act on “covered transactions”"covered transactions" with us or our subsidiaries, which include investments in our stock or other securities issued by us or our subsidiaries, the acceptance of our stock or other securities issued by us or our subsidiaries as collateral for loans, and extensions of credit to us or our subsidiaries. Certain limitations and reporting requirements are also placed on extensions of credit by our Bankbank to itsthe directors and officers of the Company, the bank, and the subsidiaries of the bank, to our directors and officers and those of our subsidiaries, to ourthe principal shareholders of the Company, and to “related interests”"related interests" of such directors, officers, and principal shareholders. In addition, federal law and regulations may affect the terms upon which any person becoming one of our directors or officers or a principal shareholder may obtain credit from banks with which our Bankbank maintains a correspondent relationship.
Safety and Soundness Standards. Pursuant to the Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”("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, compensation, fees and benefits, asset quality, and earnings.
Investment and Other Activities. Under federal law and regulations, 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
bank’sbank's primary federal regulator determines the activity would not pose a significant risk to the DIF. Impermissible investments and activities must be otherwise divested or discontinued within certain time frames set by the
bank’sbank's primary federal regulator in accordance with federal law. These restrictions are not currently expected to have a material impact on the operations of our
Bank.bank.
Consumer Banking.Our Bank’sbank's business includes making a variety of types of loans to individuals. In making these loans, our Bankbank is subject to state usury and regulatory laws and to various federal statutes, including the privacy of consumer financial information provisions of the Gramm Leach-Bliley Act, the Equal Credit Opportunity Act, the Fair Credit Reporting Act, the Truth in Lending Act, the Real Estate Settlement Procedures Act, the Home Mortgage Disclosure Act, and the regulations promulgated under these statutes, which (among other things) prohibit discrimination, specify disclosures to be made to borrowers regarding credit and settlement costs, and regulate the mortgage loan servicing activities of our Bank,bank, including the maintenance and operation of escrow accounts and the transfer of mortgage loan servicing. In receiving deposits, our Bankbank is 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 our Bankbank and its directors and officers.
Branching Authority. Michigan banks, such as our Bank,bank, have the authority under Michigan law to establish branches anywhere in the State of Michigan, subject to receipt of all required regulatory approvals. Banks may establish interstate branch networks through acquisitions of other banks. The establishment ofde novointerstate 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 only if specifically authorized by state law.
| ITEM 1. | BUSINESS (Continued) |
Michigan 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 OFIR (1) acquisition of Michigan banks by FDIC-insured banks or savings banks located in other states, (2) sale by a Michigan bank of branches to an FDIC-insured bank or savings bank located in a state in which a Michigan bank could purchase branches of the purchasing entity, (3) consolidation of Michigan banks and FDIC-insured banks or savings banks located in other states having laws permitting such consolidation, (4) establishment 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 a Michigan bank to establish a branch in such jurisdiction, and (5) establishment by foreign banks of branches located in Michigan.
12
ITEM 1.BUSINESS (Continued)
Mepco Finance Corporation.Corporation
Our subsidiary, Mepco Finance Corporation, is engaged in the business of acquiring (on a full recourse basis) and servicing payment plans used by consumers throughout the United States who have purchased a vehicle service contract and choose to make monthly payments for their coverage. In the typical transaction, no interest or other finance charge is charged to these consumers. As a result, Mepco is generally not subject to regulation under consumer lending laws. However, Mepco is subject to various federal and state laws designed to protect consumers, including laws against unfair and deceptive trade practices and laws regulating Mepco’sMepco's payment processing activities, such as the Electronic Funds Transfer Act.
Mepco purchases these payment plans on a full recourse basis, from companies (which we refer to as Mepco’s “counterparties”) that provide vehicle service contracts and similar products to consumers. The payment plans (which are classified as financepayment plan receivables in our consolidated statements of financial condition) permit a consumer to purchase a service contract by making installment payments, generally for a term of 12 to 24 months, to the sellers of those contracts (one of the “counterparties”). Mepco does not have recourse against the consumer for nonpayment of a payment plan, and therefore does not evaluate the creditworthiness of the individual customer but instead primarily relies on the payment plan collateral (the unearned vehicle service contract and unearned sales commission) in the event of default.customer. When consumers stop making payments or exercise their right to voluntarily cancel the contract, the remaining unpaid balance of the payment plan is normally recouped by Mepco from the counterparties that sold the contract and provided the coverage. The refund obligations of these counterparties are not fully secured. We record losses or charges in vehicle service contract counterparty contingencies expense, included in non-interest expenses, for estimated defaults by these counterparties in their recourse obligations to Mepco.
Our annual reportreports on FormForms 10-K, quarterly reports on FormForms 10-Q, current reports on FormForms 8-K, and all amendments to those reports are available free of charge through our website atwww.IndependentBank.com as soon as reasonably practicable after filing with the SEC.
13
ITEM 1.BUSINESS — STATISTICAL DISCLOSURE16
| ITEM 1. | BUSINESS -- STATISTICAL DISCLOSURE |
| I. (A) | | (A) DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS’STOCKHOLDERS' EQUITY; |
|
(B) | | (B) INTEREST RATES AND INTEREST DIFFERENTIAL |
|
(C) | | (C) INTEREST RATES AND DIFFERENTIAL |
The information set forth in the tables captioned “Average"Average Balances and Tax Equivalent Rates”Rates" and “Change"Change in Tax Equivalent Net Interest Income”Income" of our annual report, to be delivered to shareholders in connection with the April 27, 201023, 2013 Annual Meeting of Shareholders (filed as exhibit 13 to this report on Form 10-K), is incorporated herein by reference.
(A) The following table sets forth the book value of securities at December 31:
| | | | | | | | | | | | | |
| | | 2009 | | | 2008 | | | 2007 | |
| | | (in thousands) | |
| Trading — Preferred stock | | $ | 54 | | | $ | 1,929 | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | | | |
| Available for sale | | | | | | | | | | | | |
| States and political subdivisions | | $ | 67,132 | | | $ | 105,553 | | | $ | 208,132 | |
| U.S agency mortgage-backed | | | 47,522 | | | | 48,029 | | | | 59,004 | |
| Private label mortgage-backed | | | 30,975 | | | | 36,887 | | | | 50,475 | |
| Other asset-backed | | | 5,505 | | | | 7,421 | | | | 10,400 | |
| Trust preferred | | | 13,017 | | | | 12,706 | | | | 9,985 | |
| Preferred stock | | | | | | | 4,816 | | | | 24,198 | |
| Other | | | | | | | | | | | 2,000 | |
| | | | | | | | | | |
| Total | | $ | 164,151 | | | $ | 215,412 | | | $ | 364,194 | |
| | | | | | | | | | |
14
ITEM 1.BUSINESS — STATISTICAL DISCLOSURE (Continued)
II. | | INVESTMENT PORTFOLIO (Continued) |
| | | 2012 | | | 2011 | | | 2010 | |
| | | (in thousands) | |
| | | | | | | | | | |
| Trading - Preferred stock | | $ | 110 | | | $ | 77 | | | $ | 32 | |
| | | | | | | | | | | | | |
| Available for sale | | | | | | | | | | | | |
| U.S agency residential mortgage-backed | | $ | 127,412 | | | $ | 94,206 | | | $ | 13,331 | |
| States and political subdivisions | | | 39,051 | | | | 27,317 | | | | 31,259 | |
| U.S agency | | | 30,667 | | | | 25,017 | | | | -- | |
| Private label residential mortgage-backed | | | 8,194 | | | | 8,268 | | | | 14,184 | |
| Trust preferred | | | 3,089 | | | | 2,636 | | | | 9,090 | |
| Total | | $ | 208,413 | | | $ | 157,444 | | | $ | 67,864 | |
(B) The following table sets forth contractual maturities of securities at December 31, 20092012 and the weighted average yield of such securities:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Maturing | | | Maturing | | | | |
| | | Maturing | | Maturing | | | | | Maturing | | | After One | | | After Five | | | Maturing | |
| | | Maturing | | After One | | After Five | | Maturing | | | Within | | | But Within | | | But Within | | | After | |
| | | Within | | But Within | | But Within | | After | | | One Year | | | Five Years | | | Ten Years | | | Ten Years | |
| | | One Year | | Five Years | | Ten Years | | Ten Years | | | Amount | | | Yield | | | Amount | | | Yield | | | Amount | | | Yield | | | Amount | | | Yield | |
| | | Amount | | Yield | | Amount | | Yield | | Amount | | Yield | | Amount | | Yield | | | (dollars in thousands) | |
| | | (dollars in thousands) | | | | | | | | | | | | | | | | | | | | | | | | | |
| Trading — Preferred stock | | $ | 54 | | | 0.00 | % | |
| | | | | |
| Trading – Preferred stock | | | | | | | | | | | | | | | | | | | | | $ | 110 | | | | 0.00 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Tax equivalent adjustment for calculations of yield | | $ | 0 | | | | | | | | | | | | | | | | | | | | | $ | -- | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | |
| Available for sale | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| U.S agency residential mortgage-backed | | | $ | 314 | | | | 3.92 | % | | $ | 94,892 | | | | 1.08 | % | | $ | 28,155 | | | | 1.85 | % | | $ | 4,051 | | | | 2.17 | % |
| States and political subdivisions | | $ | 2,741 | | | 7.16 | % | | $ | 13,320 | | | 7.48 | % | | $ | 25,478 | | | 6.26 | % | | $ | 25,593 | �� | | | 6.37 | % | | | 1,055 | | | | 4.56 | | �� | | 6,560 | | | | 3.95 | | | | 12,727 | | | | 3.68 | | | | 18,709 | | | | 4.21 | |
| U.S agency mortgage-backed | | 836 | | 4.60 | | 26,742 | | 4.19 | | 11,176 | | 6.48 | | 8,768 | | 4.62 | | |
| Private label mortgage-backed | | 565 | | 4.83 | | 24,094 | | 4.83 | | 6,316 | | 5.08 | | |
| Other asset-backed | | 5,505 | | 6.97 | | |
| U.S. agency | | | | -- | | | | | | | | -- | | | | | | | | 8,097 | | | | 1.00 | | | | 22,570 | | | | 2.44 | |
| Private label residential mortgage-backed | | | | -- | | | | | | | | 74 | | | | 5.96 | | | | 3,523 | | | | 4.22 | | | | 4,597 | | | | 5.37 | |
| Trust preferred | | 13,017 | | 7.66 | | | | -- | | | | | | | | -- | | | | | | | | -- | | | | | | | | 3,089 | | | | 1.07 | |
| | | | | | | | | | | |
| Total | | $ | 4,142 | | | 6.33 | % | | $ | 69,661 | | | 5.26 | % | | $ | 42,970 | | | 6.14 | % | | $ | 47,378 | | | 6.40 | % | | $ | 1,369 | | | | 4.41 | % | | $ | 101,526 | | | | 1.27 | % | | $ | 52,502 | | | | 2.32 | % | | $ | 53,016 | | | | 3.22 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | |
| Tax equivalent adjustment for calculations of yield | | $ | 69 | | $ | 348 | | $ | 558 | | $ | 571 | | | $ | -- | | | | | | | $ | -- | | | | | | | $ | -- | | | | | | | $ | -- | | | | | |
| | | | | | | | | | | |
The rates set forth in the tables above for obligations of state and political subdivisions and preferred stock have not been restated on a tax equivalent basis assuming a marginaldue to the current net operating loss carryforward position and the deferred tax rate of 35%. The amount of the adjustment is as follows:asset valuation allowance.
| | | | | | | | | | | | | |
| | | Tax-Exempt | | | | | | Rate on Tax |
| | | Rate | | Adjustment | | Equivalent Basis |
| Trading — After 10 years | | | 0.00 | % | | | 0.00 | % | | | 0.00 | % |
| | | | | | | | | | | | | |
| Available for sale | | | | | | | | | | | | |
| Under 1 year | | | 4.66 | % | | | 2.50 | % | | | 7.16 | % |
| 1-5 years | | | 4.86 | | | | 2.62 | | | | 7.48 | |
| 5-10 years | | | 4.07 | | | | 2.19 | | | | 6.26 | |
| After 10 years | | | 4.14 | | | | 2.23 | | | | 6.37 | |
15
ITEM 1.BUSINESS — STATISTICAL DISCLOSURE| ITEM 1. | BUSINESS -- STATISTICAL DISCLOSURE (Continued) |
(A) The following table sets forth total loans outstanding at December 31:
| | | | | | | | | | | | | | | | | | | | | | |
| | | 2009 | | 2008 | | 2007 | | 2006 | | 2005 | | | 2012 | | | 2011 | | | 2010 | | | 2009 | | | 2008 | |
| | | (in thousands) | | | (in thousands) | |
| Loans held for sale | | $ | 34,234 | | $ | 27,603 | | $ | 33,960 | | $ | 31,846 | | $ | 28,569 | | | $ | 50,779 | | | $ | 44,801 | | | $ | 50,098 | | | $ | 34,234 | | | $ | 27,603 | |
| Real estate mortgage | | 749,298 | | 839,496 | | 873,945 | | 865,522 | | 852,742 | | |
| Mortgage | | | | 527,340 | | | | 590,876 | | | | 658,679 | | | | 749,298 | | | | 839,496 | |
| Commercial | | 840,367 | | 976,391 | | 1,066,276 | | 1,083,921 | | 1,030,095 | | | | 617,258 | | | | 651,155 | | | | 707,530 | | | | 840,367 | | | | 976,391 | |
| Installment | | 303,366 | | 356,806 | | 368,478 | | 350,273 | | 304,053 | | | | 189,849 | | | | 219,559 | | | | 245,644 | | | | 303,366 | | | | 356,806 | |
| Finance receivables | | 406,341 | | 286,836 | | 209,631 | | 160,171 | | 178,286 | | |
| | | | | | | | | | | | | |
| Payment plan receivables | | | | 84,692 | | | | 115,018 | | | | 201,263 | | | | 406,341 | | | | 286,836 | |
| Total Loans | | $ | 2,333,606 | | $ | 2,487,132 | | $ | 2,552,290 | | $ | 2,491,733 | | $ | 2,393,745 | | | $ | 1,469,918 | | | $ | 1,621,409 | | | $ | 1,863,214 | | | $ | 2,333,606 | | | $ | 2,487,132 | |
| | | | | | | | | | | | | |
The loan portfolio is periodically and systematically reviewed, and the results of these reviews are reported to the Board of Directors of our Bank.bank. The purpose of these reviews is to assist in assuring proper loan documentation, to facilitate compliance with consumer protection laws and regulations, 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, 2009:2012:
| | | | | | | | | | | | | | | | | |
| | | | | | | Due | | | | | | | |
| | | Due | | | After One | | | Due | | | | |
| | | Within | | | But Within | | | After | | | | |
| | | One Year | | | Five Years | | | Five Years | | | Total | |
| | | (in thousands) | |
| Real estate mortgage | | $ | 39,153 | | | $ | 18,145 | | | $ | 6,068 | | | $ | 63,366 | |
| Commercial | | | 393,732 | | | | 386,879 | | | | 59,756 | | | | 840,367 | |
| Finance receivables | | | 119,119 | | | | 287,222 | | | | | | | | 406,341 | |
| | | | | | | | | | | | | |
| Total | | $ | 552,004 | | | $ | 692,246 | | | $ | 65,824 | | | $ | 1,310,074 | |
| | | | | | | | | | | | | |
| | | | | | Due | | | | | | | |
| | | Due | | | After One | | | Due | | | | |
| | | Within | | | But Within | | | After | | | | |
| | | One Year | | | Five Years | | | Five Years | | | Total | |
| | | (in thousands) | |
| Mortgage | | $ | 2 | | | $ | 140 | | | $ | 47,725 | | | $ | 47,867 | |
| Commercial | | | 214,266 | | | | 356,201 | | | | 50,083 | | | | 620,550 | |
| Payment plan receivables | | | 31,714 | | | | 52,978 | | | | -- | | | | 84,692 | |
| Total | | $ | 245,982 | | | $ | 409,319 | | | $ | 97,808 | | | $ | 753,109 | |
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, 2009:2012:
| | | | | | | | | | | | | |
| | | Fixed | | | Variable | | | | |
| | | Rate | | | Rate | | | Total | |
| | | (in thousands) | |
| Due after one but within five years | | $ | 674,252 | | | $ | 17,994 | | | $ | 692,246 | |
| Due after five years | | | 60,089 | | | | 5,735 | | | | 65,824 | |
| | | | | | | | | | |
| Total | | $ | 734,341 | | | $ | 23,729 | | | $ | 758,070 | |
| | | | | | | | | | |
16
| | | Fixed | | | Variable | | | | |
| | | Rate | | | Rate | | | Total | |
| | | (in thousands) | |
| Due after one but within five years | | $ | 298,575 | | | $ | 110,744 | | | $ | 409,319 | |
| Due after five years | | | 42,623 | | | | 55,185 | | | | 97,808 | |
| Total | | $ | 341,198 | | | $ | 165,929 | | | $ | 507,127 | |
ITEM 1.BUSINESS — STATISTICAL DISCLOSURE
| ITEM 1. | BUSINESS -- STATISTICAL DISCLOSURE (Continued) |
III. | | LOAN PORTFOLIO (Continued) |
(C) The following table sets forth loans on non-accrual, loans ninety days or more past due and troubled debt restructured loans at December 31:
| | | | | | | | | | | | | | | | | | | | | |
| | | 2009 | | | 2008 | | | 2007 | | | 2006 | | | 2005 | |
| | | (in thousands) | |
| (a) Loans accounted for on a non-accrual basis (1, 2) | | $ | 105,965 | | | $ | 122,639 | | | $ | 72,682 | | | $ | 35,683 | | | $ | 11,546 | |
| | | | | | | | | | | | | | | | | | | | | |
| (b) Aggregate amount of loans ninety days or more past due (excludes loans in (a) above) | | | 3,940 | | | | 2,626 | | | | 4,394 | | | | 3,479 | | | | 4,862 | |
| | | | | | | | | | | | | | | | | | | | | |
| (c) Loans not included above which are “troubled debt restructurings” as defined by accounting guidance | | | 71,961 | | | | 9,160 | | | | 173 | | | | 60 | | | | 84 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| Total | | $ | 181,866 | | | $ | 134,425 | | | $ | 77,249 | | | $ | 39,222 | | | $ | 16,492 | |
| | | | | | | | | | | | | | | | |
| | | 2012 | | | 2011 | | | 2010 | | | 2009 | | | 2008 | |
| | | (in thousands) | |
| (a) Loans accounted for on a non-accrual basis (1, 2) | | $ | 32,929 | | | $ | 59,309 | | | $ | 66,652 | | | $ | 105,965 | | | $ | 122,639 | |
| | | | | | | | | | | | | | | | | | | | | |
| (b) Aggregate amount of loans ninety days or more past due (excludes loans in (a) above) | | | 7 | | | | 574 | | | | 928 | | | | 3,940 | | | | 2,626 | |
| | | | | | | | | | | | | | | | | | | | | |
| (c) Loans not included above which are "troubled debt restructurings"as defined by accounting guidance | | | 126,730 | | | | 116,569 | | | | 113,812 | | | | 71,961 | | | | 9,160 | |
| | | | | | | | | | | | | | | | | | | | | |
| Total | | $ | 159,666 | | | $ | 176,452 | | | $ | 181,392 | | | $ | 181,866 | | | $ | 134,425 | |
| | |
| (1) | | The accrual of interest income is discontinued when a loan becomes 90 days past due and the borrower’sborrower'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 $11,201,000$9,437,000 would have been earned in 20092012 had loans in categories (a) and (c) remained at their original terms; however, only $3,817,000$6,264,000 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 $24,264,000in the table above were zero at December 31, 2009. 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.2012.
At December 31, 2009,2012, 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”"Loan Portfolio" (Item III(A)).
There were no other interest-bearing assets at December 31, 2009,2012, that would be required to be disclosed above (Item III(C)), if such assets were loans.
There were no foreign loans at December 31, 2012 and 2011. Total loans in 2010 and 2009 include $0.1 million and $1.7 million, respectively of financepayment plan receivables from customers domiciled in Canada. There were no other foreign loans outstanding at December 31, 2009.prior to that time.
17
ITEM 1.BUSINESS — STATISTICAL DISCLOSURE
| 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:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | 2009 | | | | | | | | 2008 | | | | | | | | 2007 | | | |
| | | (dollars in thousands) | |
Total loans outstanding at the end
of the year (net of unearned fees) | | | | | $2,333,606 | | | | | | | | $2,487,132 | | | | | | | | $2,552,290 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Average total loans outstanding for
the year (net of unearned fees) | | | | | $2,470,568 | | | | | | | | $2,569,368 | | | | | | | | $2,541,305 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | Unfunded | | | | | | | Unfunded | | | | | | | Unfunded | |
| | | Loan | | | Commit- | | | Loan | | | Commit- | | | Loan | | | Commit- | |
| | | Losses | | | ments | | | Losses | | | ments | | | Losses | | | ments | |
| Balance at beginning of year | | $ | 57,900 | | | $ | 2,144 | | | $ | 45,294 | | | $ | 1,936 | | | $ | 26,879 | | | $ | 1,881 | |
| | | | | | | | | | | | | | | | | | | |
| Loans charged-off | | | | | | | | | | | | | | | | | | | | | | | | |
| Real estate mortgage | | | 22,869 | | | | | | | | 11,942 | | | | | | | | 6,644 | | | | | |
| Commercial | | | 51,840 | | | | | | | | 43,641 | | | | | | | | 14,236 | | | | | |
| Installment | | | 7,562 | | | | | | | | 6,364 | | | | | | | | 5,943 | | | | | |
| Finance receivables | | | 25 | | | | | | | | 49 | | | | | | | | 213 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
| Total loans charged-off | | | 82,296 | | | | | | | | 61,996 | | | | | | | | 27,036 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
| Recoveries of loans previously charged-off | | | | | | | | | | | | | | | | | | | | | | | | |
| Real estate mortgage | | | 791 | | | | | | | | 318 | | | | | | | | 381 | | | | | |
| Commercial | | | 731 | | | | | | | | 1,800 | | | | | | | | 328 | | | | | |
| Installment | | | 1,271 | | | | | | | | 1,340 | | | | | | | | 1,629 | | | | | |
| Finance receivables | | | 2 | | | | | | | | 31 | | | | | | | | 8 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
| Total recoveries | | | 2,795 | | | | | | | | 3,489 | | | | | | | | 2,346 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
| Net loans charged-off | | | 79,501 | | | | | | | | 58,507 | | | | | | | | 24,690 | | | | | |
| Additions to allowance charged to operating expense | | | 103,318 | | | | (286 | ) | | | 71,113 | | | | 208 | | | | 43,105 | | | | 55 | |
| | | | | | | | | | | | | | | | | | | |
| Balance at end of year | | $ | 81,717 | | | $ | 1,858 | | | $ | 57,900 | | | $ | 2,144 | | | $ | 45,294 | | | $ | 1,936 | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Net loans charged-off as a percent of average loans outstanding (includes loans held for sale) for the year | | | 3.22 | % | | | | | | | 2.28 | % | | | | | | | .97 | % | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Allowance for loan losses as a percent of loans outstanding (includes loans held for sale) at the end of the year | | | 3.50 | | | | | | | | 2.33 | | | | | | | | 1.77 | | | | | |
18
| | | | 2012 | | | | 2011 | | | | 2010 | |
| | | | (dollars in thousands) | |
| Total loans outstanding at the end of the year (net of unearned fees) | | $ | 1,469,918 | | | | | | $ | 1,621,409 | | | | | | $ | 1,863,214 | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
| Average total loans outstanding for the year (net of unearned fees) | | $ | 1,550,456 | | | | | | $ | 1,711,948 | | | | | | $ | 2,082,117 | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | Unfunded | | | | | | | Unfunded | | | | | | | Unfunded | |
| | | Loan | | | Commit- | | | Loan | | | Commit- | | | Loan | | | Commit- | |
| | | Losses | | | ments | | | Losses | | | ments | | | Losses | | | ments | |
| Balance at beginning of year | | $ | 58,884 | | | $ | 1,286 | | | $ | 67,915 | | | $ | 1,322 | | | $ | 81,717 | | | $ | 1,858 | |
| Loans charged-off | | | | | | | | | | | | | | | | | | | | | | | | |
| Mortgage | | | 10,741 | | | | | | | | 15,608 | | | | | | | | 20,263 | | | | | |
| Commercial | | | 12,588 | | | | | | | | 20,491 | | | | | | | | 36,108 | | | | | |
| Installment | | | 4,009 | | | | | | | | 5,439 | | | | | | | | 7,726 | | | | | |
| Payment plan receivables | | | 70 | | | | | | | | 186 | | | | | | | | 82 | | | | | |
| Total loans charged-off | | | 27,408 | | | | | | | | 41,724 | | | | | | | | 64,179 | | | | | |
Recoveries of loans previously charged-off | | | | | | | | | | | | | | | | | | | | | | | | |
| Mortgage | | | 1,581 | | | | | | | | 1,441 | | | | | | | | 1,155 | | | | | |
| Commercial | | | 3,610 | | | | | | | | 1,850 | | | | | | | | 969 | | | | | |
| Installment | | | 1,311 | | | | | | | | 1,451 | | | | | | | | 1,475 | | | | | |
| Payment plan receivables | | | 20 | | | | | | | | 5 | | | | | | | | 13 | | | | | |
| Total recoveries | | | 6,522 | | | | | | | | 4,747 | | | | | | | | 3,612 | | | | | |
| Net loans charged-off | | | 20,886 | | | | | | | | 36,977 | | | | | | | | 60,567 | | | | | |
| Reclassification to loans held for sale | | | 610 | | | | | | | | | | | | | | | | | | | | | |
| Additions (deductions) included in operations | | | 6,887 | | | | (688 | ) | | | 27,946 | | | | (36 | ) | | | 46,765 | | | | (536 | ) |
| Balance at end of year | | $ | 44,275 | | | $ | 598 | | | $ | 58,884 | | | $ | 1,286 | | | $ | 67,915 | | | $ | 1,322 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Net loans charged-off as a percent of average loans outstanding (includes loans held for sale) for the year | | | 1.35 | % | | | | | | | 2.16 | % | | | | | | | 2.91 | % | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Allowance for loan losses as a percent of loans outstanding (includes loans held for sale) at the end of the year | | | 3.01 | | | | | | | | 3.63 | | | | | | | | 3.65 | | | | | |
ITEM 1.BUSINESS — STATISTICAL DISCLOSURE (Continued)
| ITEM 1. | BUSINESS -- STATISTICAL DISCLOSURE (Continued) |
| IV. | | SUMMARY OF LOAN LOSS EXPERIENCE (Continued) |
| | | | | | | | | | | | | | | | | |
| | | | | | 2006 | | | | | | | | 2005 | | | |
| | | (dollars in thousands) | |
| Total loans outstanding at the end of the year (net of unearned fees) | | | | | $2,491,733 | | | | | | | | $2,393,745 | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Average total loans outstanding for the year (net of unearned fees) | | | | | $2,472,091 | | | | | | | | $2,268,846 | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | Unfunded | | | | | | | Unfunded | |
| | | Loan | | | Commit- | | | Loan | | | Commit- | |
| | | Losses | | | ments | | | Losses | | | ments | |
| Balance at beginning of year | | $ | 22,420 | | | $ | 1,820 | | | $ | 24,162 | | | $ | 1,846 | |
| | | | | | | | | | | | | |
| Loans charged-off | | | | | | | | | | | | | | | | |
| Real estate mortgage | | | 2,660 | | | | | | | | 1,611 | | | | | |
| Commercial | | | 6,214 | | | | | | | | 5,141 | | | | | |
| Installment | | | 4,913 | | | | | | | | 4,246 | | | | | |
| Finance receivables | | | 274 | | | | | | | | 94 | | | | | |
| | | | | | | | | | | | | | | |
| Total loans charged-off | | | 14,061 | | | | | | | | 11,092 | | | | | |
| | | | | | | | | | | | | | | |
| Recoveries of loans previously charged-off | | | | | | | | | | | | | | | | |
| Real estate mortgage | | | 215 | | | | | | | | 97 | | | | | |
| Commercial | | | 496 | | | | | | | | 226 | | | | | |
| Installment | | | 1,526 | | | | | | | | 1,195 | | | | | |
| Finance receivables | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| Total recoveries | | | 2,237 | | | | | | | | 1,518 | | | | | |
| | | | | | | | | | | | | | | |
| Net loans charged-off | | | 11,824 | | | | | | | | 9,574 | | | | | |
| Additions to allowance charged to operating expense | | | 16,283 | | | | 61 | | | | 7,832 | | | | (26 | ) |
| | | | | | | | | | | | | |
| Balance at end of year | | $ | 26,879 | | | $ | 1,881 | | | $ | 22,420 | | | $ | 1,820 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Net loans charged-off as a percent of average loans outstanding (includes loans held for sale) for the year | | | .48 | % | | | | | | | .42 | % | | | | |
| | | | | | | | | | | | | | | | | |
| Allowance for loan losses as a percent of loans outstanding (includes loans held for sale) at the end of the year | | | 1.08 | | | | | | | | .94 | | | | | |
| | | | 2009 | | | | 2008 | |
| | | | (dollars in thousands) | |
| Total loans outstanding at the end of the year (net of unearned fees) | | $ | 2,333,606 | | | | | | $ | 2,487,132 | | | | |
| | | | | | | | | | | | | | | |
| Average total loans outstanding for the year (net of unearned fees) | | $ | 2,470,568 | | | | | | $ | 2,569,368 | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | Unfunded | | | | | | | Unfunded | |
| | | Loan | | | Commit- | | | Loan | | | Commit- | |
| | | Losses | | | ments | | | Losses | | | ments | |
| Balance at beginning of year | | $ | 57,900 | | | $ | 2,144 | | | $ | 45,294 | | | $ | 1,936 | |
| Loans charged-off | | | | | | | | | | | | | | | | |
| Mortgage | | | 22,869 | | | | | | | | 11,942 | | | | | |
| Commercial | | | 51,840 | | | | | | | | 43,641 | | | | | |
| Installment | | | 7,562 | | | | | | | | 6,364 | | | | | |
| Payment plan receivables | | | 25 | | | | | | | | 49 | | | | | |
| Total loans charged-off | | | 82,296 | | | | | | | | 61,996 | | | | | |
Recoveries of loans previously charged-off | | | | | | | | | | | | | | | | |
| Mortgage | | | 791 | | | | | | | | 318 | | | | | |
| Commercial | | | 731 | | | | | | | | 1,800 | | | | | |
| Installment | | | 1,271 | | | | | | | | 1,340 | | | | | |
| Payment plan receivables | | | 2 | | | | | | | | 31 | | | | | |
| Total recoveries | | | 2,795 | | | | | | | | 3,489 | | | | | |
| Net loans charged-off | | | 79,501 | | | | | | | | 58,507 | | | | | |
| Additions (deductions) included in operations | | | 103,318 | | | | (286 | ) | | | 71,113 | | | | 208 | |
| Balance at end of year | | $ | 81,717 | | | $ | 1,858 | | | $ | 57,900 | | | $ | 2,144 | |
| | | | | | | | | | | | | | | | | |
| Net loans charged-off as a percent of average loans outstanding (includes loans held for sale) for the year | | | 3.22 | % | | | | | | | 2.28 | % | | | | |
| | | | | | | | | | | | | | | | | |
| Allowance for loan losses as a percent of loans outstanding (includes loans held for sale) at the end of the year | | | 3.50 | | | | | | | | 2.33 | | | | | |
The allowance for loan losses reflected above is a valuation allowance in its entirety and the only allowance available to absorb probable incurred loan losses.
Further discussion of the provision and allowance for loan losses (a critical accounting policy) as well as non-performing loans, is presented in Management’sManagement's Discussion and Analysis of Financial Condition and Results of Operations in our annual report, to be delivered to shareholders in connection with the April 27, 201023, 2013 Annual Meeting of Shareholders (filed as exhibit 13 to this report on Form 10-K), and is incorporated herein by reference.
19
ITEM 1.BUSINESS — STATISTICAL DISCLOSURE (Continued)| ITEM 1. | BUSINESS -- STATISTICAL DISCLOSURE (Continued) |
| IV. | | SUMMARY OF LOAN LOSS EXPERIENCE (Continued) |
(B) We have allocated the allowance for loan losses to provide for the possibility ofprobable incurred 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:follow:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2009 | | | 2008 | | | 2007 | |
| | | | | | | 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) | |
| Commercial | | $ | 41,259 | | | | 36.1 | % | | $ | 33,090 | | | | 39.3 | % | | $ | 27,829 | | | | 41.8 | % |
| Real estate mortgage | | | 18,434 | | | | 33.5 | | | | 8,729 | | | | 34.9 | | | | 4,657 | | | | 35.6 | |
| Installment | | | 6,404 | | | | 13.0 | | | | 4,264 | | | | 14.3 | | | | 3,224 | | | | 14.4 | |
| Finance receivables | | | 754 | | | | 17.4 | | | | 486 | | | | 11.5 | | | | 475 | | | | 8.2 | |
| Unallocated | | | 14,866 | | | | | | | | 11,331 | | | | | | | | 9,109 | | | | | |
| | | | | | | | | | | | | | | | | | | |
| Total | | $ | 81,717 | | | | 100.0 | % | | $ | 57,900 | | | | 100.0 | % | | $ | 45,294 | | | | 100.0 | % |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | | 2006 | | 2005 | | | 2012 | | | 2011 | | | 2010 | |
| | | Percent | | Percent | | | | | | Percent | | | | | | Percent | | | | | | Percent | |
| | | Allowance | | of Loans to | | Allowance | | of Loans to | | | Allowance | | | of Loans to | | | Allowance | | | of Loans to | | | Allowance | | | of Loans to | |
| | | Amount | | Total Loans | | Amount | | Total Loans | | | Amount | | | Total Loans | | | Amount | | | Total Loans | | | Amount | | | Total Loans | |
| | | (dollars in thousands) | | | (dollars in thousands) | |
| Commercial | | $ | 15,010 | | | 43.5 | % | | $ | 11,735 | | | 43.0 | % | | $ | 11,402 | | | | 42.2 | % | | $ | 18,183 | | | | 40.2 | % | | $ | 23,836 | | | | 38.0 | % |
| Real estate mortgage | | 1,645 | | 36.0 | | 1,156 | | 36.8 | | |
| Mortgage | | | | 21,447 | | | | 39.1 | | | | 22,885 | | | | 39.2 | | | | 22,642 | | | | 38.0 | |
| Installment | | 2,469 | | 14.1 | | 2,835 | | 12.7 | | | | 3,378 | | | | 12.9 | | | | 6,146 | | | | 13.5 | | | | 6,769 | | | | 13.2 | |
| Finance receivables | | 292 | | 6.4 | | 293 | | 7.5 | | |
| Payment plan receivables | | | | 144 | | | | 5.8 | | | | 197 | | | | 7.1 | | | | 389 | | | | 10.8 | |
| Unallocated | | 7,463 | | 6,401 | | | | 7,904 | | | | | | | 11,473 | | | | | | | 14,279 | | | | |
| | | | | | | | | | | |
| Total | | $ | 26,879 | | | 100.0 | % | | $ | 22,420 | | | 100.0 | % | | $ | 44,275 | | | | 100.0 | % | | $ | 58,884 | | | | 100.0 | % | | $ | 67,915 | | | | 100.0 | % |
| | | | | | | | | | | |
20
| | | 2009 | | | 2008 | | |
| | | | | | Percent | | | | | | Percent | | |
| | | Allowance | | | of Loans to | | | Allowance | | | of Loans to | | |
| | | Amount | | | Total Loans | | | Amount | | | Total Loans | | |
| | | (dollars in thousands) | | |
| Commercial | | $ | 41,259 | | | | 36.1 | % | | $ | 33,090 | | | | 39.3 | % | |
| Mortgage | | | 18,434 | | | | 33.5 | | | | 8,729 | | | | 34.9 | | |
| Installment | | | 6,404 | | | | 13.0 | | | | 4,264 | | | | 14.3 | | |
| Payment plan receivables | | | 754 | | | | 17.4 | | | | 486 | | | | 11.5 | | |
| Unallocated | | | 14,866 | | | | | | | | 11,331 | | | | | | |
| Total | | $ | 81,717 | | | | 100.0 | % | | $ | 57,900 | | | | 100.0 | % | |
ITEM 1.BUSINESS — STATISTICAL DISCLOSURE
| ITEM 1. | BUSINESS -- STATISTICAL DISCLOSURE (Continued) |
The following table sets forth average deposit balances and the weighted-average rates paid thereon for the years ended December 31:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2009 | | | 2008 | | | 2007 | |
| | | Average | | | | | | | Average | | | | | | | Average | | | | |
| | | Balance | | | Rate | | | Balance | | | Rate | | | Balance | | | Rate | |
| | | (dollars in thousands) | |
| Non-interest bearing demand | | $ | 321,802 | | | | | | | $ | 301,117 | | | | | | | $ | 300,886 | | | | | |
| Savings and NOW | | | 992,529 | | | | 0.58 | % | | | 968,180 | | | | 1.06 | % | | | 971,807 | | | | 1.93 | % |
| Time deposits | | | 1,019,624 | | | | 2.91 | | | | 917,403 | | | | 3.97 | | | | 1,439,177 | | | | 4.88 | |
| | | | | | | | | | | | | | | | | | | | | | |
| Total | | $ | 2,333,955 | | | | 1.52 | % | | $ | 2,186,700 | | | | 2.14 | % | | $ | 2,711,870 | | | | 3.28 | % |
| | | | | | | | | | | | | | | | | | | | | | |
| | | 2012 | | | 2011 | | | 2010 | |
| | | Average | | | | | | Average | | | | | | Average | | | | |
| | | Balance | | | Rate | | | Balance | | | Rate | | | Balance | | | Rate | |
| | | (dollars in thousands) | |
| Non-interest bearing demand | | $ | 523,926 | | | | | | $ | 467,305 | | | | | | $ | 349,376 | | | | |
| Savings and NOW | | | 1,060,882 | | | | 0.17 | % | | | 1,006,305 | | | | 0.22 | % | | | 1,089,992 | | | | 0.26 | % |
| Time deposits | | | 552,903 | | | | 1.28 | | | | 656,944 | | | | 1.98 | | | | 978,098 | | | | 2.59 | |
| Total | | $ | 2,137,711 | | | | 0.42 | % | | $ | 2,130,554 | | | | 0.72 | % | | $ | 2,417,466 | | | | 1.17 | % |
The following table summarizes time deposits in amounts of $100,000 or more by time remaining until maturity at December 31, 2009:2012:
| | | | | | |
| | | (in thousands) | | | (in thousands) | |
| Three months or less | | $ | 25,646 | | | $ | 36,586 | |
| Over three through six months | | 29,463 | | | | 30,734 | |
| Over six months through one year | | 45,756 | | | | 29,376 | |
| Over one year | | 66,797 | | | | 49,672 | |
| | | | | |
| Total | | $ | 167,662 | | | $ | 146,368 | |
| | | | | |
| VI. | | RETURN ON EQUITY AND ASSETS |
The ratio of net income (loss) to average shareholders’shareholders' equity and to average total assets, and certain other ratios, for the years ended December 31 follow:
| | | | | | | | | | | | | | | | | | | | | |
| | | 2009 | | 2008 | | 2007 | | 2006 | | 2005 |
Income (loss) from continuing operations as a percent of(1) | | | | | | | | | | | | | | | | | | | | |
| Average common equity | | | (90.72 | )% | | | (39.01 | )% | | | 3.96 | % | | | 13.06 | % | | | 18.63 | % |
| Average total assets | | | (3.17 | ) | | | (2.88 | ) | | | 0.31 | | | | 0.99 | | | | 1.42 | |
| | | | | | | | | | | | | | | | | | | | | |
Net income (loss) as a percent of(1) | | | | | | | | | | | | | | | | | | | | |
| Average common equity | | | (90.72 | ) | | | (39.01 | ) | | | 4.12 | | | | 12.82 | | | | 19.12 | |
| Average total assets | | | (3.17 | ) | | | (2.88 | ) | | | 0.32 | | | | 0.97 | | | | 1.45 | |
| | | | | | | | | | | | | | | | | | | | | |
| Dividends declared per share as a percent of diluted net income per share | | NM | | | NM | | | | 186.67 | | | | 54.55 | | | | 36.04 | |
| | | | | | | | | | | | | | | | | | | | | |
| Average shareholders’ equity as a percent of average total assets | | | 5.80 | | | | 7.50 | | | | 7.72 | | | | 7.60 | | | | 7.61 | |
| | | 2012 | | | 2011 | | | 2010 | | | 2009 | | | 2008 | |
Net income (loss) as a percent of(1) | | | | | | | | | | | | | | | |
| Average common equity | | | 68.29 | % | | | (68.44 | )% | | | (54.38 | )% | | | (90.72 | )% | | | (39.01 | )% |
| Average total assets | | | 0.92 | | | | (1.02 | ) | | | (0.75 | ) | | | (3.17 | ) | | | (2.88 | ) |
| | | | | | | | | | | | | | | | | | | | | |
| Dividends declared per share as a percent of diluted net income per share | | | 0.00 | | | | 0.00 | | | | 0.00 | | | NM | | | NM | |
| | | | | | | | | | | | | | | | | | | | | |
| Average shareholders' equity as a percent of average total assets | | | 4.82 | | | | 4.76 | | | | 3.92 | | | | 5.80 | | | | 7.50 | |
| (1) | | |
(1) | | For 2009 and 2008, theseThese amounts are calculated using loss from continuing operations applicable to common stock and net lossincome (loss) applicable to common stock. |
|
NM — Not meaningful. |
NM – Not meaningful.
Additional performance ratios are set forth in Selected Consolidated Financial Data in our annual report, to be delivered to shareholders in connection with the April 27, 201023, 2013 Annual Meeting of Shareholders (filed as exhibit 13 to this report on Form 10-K), and is incorporated herein by reference. Any significant changes in the current trend of the above ratios are reviewed in Management’sManagement's Discussion and Analysis of Financial Condition and Results of Operations in our annual report, to be delivered to shareholders in connection with the April 27, 201023, 2013 Annual Meeting of Shareholders (filed as exhibit 13 to this report on Form 10-K), and is incorporated herein by reference.
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| VII. | | SHORT-TERM BORROWINGS |
Short-term borrowings are discussed in note 9 to the consolidated financial statements incorporated herein by reference to Item 8, Part II of this report.
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Our results of operations, financial condition, and business may be materially and adversely affected if we are unable to successfully implement our Capital Plan.
Our Capital Plan, which is described in more detail under Item 1 — “Business”“Business – Recent Developments” above, contemplates threehas a primary initiatives that have been or will be undertakenobjective of achieving and thereafter maintaining certain minimum capital ratios required by resolutions adopted by our bank's Board of Directors in order to increase our common equity capital, decrease our expenses, and enable us to withstand and better respond to current market conditions and the potential for worsening market conditions. Those three initiatives are (1) an offerDecember 2009 (as subsequently amended). Since those resolutions were adopted, we have madeengaged in various transactions to help us achieve the UST to issue sharesminimum capital ratios set forth in the Capital Plan, which are also described under "Business – Recent Developments" above. As of December 31, 2012, our bank met both of the minimum capital ratios set forth in the resolutions. However, we have not fully implemented our Capital Plan.
The final initiative of our common stock in exchange for up to the entire $72 million in aggregate liquidation value of the shares of preferred stock held by the UST; (2) an offer to exchange shares of our common stock for our outstanding trust preferred securities; and (3)Capital Plan is a public offering of our common stock for cash. As discussed under "Business – Recent Developments" above, we initially anticipated conducting a new cash equity raise of not less than $100 million, which would allow us to exercise our right to compel a conversion of the Series B Convertible Preferred Stock held by the Treasury into shares of our common stock (subject to the satisfaction of certain other conditions, as described in "Business – Recent Developments" above). We cannot be sureare currently evaluating the merits of a smaller capital raise with a goal of preserving the potential future use of our net deferred tax asset, which totaled approximately $65.1 million as of December 31, 2012, and on which we have established a full valuation allowance. This evaluation will be ablealso take into account our ongoing operating results, as well as input from our financial advisors and the Treasury.
Whatever strategy we pursue to successfully execute on these identified initiatives in a timely manner or at all.reach the objectives of the Capital Plan will involve risks and uncertainties. The successful implementation of our Capital Plan is, in many respects, largely out of our control andas it primarily depends on factors such as the willingness of the UST to exchange the shares of our preferred stock it holds for shares of our common stock, the willingness of holders of our trust preferred securities to exchange such securities for shares of our common stock, and our ability to sell our common stock or other securities for cash. These factors, in turn, may dependraise new capital, which depends on factors outside of our control such as the stability of the financial markets, other macro economic conditions, and investors’ perception of the ability of the Michigan economy to continue to recover from the current recession. In addition, other risks, including each of those described in these "Risk Factors," could negatively affect our operating performance in significant ways, which would in turn have a negative impact on our ability to reach the goals set forth in our Capital Plan.
If we are unable to achievemaintain the minimum capital ratios set forth in our Capital Plan, in the near future, it would likely materially and adversely affect our business, financial condition, and the value of our securities. An inability to improve and maintain our capital position would make it very difficult for us to withstand continued losses that we may incur and that may be increased or made more likely as a result of continued economic difficulties in Michigan and other factors, as described elsewhere in this “Risk Factors” section.
In addition, we believe It is possible that if we are unable to achieveour bank’s capital could fall below the minimum capital ratios set forth in our Capital Plan by or within a reasonable time after the April 30, 2010 deadline imposed by our Board and if our financial condition and performance otherwise fail to improve significantly, it is likely we will not be ablelevels necessary to remain well-capitalized under federal regulatory standards. In that case, we also expect our primary bank regulators wouldmay impose additional regulatory restrictions and requirements on us through a regulatory enforcement action. If we failour bank fails to remain well-capitalized under federal regulatory standards, weit will be prohibited from accepting or renewing brokered deposits without the prior consent of the FDIC, which would likely have a material adverse impact on our business and financial condition. If our regulators take enforcement action against us, we could be required to take affirmative steps in an effort to improve our overall condition and weit would likely be required to perform additional reporting to our banking regulators. We believe such additional reporting would increase our expenses (due to additional costs associated with complying with such enforcement action) and divert management attention and other resources from the operation of our Bank. Any regulatory enforcement action could also limit our abilitybusiness operations (due to develop new business lines and/or could requirerestrictions imposed by the sale of certain assets.enforcement action). There could be other expenses associated with a continued deterioration of our capital, such as increased deposit insurance premiums payable to the FDIC.
These additional
If we do not remain well-capitalized, meet certain minimum capital levels or certain profitability requirements or if we incur a rapid decline in net worth we could lose our ability to sell and/or service loans to Fannie Mae or Freddie Mac. This could impact our ability to generate gains on the sale of loans and generate servicing income. A forced liquidation of our servicing portfolio could also impact the value that could be recovered on this asset. Fannie Mae has the most stringent eligibility requirements covering capital levels, profitability and decline in net worth. Fannie Mae requires seller/servicers to be well-capitalized. For the profitability requirement, we cannot record four or more consecutive quarterly losses and experience a 30% decline in net worth over the same period. Finally, our net worth cannot decline by more than 25% in one quarter or more than 40% over two consecutive quarters. The highest level of capital we are required to maintain is at least $2.5 million plus 0.25% of loans serviced for Freddie Mac.
Additional restrictions would make it increasingly difficult for us to withstand the currentany future deterioration in economic conditions, and any continued deterioration in our loan portfolio. In that case, we mayportfolio, or any additional charges related to estimated potential incurred losses for Mepco from vehicle service contract counterparty contingencies. We could then be required to engage in a sale or other transaction with a third party or our subsidiary Bankbank could be placed into receivership by bank regulators. Any such event could be expected to result in a loss of the entire value of our outstanding shares of common stock and it could also result in a loss of the entire value of our outstanding trust preferred securities and preferred stock.
We may not achieve results similar to our current financial projections.
In our annual report, to be delivered to shareholders in connection with the April 23, 2013 Annual Meeting of Shareholders (filed as exhibit 13 to this report on Form 10-K), we disclose certain information regarding our potential future financial performance, including our belief that our bank can remain above “well-capitalized” for regulatory purposes for the foreseeable future, even without additional capital, and maintain the bank regulatory capital ratios required by the Capital Plan. These projections and assumptions were based on information about circumstances and conditions existing as of the date of this Annual Report on Form 10-K. The projections are based on estimates and assumptions that are inherently uncertain and, though considered reasonable by us, are subject to significant business, economic, and competitive uncertainties and contingencies, all of which are difficult to predict and many of which are beyond our control. Accordingly, there can be no assurance that actual results will not be significantly different than the information disclosed. It is possible that our bank may not be able to remain well-capitalized as we work through asset quality issues and seek to return to consistent profitability. Any significant deterioration in or inability to improve our capital position would make it very difficult for us to withstand losses that we may incur and that may be increased or made more likely as a result of economic difficulties and other factors. We do not intend to update any such forward-looking information. Neither we nor any other person or entity assumes any responsibility for the accuracy or validity of these projections, as the projections are not, and should not be taken as, a guarantee of our future financial performance or condition.
We have credit risk inherent in our assetloan portfolios, and our allowance for loan losses may not be sufficient to cover actual loan losses.
Our loan customers may not repay their loans according to their respective terms, and the collateral securing the payment of these loans may be insufficient to assure repayment.cover any losses we may incur. We have experienced and may continue to experience significant credit losses which could have a material adverse effect on our operating results. We make various assumptions and judgments about the collectability of our loan portfolio, including the creditworthiness of our borrowers and the value of the real estate and other assets serving as collateral for the repayment of many of our loans. Non-performing loans amounted to $32.9 million and $59.9 million at December 31, 2012 and December 31, 2011, respectively. Our allowance coverage ratio of non-performing loans was 134.4% and 98.3% at December 31, 2012 and December 31, 2011, respectively. In determining the size of the allowance for loan losses, we rely on our experience and our evaluation of current economic conditions. If our assumptions or judgments prove to be incorrect, our current allowance for loan
23
losses may not be sufficient to cover certain loan losses inherent in our loan portfolio, and adjustments may be necessary to account for different economic conditions or adverse developments in our loan portfolio. Material additions to our allowance would adversely impact our operating results.
Although we perform periodic internal testing of our loan portfolio to help ensure the adequacy of our allowance for loan losses, if the assumptions or judgments used in these analyses prove to be incorrect, our current allowance for loan losses may not be sufficient to cover loan losses inherent in our loan portfolio. Material additions to our allowance would adversely impact our operating results. In addition, federal and state regulators periodically review our allowance for loan losses and may require us to increase our provision for loan losses or recognize additional loan charge-offs.charge-offs, notwithstanding any internal analysis that has been performed. Any increase in our allowance for loan losses or loan charge-offs required by these regulatory agencies could have a material adverse effect on our results of operations and financial condition.
Our business has been and may continue to be adversely affected by current conditions in the financial markets and economic conditions generally, and particularly by the continued economic slowdownconditions in Michigan.
Our success depends to a great extent upon the general economic conditions in Michigan’s Lower Peninsula. We have in general experienced a slowing economy in Michigan since 2001.2001, although economic conditions in the state began to show signs of improvement during 2010 and generally these improvements have continued, albeit at a slower pace. Unlike larger banks that are more geographically diversified, we provide banking services to customers primarily in Michigan’s Lower Peninsula.lower peninsula. Our loan portfolio, the ability of the borrowers to repay these loans, and the value of the collateral securing these loans will be impacted by local economic conditions. The continued economic difficulties faced in Michigan hashave had and may continue to have many adverse consequences, including the following:
| | • | ● | Loan delinquencies may increase; |
|
| | • | ● | Problem assets and foreclosures may increase; |
|
| | • | ● | Demand for our products and services may decline; and |
|
| | • | ● | Collateral for our loans may decline in value, in turn reducing customers’ borrowing power and reducing the value of assets and collateral associated with existing loans. |
Additionally, the overall capital and credit markets have been experiencing unprecedented levels of volatility and disruption during the past two years. In some cases, the markets have produced downward pressure on stock prices and credit availability for certain issuers without regard to those issuers’ underlying financial strength. As a consequence of the U.S. recession, business activity across a wide range of industries faces serious difficulties due to the lack of consumer spending and the extreme lack of liquidity in the global credit markets. Unemployment has also increased significantly and may continue to increase. In particular, according to data published by the federal Bureau of Labor Statistics, Michigan’s unemployment rate in December 2009 of 14.6% was the worst among all states.
During the past year, the general business environment has continued to have an overall adverse effect on our business, and this environment is not expected to improve in the near term. Until conditions improve, we expect our businesses, financial condition and results of operations to continue to be adversely affected.
Current market developments, particularly in real estate markets, may adversely affect our industry, business and results of operations.
Dramatic declines in the housing market in recent years, with fallinglower home prices and increasingincreased foreclosures and unemployment, have resulted in, and may continue to result in, significant write-downs of asset values by us and other financial institutions. These write-downs have caused many financial institutions to seek additional capital, to merge with larger and stronger institutions and, in some cases, to fail. As a result
Although we believe the Michigan economy started to show signs of thesestabilization beginning in 2010, it is possible conditions many lenders and institutional investors have reduced, and in some cases, ceasedwill not stabilize or recover at or even close to provide funding to borrowers including financial institutions.the pace expected.
This
Negative market turmoil and tightening of credit have led to an increased level of commercial and consumer delinquencies, lack of consumer confidence, increased market volatility and widespread reduction of business activity generally. The resulting lack of available credit, lack of confidencedevelopments in the financial sector, increased volatility in the financial markets and reduced business activityfuture could materially and adversely affect our business, financial condition and results of operations.
Further negative market developments may continue to negatively affect consumer confidence levels and may continue to contribute to increases in delinquencies and default rates, which may impact our charge-offs and
24
provisions for credit losses. A worsening of these conditions would likely exacerbate the adverse effects of these difficult market conditions
The assumptions we make in calculating estimated potential losses on us and others in the financial services industry.
Recent events in the vehicle service contract industrycounterparty receivables for Mepco may be inaccurate, which could lead to vehicle service contract counterparty contingencies expense that is materially greater than the charges we have increased our credit risk and reputation risk and could expose ustaken to significant losses.date.
One of our subsidiaries, Mepco, Finance Corporation, is engaged in the business of acquiring (on a full recourse basis) and servicing payment plans for consumers who purchase vehicle service contracts and similar products. The receivables generated in this business involve a different, and generally higher, level of risk of delinquency or collection than generally associated with the loan portfolios of our Bank.bank. Upon cancellation of the payment plans acquired by Mepco (whether due to voluntary cancellation by the consumer or non-payment), the third party entities that provide the service contracts or other products to consumers (which we refer to as Mepco's "counterparties") become obligated to refund Mepco the unearned portion of the sales price previously funded by Mepco. TheThese obligations of Mepco's counterparties are shown as "vehicle service contract counterparty receivables" in our Consolidated Statements of Financial Condition. At December 31, 2012, the aggregate amount of such obligations owing to Mepco by counterparties, net of write-downs and reserves made through the recognition of "vehicle service contract counterparty contingencies expense," totaled $18.4 million. This compares to a balance of $29.3 million and $37.3 million at December 31, 2011, and December 31, 2010, respectively.
In most cases, there is no collateral to secure the counterparties’ refund obligations to Mepco, but Mepco has the contractual right to offset unpaid refund obligations against amounts Mepco would otherwise be obligated to fund to the counterparties. In addition, even when other collateral is involved, the refund obligations of these counterparties are not fully secured. Mepco incurs losses when it is unable to fully recover funds owing to it by counterparties upon cancellation of the underlying service contracts.
In addition, several
Historically, Mepco's counterparties generally fulfilled their obligations to Mepco to refund Mepco the amounts owed upon cancellation of the service contracts. However, events in the vehicle service contract industry starting in approximately 2009 significantly increased the size of these counterparty obligations. These events, which included allegations that several service contract providers including the counterparty described in the next risk factor below and other companies from which Mepco has purchased payment plans, have been sued or are under investigation for alleged violations ofviolated telemarketing laws and other consumer protection laws.laws, contributed to significantly higher cancellation rates for outstanding service contracts and significantly lower sales of new service contract products which, in turn, contributed to several of Mepco's counterparties either going out of business or defaulting on their obligations to Mepco. Although Mepco generally has recourse against more than one counterparty upon the cancellation of a service contract, Mepco has not historically had to enforce its rights against one counterparty (e.g., the administrator of a particular service contract that cancelled) based upon the default of a second counterparty (e.g., the seller of the service contract). As Mepco has begun to enforce these rights in recent years, certain of its counterparties are challenging their payment obligations to Mepco. Mepco is currently involved in litigation with several counterparties to enforce Mepco's rights to collect refunds owing from those counterparties. We expect we will need to initiate additional lawsuits against other counterparties that do not pay their obligations to Mepco.
In evaluating the collectability of these receivables, Mepco estimates probable incurred losses that Mepco expects to incur as a result of being unable to fully collect all amounts owing to Mepco. The actions have been brought primarily by state attorneys generalaggregate amount of these probable incurred losses (shown as vehicle service contract counterparty contingencies expense in our Consolidated Statements of Operations) recorded in past years has grown from $0 in 2007, to $1.0 million in 2008, to $31.2 million in 2009, and the Federal Trade Commission (FTC) but there have also been class actiondeclined to $18.6 million in 2010, $11.0 million in 2011, and other private lawsuits filed. In some cases, the companies have been placed into receivership or have discontinued business. In addition, the allegations, particularly those relating to blatantly abusive telemarketing practices by a relatively small number$1.6 million in 2012.
The determination of marketers, have resulted inthese losses requires a significant amount of negative publicityjudgment because a number of factors can influence the amount of loss that we may ultimately incur. These factors include our estimate of future cancellations of vehicle service contracts (including cancellations that may result from a counterparty discontinuing its business operations), our evaluation of collateral that may be available to recover funds due from our counterparties, and the amount collected from counterparties in connection with their contractual obligations. We apply a rigorous process, based upon observable contract activity and past experience, to estimate probable incurred losses for our vehicle service contract counterparty contingencies, but there can be no assurance that our modeling process will successfully identify all such losses. Because of the uncertainty surrounding the numerous and complex assumptions made, actual losses could exceed the charges we have taken to date, and the additional losses we incur could be material.
Mepco has adversely affectedhistorically contributed a meaningful amount of profit to our consolidated results of operations, but we have shrunk the size of its business significantly since 2009 as a result of the events and mayrisks referenced above.
For 2008 and 2007, Mepco had net income of $10.7 million and $5.5 million, respectively. With the counterparty losses experienced by Mepco since late 2009 (as referenced in the future continueprevious risk factor), Mepco reported net losses of $11.7 million in 2009 (which included a $16.7 million goodwill impairment charge), $1.4 million in 2010, and $4.8 million in 2011. While Mepco reported net income of $1.7 million in 2012, this is significantly less than its contribution to adversely affect salesprofit prior to 2009.
As a result of adverse events described above and customer cancellationsunique risks within the vehicle service contract industry, we have made a concerted effort to significantly reduce the size and scope of purchased products throughoutMepco's business. Net payment plan receivables have been reduced from $406.3 million (or approximately 13.7% of total assets) at December 31, 2009, to $201.3 million (or approximately 7.9% of total assets) at December 31, 2010, to $115.0 million (or approximately 5.0% of total assets) at December 31, 2011, to $84.7 million (or approximately 4.2% of total assets) at December 31, 2012. This represents a decline of almost 80% since 2009. We expect the industry, which have already been negatively impacted by the economic recession. It is possible these events could also cause federal or state lawmakers to enact legislation to further regulate the industry.amount of total payment plan receivables will decline only modestly during 2013.
These events have
This decline in payment plan receivables has had and may continue to have an adverse impact on Mepcoour net interest income and net interest margin.
Even though the size of Mepco's business has been significantly reduced in several ways. First, we face increased risk with respect to certain counterparties defaulting in their contractual obligations to Mepco which could result in additional charges for losses if these counterparties go out of business. In 2009, we recorded a $31.2 million charge related to estimated potential losses for vehicle service contract counterparty contingencies. We may incur similar charges in the future. Second, these events have negatively affected salesrecent years, it still presents unique market, operational, and customer cancellations in the industry, which has hadinternal control challenges and is expected to continue to have a negative impact on the profitability of Mepco’s business. Largely as a result of these events, we recently wrote down all of the $16.7 million of goodwill associated with Mepco that was being carried on our balance sheet. In addition, if any federal or state investigation is expanded to include finance companies such as Mepco, Mepco will face additional legal and other expenses in connection with any such investigation. An increased level of private actions in which Mepco is named as a defendant will also cause Mepco to incur additional legal expenses as well as potential liability. Finally, Mepco has incurred and will likely continue to incur additional legal and other expenses, in general, in dealing with these industry problems.risks.
Mepco also faces unique operational and internal control challenges due to the relatively rapid turnover of its portfolio and high volume of new payment plans. Mepco’sMepco's business is highly specialized, and its success willresults of operation depend largely on the continued services of its executives and other key employees familiar with its business. In addition, because financingactivity in this market is conducted primarily through relationships with unaffiliated automobilevehicle service contract direct marketers and administrators and because the customers are located nationwide, risk management and general supervisory oversight isare generally more difficult than in our bank. The risk of third party fraud is also higher as a result of these factors. Acts of fraud are difficult to detect and deter, and we cannot assure investors that the risk management procedures and controls will prevent losses from fraudulent activity. Although we have an internal control system at Mepco, we may be exposed to the risk of significantmaterial loss in this business.
Our operations may be adversely affected if we are unable to secure adequate funding. Our use of wholesale funding sources exposes us to liquidity risk and potential earnings volatility.
We utilize wholesale funding, including Federal Home Loan Bank borrowings and reciprocal and brokered deposits, to augment our core deposits to fund our business. As of December 31, 2009,2012, our use of such wholesale funding sources amounted to approximately $65.5 million or 3.6% of total funding. Because wholesale funding sources are affected by general market conditions, the net finance receivables held by Mepco representedavailability of funding from wholesale sources may be dependent on the confidence these parties have in our banking operations. The continued availability to us of these funding sources is uncertain and may be difficult for us to retain or replace at attractive rates as they mature. Our liquidity will be constrained if we are unable to renew our wholesale funding sources or if adequate financing is not available in the future at acceptable rates of interest or at all. We may not have sufficient liquidity to continue to fund new loans, and we may need to liquidate loans or other assets unexpectedly, in order to repay obligations as they mature.
The constraint on our liquidity would be exacerbated if we were to experience a reduction in our core deposits, and we cannot be sure we will be able to maintain our current level of core deposits. In particular, those deposits that are currently uninsured or those deposits that were in non-interest bearing transaction accounts and had unlimited deposit insurance under the FDIC Transaction Account Guarantee Program ("TAGP") only through December 31, 2012 (in accordance with provisions in the Dodd-Frank Act), may be particularly susceptible to outflow. At December 31, 2012, we had $107.8 million of uninsured deposits and an additional $175.8 million of deposits that were in non-interest bearing transaction accounts and fully insured through December 31, 2012 under the TAGP. A reduction in core deposits would increase our need to rely on wholesale funding sources, at a time when our ability to do so may be more restricted, as described above.
In addition, if we fail to remain "well-capitalized" under federal regulatory standards, we will be prohibited from accepting or renewing brokered deposits without the prior consent of the FDIC. As of December 31, 2012, we had brokered deposits of approximately 13.7%$14.6 million. Approximately $11.4 million of these brokered deposits mature during the next 12 months. As a result, any such restrictions on our consolidated assets.
Mepco has significant exposureability to a single counterparty that is experiencing extreme financial difficulties. The failure of this counterparty isaccess brokered deposits are likely to have a material adverse effectimpact on our business and financial condition.
Moreover, we cannot be sure we will be able to maintain our current level of core deposits. Our deposit customers could move their deposits in reaction to media reports about bank failures in general or, particularly, if our financial condition were to deteriorate. A reduction in core deposits would increase our need to rely on wholesale funding sources, at a time when our ability to do so may be more restricted, as described above. Our financial performance will be materially and adversely affected if we are unable to maintain our access to funding or if we are required to rely more heavily on more expensive funding sources. In such case, our net interest income and results of operations. Over 40% of Mepco’soperations would be adversely affected.
Dividends being deferred on our outstanding trust preferred securities and our outstanding preferred stock are accumulating and are expected to continue to increase as we have no current outstanding receivables were purchased from a single counterparty. Beginning in the second half of 2009, this counterparty experienced decreased sales (and ceased all new sales in December of
25
2009) and significantly increased levels of customer cancellations. Customer cancellations trigger an obligation of this counterparty to us to repay the unearned portion of the sales price for the payment plan previously advanced by us to the counterparty. In addition, this counterparty is subject to a multi-state attorney general investigation regarding certain of the counterparty’s business practices and multiple civil lawsuits. These events have increased costs for the counterparty, putting further pressure on its cash flow and profitability. In December of 2009, we were advised that this counterparty plans to wind down its business operations and is contemplating a bankruptcy filingresume such dividend payments at any time in the near future.
Mepco is actively working to reduce its credit exposure to this counterparty. The amount
We are currently deferring payment of payment plans (finance receivables) purchased from this counterpartyquarterly dividends on our preferred stock held by the Treasury, which pays cumulative dividends quarterly at a rate of 5% per annum through February 14, 2014, and outstanding at December 31, 2009 totaled approximately $206.1 million.9% per annum thereafter. In addition, as of December 31, 2009, this counterparty owed Mepco $16.2 million for previously cancelled payment plans. The wind down of operations by this counterparty is likelywe have exercised our right to lead to substantial potential losses as this entity will not be in a position to honor its recourse obligationsdefer all quarterly interest payments on payment plans that Mepco has purchased which are cancelled prior to payment in full. In that event, Mepco will seek to recover amounts owed by the counterparty from various co-obligors and guarantors and through the liquidation of certain collateral held by Mepco. However,subordinated debentures we are not certain as to the amount of any such recoveries. In 2009, Mepco recorded an aggregate $19.0 million expense (as part of vehicle service contract counterparty contingencies that is included in non-interest expense) to establish a reserve for losses related to this counterparty.
Mepco has historically contributed a meaningful amount of profitissued to our consolidated results of operations, but we expect the size of its business to shrink significantly beginning in 2010. For 2008 and 2007, Mepco had net income of $10.7 million and $5.5 million, respectively. With the counterparty losses experienced by Mepco late in 2009 (including those related to the counterparty described above) and a $16.7 million goodwill impairment charge, Mepco incurred an $11.7 million loss in 2009. As of December 31, 2009, the net finance receivables held by Mepco represented approximately 13.7% of our consolidated assets. However, as a result of the loss of business with the counterparty described above as well as our desire to reduce finance receivables as a percentage of total assets, we expect Mepco’s total earning assets to decrease by approximately 50% in 2010.trust subsidiaries. As a result, all quarterly dividends on the reductionrelated trust preferred securities are also being deferred. We may defer such interest payments for a total of 20 consecutive calendar quarters without causing an event of default under the documents governing these securities. After such period, we must pay all deferred interest and resume quarterly interest payments or we will be in default. Our right to continue to defer these interest payments without being in default of the sizerelated debt instruments will expire in late 2014.
We do not have any current plans to resume dividend payments on our outstanding trust preferred securities or our outstanding preferred stock. If and when either of Mepco’s business could adversely affect our financial resultssuch payments resume, however, the accrued amounts must be paid and make it more difficult for us to be profitable on a consolidated basis in the near future.made current.
We face uncertainty with respect to legislative efforts by the federal government to help stabilize the U.S. financial system.system, address problems that caused the recent crisis in the U.S. financial markets, or otherwise regulate the financial services industry.
Beginning in the fourth quarter of 2008, the federal government enacted new laws intended to strengthen and restore confidence in the U.S. financial system. See Item 1 — “Business—"Business—Regulatory Developments”Developments" above for additional information regarding these developments. There can be no assurance, however, as to the actual impact that such programs will have on the financial markets, including the extreme levels of volatility and limited credit availability currently being experienced. The failure of these and other programs to stabilize the financial markets and a continuation or worsening of current financial market conditions could materially and adversely affect our businesses, financial condition, results of operations, access to credit or the trading price of our common stock.
In addition, these statutesadditional legislation or regulations may be adopted in the future that could adversely impact us. For example, on July 21, 2010, the President signed the Dodd-Frank Act into law, which included the creation of the Consumer Financial Protection Bureau with power to promulgate and, with respect to financial institutions with more than $10 billion in assets, enforce consumer protection laws; the creation of the Financial Stability Oversight Council chaired by the Secretary of the Treasury with authority to identify institutions and practices that might pose a systemic risk; provisions affecting corporate governance and executive compensation of all companies whose securities are relatively new initiativesregistered with the Securities and Exchange Commission; a provision that broadens the base for FDIC insurance assessments and permanently increases FDIC deposit insurance to $250,000; a provision under which interchange fees for debit cards of issuers with at least $10 billion in assets are set by the Federal Reserve under a restrictive "reasonable and proportional cost" per transaction standard; a provision that requires bank regulators to set minimum capital levels for bank holding companies that are as such, arestrong as those required for their insured depository subsidiaries, subject to changea grandfather clause for financial institutions with less than $15 billion in assets as of December 31, 2009; and evolving interpretation. There cannew restrictions on how mortgage brokers and loan originators may be no assurances as to the impact that any such changes will have on the effectivenesscompensated. Although a number of the federal government’s effortsregulations required by the Dodd-Frank Act have been issued, many of the new requirements have not yet been implemented and will likely be subject to stabilizeimplementing regulations over the credit marketscourse of several years. As these provisions continue to be implemented, we expect they may impact our business operations and may negatively affect our earnings and financial condition by affecting our ability to offer certain products or earn certain fees and by exposing us to increased compliance and other costs. At this time, it is difficult to assess the full impact of the Dodd-Frank Act on our business, financial condition or results of operations. Thesebusiness. This legislation as well as other similar federal initiatives could involve regulatory changes that may have ana material adverse impact on our business.
In addition, on June 4, 2012, the Federal Reserve proposed new regulatory capital requirements for financial institutions. These new capital requirements, if adopted as outlined in the proposals issued by the Federal Reserve, would have a material impact on the banking industry, including our organization. In general, the proposed new rules would significantly increase the need for Tier 1 common equity capital and substantially impact the calculation of risk-weighted assets.
We have credit risk inherent in our securities portfolio.
We maintain diversified securities portfolios, which include obligations of the USTTreasury and government-sponsored agencies as well as securities issued by states and political subdivisions, mortgage-backed securities, and asset-backed securities. We also invest in capital securities, which include preferred stocks and trust preferred securities. We seek to limit credit losses in our securities portfolios by generally purchasing only highly rated securities (rated “AA”"AA" or higher by a major debt rating agency) or by conducting significant due diligence on the issuer for unrated securities. However, gross unrealized losses on securities available for sale in our portfolio totaled approximately $2.6 million as of December 31, 2012 (compared to approximately $5.2 million as of December 31, 2011). We believe these unrealized losses are temporary in nature and are expected to be recovered within a reasonable time period as we believe we have the ability to hold the securities to maturity or until such time as the unrealized losses reverse. However, we evaluate securities available for sale for other than temporary impairment (OTTI) at least quarterly and more frequently when economic or market concerns warrant such evaluation. Those evaluations may result in OTTI charges to our earnings. In addition to these impairment charges, we may, in the future, experience additional losses in our securities portfolio which may result in charges that could materially adversely affect our results of operations. 26
Our mortgage-banking revenues are susceptible to substantial variations dependent largely upon factors that we do not control, such as market interest rates.
A meaningful portion of our revenues are derived from gains on the sale of real estate mortgage loans. For 2009, theseWe realized net gains represented over 4% of our total revenues.$17.3 million on mortgage loans during 2012 compared to $9.3 million during 2011. These net gains primarily depend on the volume of loans we sell, which in turn depends on our ability to originate real estate mortgage loans and the demand for fixed-rate obligations and other loans that are outside of our established interest-rate risk parameters. Net gains on real estate mortgage loans are also dependent upon economic and competitive factors as well as our ability to effectively manage exposure to changes in interest rates. Consequently, they can often be a volatile part of our overall revenues.
Fluctuations in interest rates could reduce our profitability.
We realize income primarily from the difference between interest earned on loans and investments and the interest paid on deposits and borrowings. Our interest income and interest expense are affected by general economic conditions and by the policies of regulatory authorities. While we have taken measures intended to manage the risks of operating in a changing interest rate environment, there can be no assurance that these measures will be effective in avoiding undue interest rate risk. We expect that we will periodically experience “gaps” in the interest rate sensitivities of our assets and liabilities, meaning that either our interest-bearing liabilities will be more sensitive to changes in market interest rates than our interest-earning assets, or vice versa. In either event, if market interest rates should move contrary to our position, this “gap” will work against us, and our earnings may be negatively affected.
We are unable to predict fluctuations of market interest rates, which are affected by, among other factors, changes in the following:
| | - | ● | inflation or deflation rates; |
|
| | - | ● | levels of business activity; |
|
| | - | ● | domestic or foreign events; and |
|
| | - | ● | instability in domestic and foreign financial markets. |
Changes in accounting standards could impact our reported earnings. Financial accounting and reporting standards are periodically changed by the Financial Accounting Standards Board (FASB), the SEC, and other regulatory authorities. Such changes affect how we are required to prepare and report our consolidated financial statements. These changes are often hard to predict and may materially impact our reported financial condition and results of operations. In some cases, we may be required to apply a new or revised standard retroactively, resulting in the restatement of prior period financial statements.
Our operations may be adversely affected if we are unable to secure adequate funding. Our use of wholesale funding sources exposes us to liquidity risk and potential earnings volatility. We rely on wholesale funding, including Federal Home Loan Bank borrowings, brokered deposits, and Federal Reserve Bank borrowings, to augment our core deposits to fund our business. As of December 31, 2009, our use of such wholesale funding sources amounted to approximately $760 million. Because wholesale funding sources are affected by general market conditions, the availability of funding from wholesale lenders may be dependent on the confidence these investors have in our commercial and consumer banking operations. The continued availability to us of these funding sources is uncertain, and brokered deposits may be difficult for us to retain or replace at attractive rates as they mature. Our liquidity will be constrained if we are unable to renew our wholesale funding sources or if adequate financing is not available in the future at acceptable rates of interest or at all. We may not have sufficient liquidity to continue to fund new loans, and we may need to liquidate loans or other assets unexpectedly, in order to repay obligations as they mature.
In addition, if we fail to remain “well-capitalized” under federal regulatory standards, which is likely if we are unable to successfully implement our Capital Plan, we will be prohibited from accepting or renewing brokered deposits without the prior consent of the FDIC. As of December 31, 2009, we had brokered deposits of
27
approximately $629 million. As a result, any such restrictions on our ability to access brokered deposits is likely to have a material adverse impact on our business and financial condition.
Moreover, we cannot be sure that we will be able to maintain our current level of core deposits. Our deposit customers could move their deposits in reaction to media reports about bank failures in general (as discussed in a separate Risk Factor below) or in reaction to negative publicity we may receive as a result of the pursuit of our capital raising initiatives or, particularly, if we are unable to successfully complete such initiatives. A reduction in core deposits would increase our need to rely on wholesale funding sources, at a time when our ability to do so may be more restricted, as described above.29
Our financial performance will be materially affected if we are unable to maintain our access to funding or if we are required to rely more heavily on more expensive funding sources. In such case, our net interest income and results of operations would be adversely affected.
We rely heavily on our management team, and the unexpected loss of key managers may adversely affect our operations and the ability to implement our Capital Plan.Plan and business strategies.
The continuity of our operations is influenced strongly by our ability to attract and to retain senior management experienced in banking and financial services. Our ability to retain executive officers and the current management teams of each of our lines of business will continue to be important to the successful implementation of our Capital Plan and our strategies. We do not have employment or non-compete agreements with any of theseour executives or other key employees. In addition, we face restrictions on our ability to compensate our executives as a result of our participation in the UST’s Capital Purchase ProgramCPP under the Troubled Asset Relief Program (TARP).TARP. Many of our competitors do not face these same restrictions. The unexpected loss of services of any key management personnel, or the inability to recruit and retain qualified personnel in the future, could have ana material adverse effect on our business and financial results.
Competition with other financial institutions could adversely affect our profitability.
We face vigorous competition from banks and other financial institutions, including savings banks, finance companies, and credit unions. A number of these banks and other financial institutions have substantially greater resources and lending limits, larger branch systems, and a wider array of banking services. To a limited extent, we also compete with other providers of financial services, such as money market mutual funds, brokerage firms, consumer finance companies, and insurance companies, which are not subject to the same degree of regulation as that imposed on bank holding companies. As a result, these non-bank competitors may have an advantage over us in providing certain services, and this competition may reduce or limit our margins on banking services, reduce our market share, and adversely affect our results of operations and financial condition. Our current capital position and the tough economic climate
We will face challenges in Michigan will make future growth in the near term very challenging. We have recently taken certain actions to deleverage our balance sheet, which has had and is expected to continue to have an adverse impact on our net interest income. Although we have also undertaken actions intended to reduce our expenses and continue to do so, we may not be able to reduce our expenses on a basis commensurate with the reduction in our net interest income, which causes a negative impact on our financial results. In addition, even if we are successful in raising additional capital through the initiatives described in our Capital Plan, our ability to achieve future growth in the near term will be very challengingterm.
Our current capital position has prevented us from pursuing any meaningful growth initiatives, and we have taken actions to shrink our balance sheet, including closing a total of 7 branches in 2012 and the sale of an additional 21 branches. Our current economic environmentfocus, as discussed elsewhere in Michigan.this Annual Report on Form 10-K and in our annual report to shareholders included as Exhibit 13 to this Annual Report on Form 10-K, is to strengthen our capital base, as opposed to pursuing growth.
We operate in a highly regulated environment and may be adversely affected by changes in federal and local laws and regulations.
We are generally subject to extensive regulation, supervision, and examination by federal and state banking authorities. The burden of regulatory compliance has increased under current legislation and banking regulations and is likely to continue to have a significant impact on the financial services industry. Recent legislative and regulatory changes as well as changes in regulatory enforcement policies and capital adequacy guidelines are likely to increase our cost of doing business. In addition, future legislative or regulatory changes could have a substantial impact on us and our Bank and its operations.us. Additional legislation and regulations may be enacted or adopted in the future that could significantly affect our powers, authority, and operations,operations; increase our costs of doing businessbusiness; and, as a result, give an advantage to our competitors who may not be subject to similar legislative and regulatory
28
requirements. Further, regulators have significant discretion and power to prevent or remedy unsafe or unsound practices or violations of laws by banks and bank holding companies in the performance of their supervisory and enforcement duties. The exercise of regulatory power may have a negative impact on our results of operations and financial condition.
There
Increases in FDIC insurance premiums may have a material adverse effect on our earnings.
As an FDIC-insured institution, we are required to pay deposit insurance premium assessments to the FDIC. Due to higher levels of bank failures beginning in 2008, the FDIC has taken numerous steps to restore reserve ratios of the deposit insurance fund. Our deposit insurance expense increased substantially in 2009 compared to prior periods, reflecting higher rates and a special assessment of $1.4 million in the second quarter of 2009. This industry-wide special assessment was equal to 5 basis points on our total assets less our Tier 1 capital.
Since April 1, 2011, banks have been numerous media reports about bank failures, which we expect will continuecharged FDIC insurance premiums based on net assets (defined as additional banks fail. These reports have created concerns among certainthe quarter to date average daily total assets less the quarter to date average daily Tier 1 capital) rather than based on average domestic deposits. Initial base assessment rates vary from 0.05% to 0.35% of net assets and may be adjusted between negative 0.025% and positive 0.10% for an unsecured debt adjustment and a brokered deposit adjustment. This new FDIC assessment system has resulted in a decline in our customers, particularly those with deposit balancesinsurance premiums from $6.8 million in excess2010 to $3.5 million in 2011 to $3.3 million in 2012. However, if our financial condition worsens and our Tier 1 capital deteriorates, our deposit insurance expense may increase. The amount of deposit insurance limits. We have proactively soughtthat we are required to provide appropriate informationpay is also subject to factors outside of our deposit customers aboutcontrol, including bank failures and regulatory initiatives. Such increases may adversely affect our organization in order to retain our business and deposit relationships. The outflow of significant amounts of deposits could have an adverse impact on our liquidity and results of operations.
If successful, the initiatives set forth in
Initiatives we may take to fully implement our Capital Plan willcould be highly dilutive to our existing common shareholders.
Our Capital Plan contemplates capital raising initiatives that involve the issuance of a significant number of shares of our common stock. The completion ofstock, as described under "Business – Recent Developments" above. While we are currently re-evaluating the best strategy to implement our Capital Plan, any pursuit of these capital raising transactionsinitiatives is likely to be highly dilutive to our existing common shareholders.shareholders and their voting power. The market price of our common stock could decline as a result of the dilutive effect of the capital raising transactions we may enter into or the perception that such transactions could occur.
The capital raising initiatives we are pursuing could result in
It is possible the USTTreasury or one or more private investors could end up owning a significant percentage of our stock and havinghave the ability to exert significant influence over our management and operations.
One of the primary capital raising initiatives set forth in our Capital Plan is a proposal toconsists of the UST to exchangeconversion of the shares of our preferred stock it owns for newly issuedheld by the Treasury into shares of our common stock. If the UST agrees to participate in such exchange on the terms we have proposed (asAs described under Item 1 — “Business —"Business – Recent Developments “ above) and if such exchange was completed prior toDevelopments" above, the completion of any exchange offer for our trust preferred securities or any public offeringSeries B Convertible Preferred Stock currently held by the Treasury is convertible into shares of our commons stock,common stock. Any such conversion is likely to result in the UST would end upTreasury owning a majoritysignificant percentage of our outstanding common stock. We do not know whetherstock, perhaps over 50%.
Except with respect to certain designated matters, the UST will be willingTreasury has agreed to participatevote all shares of our common stock acquired upon conversion of the Series B Convertible Preferred Stock or upon exercise of the amended and restated Warrant that are beneficially owned by it and its controlled affiliates in the same proportion (for, against, or abstain) as all other shares of our common stock are voted. The "designated matters" are (i) the election and removal of our directors, (ii) the approval of any such exchangemerger, consolidation or similar transaction that requires the termsapproval of our shareholders, (iii) the approval of a sale of all or substantially all of our assets or property, (iv) the approval of our dissolution, (v) the approval of any issuance of any of our securities on which our shareholders are entitled to vote, (vi) the approval of any amendment to our organizational documents on which our shareholders are entitled to vote, and conditions upon which it may agree(vii) the approval of any other matters reasonably incidental to participate. It is possible that we may agree to conditions and restrictions on our business imposedthe foregoing as determined by the UST in order to complete such exchange, including limitations and requirements related to executive compensation and corporate governance. Many of our competitors may not be subject to similar conditions, limitations, and requirements, which could give them a competitive advantage over us.Treasury.
It is also possible that one or more large investors, other than the UST,Treasury, could end up as the owner of a significant portion of our common stock. This could occur, for example, if the UST agreesTreasury transfers shares of the Series B Convertible Preferred Stock it holds or, upon conversion of such stock, transfers to participate in the exchange offer and subsequently transfersa third party the common stock acquired from us.issued upon conversion. It also could also occur if one or more large investors makesmake a significant investment in our common stock in the publicany offering of our commoncapital stock that we currently intendundertake.
Subject to conduct as part of our Capital Plan. Anythe voting limitations applicable to the Treasury and its controlled affiliates described above, any such significant shareholder could exercise significant influence on matters submitted to our shareholders for approval, including the election of directors. In addition, having a significant shareholder could make future transactions more difficult or even impossible to complete without the support of such shareholder, whose interests may not coincide with interests of smaller shareholders. These possibilities could have an adverse effect on the market price of our common stock.
It is possible
In addition to the foregoing, the Series B Convertible Preferred Stock we issued to the Treasury contains a provision providing that, oneif dividends on the preferred stock have not been paid for an aggregate of six quarterly dividend periods or more, whether consecutive or not, the holders of the initiatives set forthpreferred stock have the right to elect two additional directors at our next annual meeting of shareholders or at a special meeting of shareholders called for that purpose. These directors would be elected annually and serve until all accrued and unpaid dividends on the Series B Convertible Preferred Stock have been paid. Because we have deferred dividends on the Series B Convertible Preferred Stock for at least six quarterly dividend periods, the Treasury currently has the right to elect two directors to our board. At this time, in lieu of electing such directors, the Treasury requested us to allow (and we agreed) an observer to attend our Capital PlanBoard of Directors meetings beginning in the third quarter of 2011. The Treasury continues to retain the right to elect two directors as described above.
An offering of our common stock could trigger an ownership change under federal tax law that will negatively affect our ability to utilize net operating loss carryforwards and other deferred tax assets in the future.
As of December 31, 2009,2012, we had federal net operating loss carryforwards of approximately $42.8 million, and such amount may grow significantly in the future.$111.9 million. Under federal tax law, our ability to utilize these carryforwardsthis carryforward and other deferred tax assets is limited if we are deemed to experience a change of ownership.ownership pursuant to Section 382 of the Internal Revenue Code. This would result in our loss of the benefit of these deferred tax assets. The capital raising transactions contemplated byPlease see the more detailed discussion of these tax rules under "Results of Operations - Income Taxes" in our Capital Plan could cause a change of ownership under these rules, which would likely materially limit our abilityannual report to utilize these significant deferred tax assets.shareholders included as Exhibit 13 to this Annual Report on Form 10-K.
The trading price of our common stock may be subject to continued significant fluctuations and volatility.
The market price of our common stock could be subject to significant fluctuations due to, among other things:
29
| | •· | | announcements regarding significant transactionsactual or anticipated quarterly fluctuations in which we may engage, including the capital raising initiatives that are part of our Capital Plan; |
|
| • | | market assessments regardingoperating and financial results, particularly if such transactions, including the timing, terms, and likelihood of success of such capital raising initiatives; |
|
| • | | operating results that vary from the expectations of management, securities analysts, and investors, including with respect to further loan losses or vehicle service contract counterparty contingencies expenses we may incur; |
|
| | •· | announcements regarding significant transactions in which we may engage, including the initiatives that are part of our Capital Plan; |
| · | market assessments regarding such transactions, including the timing, terms, and likelihood of success of any offering of our common stock; |
| · | developments relating to litigation or other proceedings that involve us; |
| · | changes or perceived changes in our operations or business prospects; |
|
| | • | · | legislative or regulatory changes affecting our industry generally or our businesses and operations; |
|
| | • | · | the failure of general market and economic conditions to stabilize and recover, particularly with respect to economic conditions in Michigan, and the pace of any such stabilization and recovery; |
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| | • | · | the possible delisting of our common stock from Nasdaq or perceptions regarding the likelihood of such delisting; |
|
| | • | · | the operating and share price performance of companies that investors consider to be comparable to us; |
|
| | • | · | future offerings by us of debt, preferred stock, or additional trust preferred securities, each of which would be senior to our common stock upon liquidation and for purposes of dividend distributions; and |
|
| | •· | actions of our current shareholders, including future sales of common stock by existing shareholders and our directors and executive officers; and |
| · | other changes in U.S. or global financial markets, economies, and market conditions, such as interest or foreign exchange rates, stock, commodity, credit or asset valuations or volatility. |
Stock markets in general and our common stock in particular, have experienced significant volatility over approximately the past two years,since October 2007 and continue to experience significant price and volume volatility. As a result, the market price of our common stock may continue to be subject to similar market fluctuations that may or may not be related to our operating performance or prospects. Increased volatility could result in a decline in the market price of our common stock. Our common stock could be delisted from Nasdaq. Our common stock is currently listed on the Nasdaq GSM. However, on December 21, 2009, we received a letter from The Nasdaq Stock Market notifying us that we no longer meet Nasdaq’s continued listing requirements under Listing Rule 5450(a)(1) because the bid price for our common stock had closed below $1.00 per share for 30 consecutive business days. We have until approximately June 21, 2010, to demonstrate compliance with this bid price rule by maintaining a minimum closing bid price of at least $1.00 for a minimum of 10 consecutive business days. If we are unable to establish compliance with the bid price rule within such time period, our common stock will be subject to delisting from the Nasdaq GSM. However, in that event, we may be eligible for an additional grace period by transferring our common stock listing from the Nasdaq GSM to the Nasdaq Capital Market. This would require us to meet the initial listing criteria of the Nasdaq Capital Market, other than with respect to the minimum closing bid price requirement. If we are then permitted to transfer our listing to the Nasdaq Capital Market, we expect we would be granted an additional 180 calendar day period in which to demonstrate compliance with the minimum bid price rule.
The delisting of our common stock from Nasdaq, whether in connection with the foregoing or as a result of our future inability to meet any listing standards, would have an adverse effect on the liquidity of our common stock and, as a result, the market price of our common stock might become more volatile. Even the perception that our common stock may be delisted could affect its liquidity and market price. Delisting could also make it more difficult to raise additional capital.If our common stock is delisted from the Nasdaq, it is likely that quotes for our common stock would continue to be available on the OTC Bulletin Board or on the “Pink Sheets.” However, these alternatives are generally considered to be less efficient markets and it is likely that the liquidity of our common stock as well as our stock price would be adversely impacted as a result.32
We are not currently paying dividends on our common stock, and there are significant restrictions on our ability to do so. Holders of our common stock are only entitled to receive such dividends as our Board of Directors may declare out of funds legally available for such payments. We are currently prohibited from paying any cash dividends on our common stock. Even when such prohibitions end (which we do not expect to occur in the near term), there are restrictions on our ability to pay cash dividends that will likely continue to materially limit our ability to pay cash
30
dividends. We cannot provide any assurances of when we may pay cash dividends in the future. Furthermore, our common shareholders are subject to the prior dividend rights of any holders of our preferred stock and to the prior distribution rights of holders of our trust preferred securities.
Our Articles of Incorporation as well as certain banking laws may have an anti-takeover effect. Provisions of our Articles of Incorporation and certain federal banking laws, including regulatory approval requirements, could make it more difficult for a third party to acquire us, even if doing so would be perceived to be beneficial to our shareholders. The combination of these provisions may inhibit a non-negotiated merger or other business combination, which, in turn, could adversely affect the market price of our common stock.
| ITEM 1B. | UNRESOLVED STAFF COMMENTS |
ITEM 1B.UNRESOLVED STAFF COMMENTS
None.
ITEM 2.PROPERTIES
We and our Bankbank operate a total of 12089 facilities in Michigan and 1 facility in Chicago, Illinois. The individual properties are not materially significant to us or our Bank’sbank's 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.
Due
We are involved in various litigation matters in the ordinary course of business. At the present time, we do not believe any of these matters will have a significant impact on our consolidated financial position or results of operations. The aggregate amount we have accrued for losses we consider probable as a result of these litigation matters is immaterial. However, because of the inherent uncertainty of outcomes from any litigation matter, we believe it is reasonably possible we may incur losses in addition to the natureamounts we have accrued. At this time, we estimate the maximum amount of our business,additional losses that are reasonably possible is approximately $0.4 million. However, because of a number of factors, including the fact that certain of these litigation matters are still in their early stages and involve claims for which, at this point, we are often subjectbelieve have little to numerous legal actions. These legal actions, whether pending or threatened, arise throughno merit, this maximum amount may change in the normal course of business and are not considered unusual or material.future.
ITEM 4.SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
A Special Meeting of Shareholders was held on January 29, 2010. AsThe litigation matters described in our proxy statement, dated December 18, 2009, the followingpreceding paragraph primarily include claims that have been brought against us for damages, but do not include litigation matters were considered atwhere we seek to collect amounts owed to us by third parties (such as litigation initiated to collect delinquent loans or vehicle service contract counterparty receivables). These excluded, collection-related matters may involve claims or counterclaims by the opposing party or parties, but we have excluded such matters from the disclosure contained in the preceding paragraph in all cases where we believe the possibility of us paying damages to any opposing party is remote. Risks associated with the likelihood that meeting:we will not collect the full amount owed to us, net of reserves, are disclosed elsewhere in this report.
| ITEM 4. | (1) | | A proposal to amend our Articles of Incorporation to increase the number of authorized shares of common stock from 60 million shares to 500 million shares. Votes for, votes against and abstentions were as follows:MINE SAFETY DISCLOSURES |
| | | | |
Votes for: | | | 16,934,931 | |
Votes against: | | | 3,294,161 | |
Abstain: | | | 257,871 | |
| (2) | | A proposed stock option exchange program, under which eligible employees would be able to exchange certain options for a lesser number of new options. Votes for, votes against and abstentions were as follows: |
Not applicable. | | | | |
Votes for: | | | 9,714,284 | |
Votes against: | | | 2,623,686 | |
Abstain: | | | 262,159 | |
| (3) | | A proposal to issue additional shares of our common stock in exchange for certain outstanding trust preferred securities and in exchange for certain outstanding shares of preferred stock. Votes for, votes against and abstentions were as follows: |
| | | | |
Votes for: | | | 10,281,873 | |
Votes against: | | | 2,103,219 | |
Abstain: | | | 215,039 | |
33
31
ADDITIONAL ITEM — - EXECUTIVE OFFICERS
Our executive officers are appointed annually by our Board of Directors at the meeting of Directors preceding the Annual Meeting of Shareholders. There are no family relationships among these officers and/or our Directors 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 our executive officers at February 26, 2010.25, 2013.
| | | | | | |
| | | | First elected |
| | | | | as an
executive |
| Name (Age) | | Position | | officer |
Michael M. Magee, Jr. (54) | William B. Kessel (48) | President, Chief Executive Officer and Director (1) | | | 1993 | 2004 |
| | | |
| Michael M. Magee, Jr. (57) | Executive Chairman of the Board of Directors and Director (2) | 1993 |
| | | |
Robert N. Shuster (52) | (55) | Executive Vice President and Chief Financial Officer | | | 1999 | |
| | | | | | |
Stefanie M. Kimball (50) | (53) | Executive Vice President and Chief LendingRisk Officer | | | 2007 | |
| | | | | | |
William B. Kessel (45) | | Executive Vice President and Chief Operating Officer | | | 2004 | |
| | | | | | |
David C. Reglin (50) | (53) | Executive Vice President, Retail Banking | | | 1998 | |
| | | | | | |
Mark L. Collins (52) | (55) | Executive Vice President, General Counsel | | (3) | 2009 | |
| | | |
| Dennis J. Mack (51) | Executive Vice President and Chief Lending Officer (4) | 2012 |
| | | |
Richard E. Butler (58) | (61) | Senior Vice President, Operations | | | 1998 | |
| | | | | | |
Peter R. Graves (52) | (55) | Senior Vice President, Chief Information Officer | | | 1999 | |
| | | | | | |
James J. Twarozynski (44) | (47) | Senior Vice President, Controller | | | 2002 | |
Prior to being named Executive Vice President and Chief Lending Officer in 2007, Ms. Kimball was a Senior Vice President at Comerica Incorporated since 1998.
Prior to being named Executive Vice President, General Counsel in 2009, Mr. Collins was a Partner with Varnum LLP, a Grand Rapids, Michigan based law firm, where he specialized in commercial law.32
PART II.
| (1) | Mr. Kessel assumed the role of President as of April 1, 2011, and assumed the roles of CEO and director starting January 1, 2013. Prior to being appointed President, Mr. Kessel was Executive Vice President and COO. |
| (2) | As part of a senior management succession plan, Mr. Magee retired from the role of President as of April 1, 2011, and from the role of CEO as of January 1, 2013. |
| (3) | Prior to being named Executive Vice President, General Counsel in 2009, Mr. Collins was a Partner with Varnum LLP, a Grand Rapids, Michigan based law firm, where he specialized in commercial law. |
| (4) | Prior to being named Executive Vice President and Chief Lending Officer in 2012, Mr. Mack was a Senior Vice President and commercial credit officer since 2009 and a Senior Vice President at Comerica Incorporated since 2001. |
PART II.
| ITEM 5. | | MARKET FOR OUR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
The information set forth under the caption “Quarterly Summary”"Quarterly Summary" in our annual report, to be delivered to shareholders in connection with the April 27, 201023, 2013 Annual Meeting of Shareholders (filed as exhibit 13 to this report on Form 10-K), is incorporated herein by reference.
The following table shows certain information relating to purchases of common stock for the three-months ended December 31, 2009 pursuant to our share repurchase plan:
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | Remaining |
| | | | | | | | | | | Total Number of | | Number of |
| | | | | | | | | | | Shares Purchased | | Shares |
| | | | | | | | | | | as Part of a | | Authorized for |
| | | Total Number of | | Average Price | | Publicly | | Purchase Under |
| Period | | Shares Purchased | | Paid Per Share | | Announced Plan | | the Plan |
| |
October 2009(1) | | | 620 | | | $ | 1.18 | | | | | | | | 7,414 | |
| November 2009 | | | | | | | | | | | | | | | 7,414 | |
| December 2009 | | | | | | | | | | | | | | | 7,414 | |
| | | |
| Total | | | 620 | | | $ | 1.18 | | | | 0 | | | | 0 | (2) |
| | | |
| | |
(1) | | Shares purchased to fund our Deferred Compensation and Stock Purchase Plan for Non-employee Directors. |
|
(2) | | A stock repurchase plan authorizing the purchase of up to 25,000 shares of our common stock expired on December 31, 2009. |
| ITEM 6. | SELECTED FINANCIAL DATA |
ITEM 6.SELECTED FINANCIAL DATA
The information set forth under the caption “Selected"Selected Consolidated Financial Data”Data" in our annual report, to be delivered to shareholders in connection with the April 27, 201023, 2013 Annual Meeting of Shareholders (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| ITEM 7. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
The information set forth under the caption “Management’s"Management's Discussion and Analysis of Financial Condition and Results of Operations”Operations" in our annual report, to be delivered to shareholders in connection with the April 27, 201023, 2013 Annual Meeting of Shareholders (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 |
ITEM 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information set forth in “Management’s"Management's Discussion and Analysis of Financial Condition and Results of Operations”Operations" under the caption “Asset/"Asset/liability management”management" in our annual report, to be delivered to shareholders in connection with the April 27, 201023, 2013 Annual Meeting of Shareholders (filed as exhibit 13 to this report on Form 10-K), is incorporated herein by reference.
33
PART II.
| ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
ITEM 8.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following consolidated financial statements management’s report on internal controls, and the independent auditor’sauditor's report are set forth in our annual report, to be delivered to shareholders in connection with the April 27, 201023, 2013 Annual Meeting of Shareholders (filed as exhibit 13 to this report on Form 10-K), and is incorporated herein by reference.
| | | Management’s Annual Report on Internal Control Over Financial Reporting Report of Independent Registered Public Accounting Firm |
| |
| |
| | Consolidated Statements of Financial Condition at December 31, 20092012 and 20082011 |
| |
| |
| | Consolidated Statements of Operations for the years ended December 31, 2009, 20082012, 2011 and 20072010 |
| |
| |
| | Consolidated Statements of Shareholders’Comprehensive Income (Loss) for the years ended December 31, 2012, 2011 and 2010 |
| |
| Consolidated Statements of Shareholders' Equity for the years ended December 31, 2009, 20082012, 2011 and 2007 |
| 2010 |
| | | Consolidated Statements of Comprehensive Income for the years ended December 31, 2009, 2008 and 2007 |
|
| | Consolidated Statements of Cash Flows for the years ended December 31, 2009, 20082012, 2011 and 20072010 |
| |
| |
| | Notes to Consolidated Financial Statements |
The supplementary data required by this item set forth under the caption “Quarterly"Quarterly Financial Data”Data" in our annual report, to be delivered to shareholders in connection with the April 27, 201023, 2013 Annual Meeting of Shareholders (filed as exhibit 13 to this report on Form 10-K), is incorporated herein by reference.
The portions of our annual report, to be delivered to shareholders in connection with the April 27, 201023, 2013 Annual Meeting of Shareholders (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.
PART II.
| ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
| ITEM 9A. | CONTROLS AND PROCEDURES |
ITEM 9A.CONTROLS AND PROCEDURES
| 1. | | Evaluation of Disclosure Controls and Procedures. With the participation of management, our chief executive officer and chief financial officer, after evaluating the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a —– 15e and 15d —– 15e) as of the year ended December 31, 20092012 (the “Evaluation Date”"Evaluation Date"), have concluded that, as of such date, our disclosure controls and procedures were effective. |
|
| 2. | | Management’s Annual Report on Internal Control Over Financial Reporting under Item 8 hereof is included in the 2009 Annual Report under the caption “Management’s Annual Report on Internal Control over Financial Reporting” and is incorporated herein by reference. The Company’s independent registered public accounting firm’s attestation report on our internal control over financial reporting is also included in the 2009 Annual Report under the caption “Report of Independent Registered Public Accounting Firm” under item 8 hereof and is incorporated herein by reference.. |
34
The management of Independent Bank Corporation is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control system was designed to provide reasonable assurance to us and the board of directors regarding the preparation and fair presentation of published financial statements. ITEM 9A.CONTROLS AND PROCEDURES (continued)
All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
We assessed the effectiveness of our internal control over financial reporting as of December 31, 2012. In making this assessment, we used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control — Integrated Framework. Based on our assessment, management has concluded that as of December 31, 2012, the Company’s internal control over financial reporting was effective to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
There were no changes in our internal control over financial reporting during the quarter ended December 31, 2012, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Our annual report does not include an attestation report of the Company’s independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s independent registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in our annual report.
3./s/William B. Kessel. | /s/Robert N. Shuster |
| President and | Executive Vice President |
| Chief Executive Officer | and Chief Financial Officer |
| |
There were no changes in our internal control over financial reporting during the quarter ended December 31, 2009, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.March 13, 2013 | |
PART II.
| ITEM 9B. | OTHER INFORMATION |
ITEM 9B.OTHER INFORMATION
None.
PART III.
| ITEM 10. | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE |
ITEM 10.DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
DIRECTORS —- The information with respect to our Directors, set forth under the captions “Election"Election of Directors”Directors" and “Section"Section 16(a) Beneficial Ownership Reporting Compliance”Compliance" in our definitive proxy statement, to be delivered to shareholders in connection with the April 27, 201023, 2013 Annual Meeting of Shareholders, is incorporated herein by reference.
EXECUTIVE OFFICERS —- Reference is made to additional item under Part I of this report on Form 10-K.
CODE OF ETHICS —- We have adopted a Code of Ethics for our Chief Executive Officer and Senior Financial Officers. A copy of our Code of Ethics is posted on our website atwww.IndependentBank.com, under Investor Relations, and a printed copy is available upon request by writing to our Chief Financial Officer, Independent Bank Corporation, P.O. Box 491, Ionia, Michigan 48846.
CORPORATE GOVERNANCE – Information relating to certain functions and the composition of our board committees, set forth under the caption “Board"Board Committees Functions”and Functions" in our definitive proxy statement, to be delivered to shareholders in connection with the April 27, 201023, 2013 Annual Meeting of Shareholders, is incorporated herein by reference.
| ITEM 11. | EXECUTIVE COMPENSATION |
ITEM 11.EXECUTIVE COMPENSATION
The information set forth under the captions “Executive Compensation”"Executive Compensation," "Director Compensation," and “Compensation of Directors”Committee Interlocks and Insider Participation” in our definitive proxy statement, to be delivered to shareholders in connection with the April 27, 201023, 2013 Annual Meeting of Shareholders, is incorporated herein by reference.
35
PART III.
| | |
| ITEM 12. | | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
The information set forth under the captions “Voting"Voting Securities and Record Date”Date", “Election"Election of Directors”Directors" and “Securities"Securities Ownership of Management”Management" in our definitive proxy statement, to be delivered to shareholders in connection with the April 27, 201023, 2013 Annual Meeting of Shareholders, is incorporated herein by reference.
We maintain certain equity compensation plans under which our common stock is authorized for issuance to employees and directors, including our Deferred Compensation and Stock Purchase Plan for Non-employee Director Stock Option Plan, Employee Stock Option PlanDirectors and Long-Term Incentive Plan.
The following sets forth certain information regarding our equity compensation plans as of December 31, 2009.2012.
| | | | | | | | | | | | | |
| | | | | | | | | | | (c) | |
| | | (a) | | | | | | | Number of securities | |
| | | Number of securities | | | | | | | remaining available for | |
| | | to be issued upon | | | (b) | | | future issuance under | |
| | | exercise of | | | Weighted-average | | | equity compensation | |
| | | outstanding | | | exercise price of | | | plans (excluding | |
| | | options, warrants | | | outstanding options, | | | securities reflected | |
| Plan Category | | and rights | | | warrants and rights | | | in column (a)) | |
| Equity compensation plans approved by security holders | | | 1,099,000 | | | $ | 13.19 | | | | 528,000 | |
| | | | | | | | | | |
| | | | | | | | | | | | | |
| Equity compensation plan not approved by security holders | | None | | | | | | | None | |
| | | | | | | | | (c) | |
| | | | | | | | | Number of securities | |
| | | (a) | | | | | | remaining available for | |
| | | Number of securities | | | (b) | | | future issuance under | |
| | | to be issued upon | | | Weighted-average | | | equity compensation | |
| | | exercise of outstanding | | | exercise price of | | | plans (excluding | |
| | | options, warrants | | | outstanding options, | | | securities reflected | |
| Plan Category | | and rights | | | warrants and rights | | | in column (a)) | |
| | | | | | | | | | |
| Equity compensation plans approved by security holders | | | 275,933 | | | $ | 4.46 | | | | 142,178 | |
| | | | | | | | | | | | | |
| Equity compensation plan not approved by security holders | | None | | | | | | | | 306,740 | |
The equity compensation plan not approved by security holders referenced above is our Deferred Compensation and Stock Purchase Plan for Non-employee Directors. This plan allows our non-employee directors to defer payment of all or a part of their director fees and to receive shares of common stock in lieu of cash for these fees. Under the plan, each non-employee director may elect to participate in a Current Stock Purchase Account, a Deferred Cash Investment Account, or a Deferred Stock Account. A Current Stock Purchase Account is credited with shares of our common stock having a fair market value equal to the fees otherwise payable. A Deferred Cash Investment Account is credited with an amount equal to the fees deferred and on each quarterly credit date with an appreciation factor that may not exceed the prime rate of interest charged by our Bank. A Deferred Stock Account is credited with the amount of fees deferred and converted into stock units based on the fair market value of our common stock at the time of the deferral. Amounts in the Deferred Stock Account are credited with cash dividends and other distributions on our common stock. Fees credited to a Deferred Cash Investment Account or a Deferred Stock Account are deferred for income tax purposes. This plan does not provide for distributions of amounts deferred prior to a participant’s termination as a non-employee director. Participants may generally elect either a lump sum or installment distributions.
| ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE |
ITEM 13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information set forth under the captions “Transactions"Transactions Involving Management”Management" and “Determination"Determination of Independence of Board Members”Members" in our definitive proxy statement, to be delivered to shareholders in connection with the April 27, 201023, 2013 Annual Meeting of Shareholders, is incorporated herein by reference.
| ITEM 14. | PRINCIPAL ACCOUNTANT FEES AND SERVICES |
ITEM 14.PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information set forth under the caption “Disclosure"Disclosure of Fees Paid to our Independent Auditors”Auditors" in our definitive proxy statement, to be delivered to shareholders in connection with the April 27, 201023, 2013 Annual Meeting of Shareholders, is incorporated herein by reference.
PART IV.
| ITEM 15. | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES |
ITEM 15.EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
| (a) | 1. | Financial Statements |
| | | | | | | |
(a) | | | 1. | | | Financial StatementsAll of our financial statements are incorporated herein by reference as set forth in the annual report to be delivered to shareholders in connection with the April 27, 201023, 2013 Annual Meeting of Shareholders (filed as exhibit 13 to this report on Form 10-K.) |
| | 2. | | | | | |
| | | 2. | | | Exhibits (Numbered in accordance with Item 601 of Regulation S-K) |
| | The Exhibit Index is located on the final pagethree pages of this report on Form 10-K. |
36
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 February 26, 2010.March 13, 2013.
INDEPENDENT BANK CORPORATION
| | |
| | Robert N. Shuster, Executive Vice President and Chief Financial Officer
(Principal Financial 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 whose signature appears below hereby appoints Michael M. Magee, Jr.William B. Kessel and Robert N. Shuster and each of them severally, as his or her attorney-in-fact, to sign in his or her name and on his or her behalf, as a director, and to file with the Commission any and all amendments to this Report on Form 10-K.
William B. Kessel, President and Chief Executive Officer (Principal Executive Officer) | /s/William B. Kessel | | March 13, 2013 |
| | | | |
Michael M. Magee, Jr., President and Chief Executive Officer (Principal Executive Officer) | | s/Michael M. Magee Jr. | | February 23, 2010 |
| | | | |
| | | | |
Robert N. Shuster, Executive Vice President and Chief Financial Officer (Principal (Principal Financial Officer) | | /s/Robert N. Shuster | | February 26, 2010March 13, 2013 |
| | | | |
James J. Twarozynski, Senior Vice President and Controller (Principal Accounting Officer) | /s/James J. Twarozynski | | March 13, 2013 |
| | | | | |
James J. Twarozynski, Senior Vice PresidentMichael M. Magee, Jr., Executive Chairman and Controller (Principal Accounting Officer)Director | /s/Michael M. Magee Jr. | | s/James J. Twarozynski | | February 26, 2010March 13, 2013 |
| | | | |
| William J. Boer, Director | /s/William J. Boer | | March 12, 2013 |
| | | | |
| Donna J. Banks, Director | | /s/Donna J. Banks | | February 24, 2010March 13, 2013 |
| | | | |
| | | | |
| Jeffrey A. Bratsburg, Director | | /s/Jeffrey A. Bratsburg | | February 25, 2010March 7, 2013 |
| | | | |
| | | | |
| Stephen L. Gulis, Jr., Director | | /s/Stephen L. Gulis, Jr. | | February 26, 2010March 13, 2013 |
| | | | |
| | | | |
| Terry L. Haske, Director | | /s/Terry L. Haske | | February 23, 2010March 7, 2013 |
| | | | |
| | | | |
| Robert L. Hetzler, Director | | /s/Robert LL. Hetzler | | February 23, 2010March 6, 2013 |
| | | | | |
| William B. Kessel, Director | /s/William B. Kessel | | | | March 13, 2013 |
Michael M. Magee, Jr., Director | | s/Michael M. Magee, Jr. | | February 23, 2010 |
| | | | |
| | | | |
Clarke B. Maxson, Director | | s/Clarke B. Maxson | | February 26, 2010 |
| | | | |
| | | | |
| James E. McCarty, Director | | /s/James E. McCarty | | February 23, 2010March 13, 2013 |
| | | | |
| | | | |
| Charles A. Palmer, Director | | /s/Charles A. Palmer | | February 23, 2010March 4, 2013 |
| | | | |
| | | | |
| Charles C. Van Loan, Director | | /s/Charles C. Van Loan | | February 23, 2010 |
| | | | March 13, 2013 |
37
EXHIBIT INDEX
Exhibit number and description
EXHIBITS FILED HEREWITH
| | |
| | Annual report, relating to the April 27, 201023, 2013 Annual Meeting of Shareholders. This annual report will be delivered to our shareholders in compliance with Rule 14(a)-3 of the Securities Exchange Act of 1934, as amended. |
| | |
| | List of Subsidiaries. |
| | |
| | Consent of Independent Registered Public Accounting Firm (Crowe Horwath LLP) |
| | . |
| 24 | | Power of Attorney (Included(included on page 37)41). |
| | |
| | Certificate of the Chief Executive Officer of Independent Bank Corporation pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| | |
| | Certificate of the Chief Financial Officer of Independent Bank Corporation pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| | |
| | Certificate of the Chief Executive Officer of Independent Bank Corporation pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| | |
| | Certificate of the Chief Financial Officer of Independent Bank Corporation pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| | |
| | Certification of Chief Executive Officer pursuant to Section 111(b)(4) of the Emergency Economic Stabilization Act of 20082008. |
| | |
| | Certification of Chief Financial Officer pursuant to Section 111(b)(4) of the Emergency Economic Stabilization Act of 20082008. |
| 101.INS Instance Document |
| 101.SCH XBRL Taxonomy Extension Schema Document. |
| 101.CAL XBRL Taxonomy Extension Calculation Linkbase Document. |
| 101.DEF XBRL Taxonomy Extension Definition Linkbase Document. |
| 101.LAB XBRL Taxonomy Extension Label Linkbase Document. |
| 101.PRE XBRL Taxonomy Extension Presentation Linkbase Document. |
EXHIBITS INCORPORATED BY REFERENCE
| | |
| 3.1 | | Restated Articles of Incorporation, conformed through May 12, 2009 (incorporated herein by reference to Exhibit 3.1 to our Form S-4 RegistrationsRegistration Statement dated January 27, 2010, filed under registration No. 333-164546). |
| | |
| 3.1(a) | | Amendment to Article III of the Articles of Incorporation (incorporated herein by reference to Exhibit 99.1 to our current report on Form 8-K dated February 1, 2010 and filed February 3, 2010). |
| 3.1(b) | Amendment to Article III of the Articles of Incorporation (incorporated herein by reference to Exhibit 3.1 to our current report on Form 8-K dated April 9, 2010 and filed April 9, 2010). |
| 3.1(c) | Certificate of Designations for Fixed Rate Cumulative Mandatorily Convertible Preferred Stock, Series B, filed as an amendment to the Articles of Incorporation (incorporated herein by reference to Exhibit 3.1 to our current report on Form 8-K dated April 16, 2010 and filed April 21, 2010). |
| 3.1(d) | Amendment to Article III of the Articles of Incorporation (incorporated herein by reference to Exhibit 3.1 to our current report on Form 8-K dated August 31, 2010 and filed August 31, 2010). |
| 3.1(e) | Certificate of Designations for Series C Junior Participating Preferred Stock, filed as an amendment to the Articles of Incorporation (incorporated herein by reference to Exhibit 4.2 to our Registration Statement on Form 8-A dated November 15, 2011 and filed November 15, 2011). |
| 3.2 | | Amended and Restated Bylaws, conformed through December 8, 2008 (incorporated herein by reference to Exhibit 3.2 to our current report on Form 8-K dated December 8, 2008 and filed on December 12, 2008). |
| | |
| 4.1 | | Certificate of Trust of IBC Capital Finance II dated February 26, 2003 (incorporated herein by reference to Exhibit 4.1 to our report on Form 10-Q for the quarter ended March 31, 2003). |
| | |
| 4.2 | | Amended and Restated Trust Agreement of IBC Capital Finance II dated March 19, 2003 (incorporated herein by reference to Exhibit 4.2 to our report on Form 10-Q for the quarter ended March 31, 2003). |
| | |
| 4.3 | | Preferred Securities Certificate of IBC Capital Finance II dated March 19, 2003 (incorporated herein by reference to Exhibit 4.3 to our report on Form 10-Q for the quarter ended March 31, 2003). |
| | |
| 4.4 | | Preferred Securities Guarantee Agreement dated March 19, 2003 (incorporated herein by reference to Exhibit 4.4 to our report on Form 10-Q for the quarter ended March 31, 2003). |
38
EXHIBIT INDEX (Continued)
| | |
| 4.5 | | Agreement as to Expenses and Liabilities dated March 19, 2003 (incorporated herein by reference to Exhibit 4.5 to our report on Form 10-Q for the quarter ended March 31, 2003). |
| | |
| 4.6 | | Indenture dated March 19, 2003 (incorporated herein by reference to Exhibit 4.6 to our report on Form 10-Q for the quarter ended March 31, 2003). |
| 4.7 | | First Supplemental Indenture of Independent Bank Corporation issued to IBC Capital Finance II dated as of April 1, 2010 (incorporated herein by reference to Exhibit 4.4 to our Form S-4/A Registration Statement dated April 5, 2010, filed under registration No. 333-164546). |
4.7 | 4.8 | 8.25% Junior Subordinated Debenture of Independent Bank Corporation dated March 19, 2003 (incorporated herein by reference to Exhibit 4.6 to our report on Form 10-Q for the quarter ended March 31, 2003). |
| 4.9 | | Cancellation Direction and Release between Independent Bank Corporation, IBC Capital Finance II and U.S. Bank National Association dated as of June 23, 2010 and related Irrevocable Stock Power (incorporated herein by reference to Exhibit 4.9 to our Form S-1 Registration Statement dated July 8, 2010, filed under registration No. 333-168032). |
4.8 | 4.10 | Form of Certificate for the Fixed Rate Cumulative Perpetual Preferred Stock, Series A (incorporated herein by reference to Exhibit 4.1 to our current report on Form 8-K dated December 8, 2008 and filed on December 12, 2008). |
| | |
4.9 | 4.11 | Warrant dated December 12, 2008 to purchase shares of Common Stock of Independent Bank Corporation (incorporated herein by reference to Exhibit 4.2 to our current report on Form 8-K dated December 8, 2008 and filed on December 12, 2008). |
| 4.12 | Certificate for the Fixed Rate Cumulative Mandatorily Convertible Preferred Stock, Series B (incorporated herein by reference to Exhibit 4.1 to our current report on Form 8-K dated April 16, 2010 and filed April 21, 2010). |
| 4.13 | Amended and Restated Warrant dated April 16, 2010 to purchase shares of Common Stock of Independent Bank Corporation (incorporated herein by reference to Exhibit 4.2 to our current report on Form 8-K dated April 16, 2010 and filed April 21, 2010). |
10.1* | | Deferred Benefit Plan for Directors (incorporated herein by reference to Exhibit 10(C) to our report on Form 10-K for the year ended December 31, 1984). |
| | |
| 10.2 | | The form of Indemnity Agreement approved by our 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 our report on Form 10-K for the year ended December 31, 1988). |
| | |
10.3* | | Non-Employee Director Stock Option Plan, as amended, approved by our shareholders at its April 15, 1997 Annual Meeting (incorporated herein by reference to Exhibit 4 to our Form S-8 Registration Statement dated July 28, 1997, filed under registration No. 333-32269). |
| | |
10.4* | | Employee Stock Option Plan, as amended, approved by our shareholders at its April 17, 2000 Annual Meeting (incorporated herein by reference to Exhibit 4 to our Form S-8 Registration Statement dated October 8, 2000, filed under registration No. 333-47352). |
| | |
| 10.5 | | The form of Management Continuity Agreement as executed with executive officers and certain senior managers (incorporated herein by reference to Exhibit 10 to our report on Form 10-K for the year ended December 31, 1998). |
| | |
10.6* | | Independent Bank Corporation Long-term Incentive Plan, as amended through April 26, 2005, (incorporated herein by reference to Exhibit 10 to our report on Form 10-K for the year ended December 31, 2005). |
| | |
10.7 | | Letter Agreement, dated as of December 12, 2008, between Independent Bank Corporation and the United States Department of the Treasury, and the Securities Purchase Agreement—Standard Terms attached thereto (incorporated herein by reference to Exhibit 10.1 to our current report on Form 8-K dated December 8, 2008 and filed on December 12, 2008). |
| | |
10.8 | 10.7 | Form of Letter Agreement executed by each of Michael M. Magee, Jr., Robert N. Shuster, William B. Kessel, Stefanie M. Kimball, and David C. Reglin (incorporated herein by reference to Exhibit 10.2 to our current report on Form 8-K dated December 8, 2008 and filed on December 12, 2008). |
| | |
10.9 | 10.8 | Form of waiver executed by each of Michael M. Magee, Jr., Robert N. Shuster, William B. Kessel, Stefanie M. Kimball, and David C. Reglin (incorporated herein by reference to Exhibit 10.3 to our current report on Form 8-K dated December 8, 2008 and filed on December 12, 2008). |
| 10.9 | Exchange Agreement, dated April 2, 2010, between Independent Bank Corporation and the United States Department of the Treasury (incorporated herein by reference to Exhibit 10.1 to our current report on Form 8-K dated April 2, 2010 and filed on April 2, 2010). |
EXHIBIT INDEX (Continued)
| 10.10 | | Form of waiver agreement executed by, among other employees, Michael M. Magee (President and Chief Executive Officer), William B. Kessel (Executive Vice President and Chief Operating Officer), Robert N. Shuster (Executive Vice President and Chief Financial Officer), David C. Reglin (Executive Vice President for Retail Banking), Stefanie M. Kimball (Executive Vice President and Chief Lending Officer), and Mark L. Collins (Executive Vice President and General Counsel) (incorporated herein by reference to Exhibit 10.1 to our current report on Form 8-K dated April 16, 2010 and filed on April 21, 2010). |
*10.11 | Technology Outsourcing Renewal Agreement, dated as of April 1, 2006, between Independent Bank Corporation and Metavante Corporation (incorporated herein by reference to Exhibit 10 to our report on Form 10-Q for the quarter ended March 31, 2006). |
| 10.12 | Represents a compensation plan.Amendment to Technology Outsourcing Renewal Agreement, dated as of July 8, 2010, between Independent Bank Corporation and Metavante Corporation (incorporated herein by reference to Exhibit 10.1 to our current report on Form 8-K dated July 22, 2010 and filed on July 27, 2010). |
| 10.13* | Long-Term Incentive Plan, as amended through April 26, 2011 (incorporated herein by reference to Appendix A to our proxy statement filed on Schedule 14A on March 17, 2011). |
| 10.14* | Amended and Restated Deferred Compensation and Stock Purchase Plan for Nonemployee Directors, as amended through March 8, 2011 (incorporated herein by reference to Exhibit 10.2 to our annual report on Form 10-K filed March 10, 2011). |
| 10.15* | First Amendment to Amended and Restated Deferred Compensation and Stock Purchase Plan for Nonemployee Directors, effective March 1, 2012 (incorporated herein by reference to Exhibit 10.1 to our annual report on Form 10-K filed March 13, 2012). |
| 10.16 | Purchase and Assumption Agreement, dated May 23, 2012, between Independent Bank and Chemical Bank (incorporated herein by reference to Exhibit 10.1 to our current report on Form 8-K filed May 30, 2012). |
| 10.17* | Form of Restricted Stock Unit Grant Agreement as executed with certain executive officers (incorporated herein by reference to Exhibit 10.2 to our quarterly report on Form 10-Q filed May 9, 2011). |
39
* Represents a compensation plan.
44