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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
/X/ Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 for the fiscal year ended December 31, 1997 or
/ / Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from to
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Commission file Number 0-7818
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INDEPENDENT BANK CORPORATION
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(Exact name of Registrant as specified in its charter)
MICHIGAN 38-2032782
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(State or other jurisdiction of (I.R.S. employer
incorporation) identification no.)
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
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $1.00 Par Value
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(Title of class)
9.25% Cumulative Trust Preferred Securities, $25.00 Liquidation Amount
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(Title of class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
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State the aggregate market value of the voting stock held by non-affiliates of
the Registrant. (For this purpose only, the affiliates of the Registrant have
been assumed to be the executive officers and directors of the Registrant and
their associates.)
Common Stock, $1.00 Par Value - $168,573,923
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(Based on $40.25 per common share, the last reported sales price on the Nasdaq
National Market tier of the Nasdaq Stock Market on March 17, 1998. Reference is
made to Part II, Item 5 for further information).
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date.
Common stock, $1.00 par value - 4,621,631 shares at March 17, 1998
Documents incorporated by reference
Portions of the Registrant's definitive proxy statement, and appendix thereto
dated March 13, 1998, relating to its April 21, 1998 Annual Meeting of
Shareholders are incorporated by reference into Part II and Part III of this
form.
The Exhibit Index appears on Page 24
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Included or incorporated by reference in this Form 10-K are certain
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. Such forward-looking statements are based upon the beliefs of the
Registrant's management as well as on assumptions made by and information
currently available to the Registrant at the time such statements were made.
Actual results could differ materially from those included in such
forward-looking statements as a result of, among other things, the factors
included in or incorporated by reference in this Report, general and certain
economic and business factors, some of which may be beyond the control of the
Registrant. Investors are cautioned that all forward-looking statements involve
risks and uncertainty.
PART I
ITEM 1. BUSINESS
Independent Bank Corporation (the "Registrant") was incorporated under the laws
of the State of Michigan on September 17, 1973, for the purpose of becoming a
bank holding company. The Registrant is registered under the Bank Holding
Company Act of 1956, as amended, and owns the outstanding stock of four banks
(the "Banks") which are all organized under the laws of the State of Michigan.
Aside from the stock of the Banks, the Registrant has no other substantial
assets. The Registrant conducts no business except for the provision of certain
management and operational services to the Banks, the collection of fees and
dividends from the Banks and the payment of dividends to the Registrant's
shareholders. Certain employee retirement plans (including an employee stock
ownership plan and a deferred compensation plan) as well as health and other
insurance programs have been established by the Registrant. The proportional
costs of these plans are borne by each of the Banks and their respective
subsidiaries.
The Registrant and the Banks have no material patents, trademarks, licenses or
franchises except the corporate franchises of the Banks which permit them to
engage in commercial banking pursuant to Michigan law.
The following table shows each of the Banks and their total loans and deposits
as of December 31, 1997:
Main
Office Total Total
Bank Location Deposits Loans
---- -------- -------- -----
Independent Bank Ionia $250,738,000 $241,808,000
Independent Bank
West Michigan Rockford 151,006,000 206,991,000
Independent Bank
South Michigan Leslie 111,126,000 126,799,000
Independent Bank
East Michigan Caro 191,139,000 190,334,000
Independent Bank (formerly First Security Bank) affiliated with the Registrant
on June 1, 1974. Independent Bank consolidated with North Bank, the sole banking
subsidiary of North Bank Corporation ("NBC") acquired by the Registrant
effective May 31, 1996. On that date NBC had total assets of $152,000,000.
Independent Bank West Michigan is the result of a merger in 1985 of the First
State Bank of Newaygo (acquired December 16, 1974), the Western State Bank,
Howard City (acquired February 7, 1977), and the Bank of Rockford (organized by
the Registrant as a new bank on August 18, 1975).
Independent Bank South Michigan is the result of a merger in 1985 of the Peoples
Bank of Leslie (acquired February 16, 1981) and the Olivet State Bank (acquired
on October 16, 1979).
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ITEM 1. BUSINESS (Continued)
Independent Bank East Michigan is the result of the consolidation of the former
American Home Bank (acquired October 8, 1993), Pioneer Bank (acquired October
15, 1993) and The Kingston State Bank (acquired March 7, 1994). On December 13,
1996 Independent Bank East Michigan purchased eight offices from First of
America Bank--Michigan N.A. with deposits and loans of $121,900,000 and
$22,100,000, respectively.
On November 7, 1996, the Registrant formed IBC Capital Finance, a Delaware
statutory business trust ("IBC Capital"). IBC Capital's business and affairs are
conducted by its property trustee, a Delaware trustee, and three individual
administrative trustees who are employees or officers of or affiliated with the
Registrant. IBC Capital exists for the sole purposes of selling and issuing its
preferred securities and common securities, using the proceeds from the sale of
those securities to acquire subordinated debentures issued by the Registrant and
certain related services. As a result, the sole assets of IBC Capital are the
subordinated debentures of the Registrant.
The Banks transact business in the single industry segment of commercial
banking. Most of the Banks' offices provide full service lobby and drive-in
services in the communities which they serve. Automatic teller machines are also
provided at most locations.
The Banks' activities cover all phases of commercial banking, including checking
and savings accounts, commercial and agricultural lending, direct and indirect
consumer financing, mortgage lending and deposit box services. The Banks also
offer title insurance services through a separate subsidiary. The Banks do not
offer trust services. The principal markets are the rural and suburban
communities across lower Michigan that are served by the banks' branch networks.
The local economies of the communities served by the Banks are relatively stable
and reasonably diversified. The Banks serve their markets through their four
main offices and a total of 54 branch and 9 loan production offices.
Banking is highly competitive. The Banks compete with other commercial banks,
savings and loan associations, credit unions, mortgage banking companies,
securities brokerage companies, insurance companies, and money market mutual
funds. Many of these competitors have substantially greater resources than the
Registrant and the Banks and offer certain services that the Registrant and
Banks do not currently provide. Such competitors may also have greater lending
limits than the Banks. The number of competitors may increase as a result of the
easing of restrictions on interstate banking effected under the Riegle-Neal
Interstate Banking and Branching Efficiency Act of 1994 (the "Riegle-Neal Act").
In addition, non-bank competitors are generally not subject to the extensive
regulations applicable to the Registrant and the Banks.
Price (the interest charged on loans and/or paid on deposits) remains a
principal means of competition within the financial services industry. The Banks
also compete on the basis of service and convenience, utilizing the strengths
and benefits of the Registrant's decentralized structure to providing financial
services.
The principal sources of revenue, on a consolidated basis, are interest and fees
on loans, other interest income and non-interest income. The sources of income
for the three most recent years are as follows:
1997 1996 1995
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Interest and fees on loans 76.6% 76.5% 76.1%
Other interest income 13.5 15.0 16.3
Non-interest income 9.9 8.5 7.6
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100.0% 100.0% 100.0%
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As of December 31, 1997, the Registrant and the Banks had 507 full-time
employees and 201 part-time employees.
Supervision and Regulation
The following is a summary of certain statutes and regulations affecting the
Registrant and the Banks. This summary is qualified in its entirety by reference
to the particular statutes and regulations. A change in applicable laws or
regulations may have a material effect on the Registrant, the Banks and the
businesses of the Registrant and the Banks.
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ITEM 1. BUSINESS (Continued)
General
Financial institutions and their holding companies are extensively regulated
under federal and state law. Consequently, the growth and earnings performance
of the Registrant and the Banks can be affected not only by management decisions
and general and local economic conditions, but also by the statutes administered
by, and the regulations and policies of, various governmental regulatory
authorities. The effect of such statutes, regulations and policies and any
changes thereto can be significant and cannot be predicted.
The system of supervision and regulation applicable to the Registrant and the
Banks establishes a comprehensive framework for their respective operations and
is intended primarily for the protection of the Federal Deposit Insurance
Corporation's (the "FDIC") deposit insurance funds, the depositors of the Banks,
and the public, rather than the shareholders of the Registrant. Federal law and
regulations, including provisions added by the Federal Deposit Insurance
Corporation Improvement Act of 1991 ("FDICIA") and regulations promulgated
thereunder, establish supervisory standards applicable to the lending activities
of the Banks, including internal controls, credit underwriting, loan
documentation, and loan-to-value ratios for loans secured by real property.
The Registrant
General. The Registrant is a bank holding company and, as such, is registered
with, and subject to regulation by, the Board of Governors of the Federal
Reserve System (the "Federal Reserve") under the Bank Holding Company Act, as
amended (the "BHCA"). Under the BHCA, the Registrant is subject to periodic
examination by the Federal Reserve, and is required to file periodic reports of
its operations and such additional information as the Federal Reserve may
require.
In accordance with Federal Reserve policy, a bank holding company is expected to
act as a source of financial strength to its subsidiary banks and to commit
resources to support the subsidiary banks in circumstances where the bank
holding company might not do so absent such policy. In addition, if the
Commissioner of the Michigan Financial Institutions Bureau (the "Commissioner")
deems a bank's capital to be impaired, the Commissioner may require a bank to
restore its capital by special assessment upon a bank holding company, as the
bank's sole shareholder. If the bank holding company were to fail to pay such
assessment, the directors of that bank would be required, under Michigan law, to
sell the shares of that bank stock owned by the bank holding company to the
highest bidder at either public or private auction and use the proceeds of the
sale to restore the bank's capital.
Any capital loans by a bank holding company to a subsidiary bank are subordinate
in right of payment to deposits and to certain other indebtedness of such
subsidiary bank. In the event of a bank holding company's bankruptcy, any
commitment by the bank holding company to a federal bank regulatory agency to
maintain the capital of a subsidiary bank will be assumed by the bankruptcy
trustee and entitled to a priority of payment.
Investments and Activities. Under the BHCA, bank holding companies are
prohibited, with certain limited exceptions, from engaging in activities other
than those of banking or of managing or controlling banks and from acquiring or
retaining direct or indirect ownership or control of voting shares or assets of
any company which is not a bank or bank holding company, other than subsidiary
companies furnishing services to or performing services for its subsidiaries,
and other subsidiaries engaged in activities which, by the Federal Reserve's
determination, are closely related to banking or managing or controlling banks.
In general, any direct or indirect acquisition by a bank holding company of any
voting shares of any bank which would result in the bank holding company's
direct or indirect ownership or control of more than 5% of any class of voting
shares of such bank, and any merger or consolidation of the bank holding company
with another bank holding company, will require the prior written approval of
the Federal Reserve under the BHCA. In acting on such applications, the Federal
Reserve must consider various statutory factors. Among others, such statutory
factors include the effect of the proposed transaction on competition in
relevant geographic and product markets, and each party's financial condition,
managerial resources, and record of performance under the Community Reinvestment
Act.
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ITEM 1. BUSINESS (Continued)
In addition and subject to certain exceptions, the Change in the Bank Control
Act ("Control Act") and regulations promulgated thereunder by the Federal
Reserve, require any person acting directly or indirectly, or through or in
concert with one or more persons, to give the Federal Reserve 60 days' written
notice before acquiring control of a bank holding company. Transactions which
are presumed to constitute the acquisition of control include the acquisition of
any voting securities of a bank holding company having securities registered
under Section 12 of the Securities Exchange Act of 1934, as amended, if, after
the transaction, the acquiring person (or persons acting in
concert) owns, controls or holds with power to vote 25% or more of any class of
voting securities of the institution. The acquisition may not be consummated
subsequent to such notice if the Federal Reserve issues a notice within 60 days,
or within certain extensions of such period, disapproving the same.
The merger or consolidation of an existing bank subsidiary of a bank holding
company with another bank, or the acquisition by such a subsidiary of the assets
of another bank, or the assumption of the deposit and other liabilities by such
a subsidiary requires the prior written approval of the responsible Federal
depository institution regulatory agency under the Bank Merger Act, based upon a
consideration of statutory factors similar to those outlined above with respect
to the BHCA. In addition, in certain cases an application to, and the prior
approval of, the Commissioner under Michigan banking laws, may be required.
With certain limited exceptions, the BHCA prohibits bank holding companies from
acquiring direct or indirect ownership or control of voting shares or assets of
any company other than a bank, unless the company involved is engaged solely in
one or more activities which the Federal Reserve has determined to be closely
related to banking or managing or controlling banks. The Economic Growth and
Regulatory Paperwork Reduction Act of 1996 ("EGRPRA") streamlined the nonbanking
activities application process for well capitalized and well managed bank
holding companies.
Capital Requirements. The Federal Reserve uses capital adequacy guidelines in
its examination and regulation of bank holding companies. If capital falls below
minimum guidelines, a bank holding company may, among other things, be denied
approval to acquire or establish additional banks or non-bank businesses.
The Federal Reserve's capital guidelines establish the following minimum
regulatory capital requirements for bank holding companies: (i) a capital
leverage requirement expressed as a percentage of total assets, (ii) a
risk-based requirement expressed as a percentage of total risk-weighted assets,
and (iii) a Tier 1 leverage requirement expressed as a percentage of total
assets. The capital leverage requirement consists of a minimum ratio of total
capital to total assets of 6%, with an expressed expectation that banking
organizations generally should operate above such minimum level. The risk-based
requirement consists of a minimum ratio of total capital to total risk-weighted
assets of 8%, of which at least one-half must be Tier 1 capital (which consists
principally of shareholders' equity). The Tier 1 leverage requirement consists
of a minimum ratio of Tier 1 capital to total assets, less goodwill, of 3% for
the most highly rated companies, with minimum requirements of 4% to 5% for all
others.
The risk-based and leverage standards presently used by the Federal Reserve are
minimum requirements, and higher capital levels will be required if warranted by
the particular circumstances or risk profiles of individual banking
organizations.
FDICIA requires the federal bank regulatory agencies biennially to review
risk-based capital standards to ensure that they adequately address interest
rate risk, concentration of credit risk and risks from non-traditional
activities. In 1995, the Federal bank regulatory agencies have also adopted
regulations requiring as part of the assessment of an institution's capital
adequacy the consideration of identified concentrations of credit risks and the
exposure of the institution to a decline in the value of its capital due to
changes in interest rates.
Dividends. Subsidiary banks are subject to statutory restrictions on their
ability to pay dividends to a bank holding company. In its policy statement, the
Federal Reserve expressed its view that a bank holding company experiencing
earnings weaknesses should not pay cash dividends exceeding its net income or
which could only be funded in ways that weakened the bank holding company's
financial health. Additionally, the Federal Reserve possesses
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enforcement powers over bank holding companies and their non-bank subsidiaries
to prevent or remedy actions that represent unsafe or unsound practices or
violations of applicable statutes and regulations. Among these powers is the
ability to proscribe the payment of dividends by banks and bank holding
companies. Similar
ITEM 1. BUSINESS (Continued)
enforcement powers over subsidiary banks are possessed by the FDIC. The "prompt
corrective action" provisions of FDICIA impose further restrictions on the
payment of dividends by insured banks which fail to meeting specified capital
levels and, in some cases, impose similar restrictions on their parent bank
holding companies.
In addition to the restrictions on dividends imposed by the Federal Reserve,
the Michigan Business Corporation Act provides that dividends may be legally
declared or paid only if after the distribution a corporation can pay its debts
as they come due in the usual course of business and its total assets equal or
exceed the sum of its liabilities plus the amount that would be needed to
satisfy the preferential rights upon dissolution of any holders of preferred
stock whose preferential rights are superior to those receiving the
distribution. The Registrant does not have any holders of its preferred stock.
The Banks
General. The Banks are Michigan banking corporations and their deposit accounts
are principally insured by the Bank Insurance Fund ("BIF") of the FDIC. As
BIF-insured Michigan chartered banks, the Banks are subject to the examination,
supervision, reporting and enforcement requirements of the Commissioner, as the
chartering authority for Michigan banks, and the FDIC, as administrator of the
BIF.
Deposit Insurance. As FDIC-insured institutions, banks are required to pay
deposit insurance premium assessments to the FDIC. Pursuant to FDICIA, the FDIC
adopted a risk-based assessment system under which all insured depository
institutions are placed into one of nine categories and assessed insurance
premiums, based upon their level of capital and supervisory evaluation.
Institutions classified as well-capitalized and considered healthy pay the
lowest premium while institutions that are less than adequately capitalized and
considered of substantial supervisory concern pay the highest premium. The FDIC
has established the schedule of BIF-insurance assessments, ranging from 0% of
deposits for institutions in the highest category to .27% of deposits for
institutions in the lowest category.
Capital Requirements. FDICIA establishes five capital categories, and the
federal depository institution regulators, as directed by FDICIA, have adopted,
subject to certain exceptions, the following minimum requirements for each of
such categories:
TOTAL TIER 1
RISK-BASED RISK-BASED
CAPITAL RATIO CAPITAL RATIO LEVERAGE RATIO
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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, 1997, each of the Banks' ratios exceeded minimum requirements
for the well-capitalized category. See note 16 to the 1997 consolidated
financial statements.
FDICIA requires the federal depository institution regulators to take prompt
corrective action with respect of depository institutions that do not meet
minimum capital requirements. The scope and degree of regulatory intervention is
linked to the capital category to which a depository institution is assigned. A
depository institution may be reclassified to a lower category than is indicated
by its capital position if the appropriate federal depository institution
regulatory agency determines the institution to be otherwise in an unsafe or
unsound condition or to be engaged in an unsafe or unsound practice.
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Commissioner Assessments. Michigan banks are required to pay supervisory fees to
the Commissioner to fund the operations of the Michigan Financial Institutions
Bureau. The amount of supervisory fees paid by a bank is based upon the bank's
total assets, as reported to the Commissioner.
ITEM 1. BUSINESS (Continued)
FICO Assessments. Pursuant to federal legislation enacted September 30, 1996,
the banks, as members of BIF, are subject to assessments to cover the payments
on outstanding obligations of the financing corporation ("FICO"). FICO was
created in 1987 to finance the recapitalization of the Federal Savings and Loan
Insurance Corporation, the predecessor to the FDIC's Savings Association
Insurance Fund (the "SAIF), which insures the deposits of thrift institutions.
Until January 1, 2000, the FICO assessments made against BIF members may not
exceed 20 percent of the amount of FICO assessments made against SAIF members.
Currently, SAIF members pay FICO assessments at a rate equal to approximately
0.063 percent of deposits, while BIF members pay FICO assessments at a rate
equal to approximately 0.013 percent of deposits. Between January 1, 2000, and
the maturity of the outstanding FICO obligations in 2019, BIF members and SAIF
members will share the cost of the interest on the FICO bonds on a pro rata
basis. It is estimated that FICO assessments during this period will be less
than 0.025 percent of deposits.
Dividends. Under Michigan law, banks are restricted as to the maximum amount of
dividends they may pay on their common stock. A Michigan state bank may not
declare or pay a dividend unless the bank will have a surplus amounting to at
least 20% of its capital after the payment of the dividend.
FDICIA generally prohibits a depository institution from making any capital
distribution or paying any management fee to its holding company if the
depository institution would thereafter be undercapitalized. The FDIC may also
prevent an insured bank from paying dividends if the bank is in default of
payment of any assessment due to the FDIC. Payment of dividends by a bank may be
prevented by the applicable federal regulatory authority if such payment is
determined, by reason of the financial condition of such bank, to be an unsafe
and unsound banking practice.
Insider Transactions. Banks are subject to certain restrictions imposed by the
Federal Reserve Act on "covered transactions" with the Registrant or its
subsidiaries. Certain limitations and reporting requirements are also placed on
extensions of credit by banks to their directors and officers, to directors and
officers of bank holding company's and their subsidiaries, to principal
shareholders of the Registrant, and to "related interests" of such directors,
officers and principal shareholders.
Safety and Soundness Standards. Pursuant to FDICIA the FDIC adopted guidelines
to establish operational and managerial standards to promote the safety and
soundness of federally insured depository institutions. The guidelines establish
standards for internal controls, information systems, internal audit systems,
loan documentation, credit underwriting, interest rate exposure, asset growth,
and compensation, fees and benefits. The guidelines prescribe the goals to be
achieved in each area, and each institution is responsible for establishing its
own procedures to achieve those goals. If an institution fails to comply with
any of the standards set forth in the guidelines, the institution's primary
federal regulator may require the institution to submit a plan for achieving and
maintaining compliance.
State Bank Activities. Under FDICIA, as implemented by final regulations adopted
by the FDIC, FDIC-insured state banks are prohibited, subject to certain
exceptions, from making or retaining equity investments of a type, or in an
amount, that are not permissible for a national bank. FDICIA, as implemented by
FDIC regulations, also prohibits FDIC-insured state banks and their
subsidiaries, subject to certain exceptions, from engaging as a principal in any
activity that is not permitted for a national bank or its subsidiary,
respectively, unless the bank meets, and continues to meet, its minimum
regulatory capital requirements and the FDIC determines the activity would not
pose a significant risk to the deposit insurance fund of which the bank is a
member. Impermissible investments and activities must be otherwise divested or
discontinued within certain time frames set by the FDIC in accordance with
FDICIA.
Consumer Banking. The Banks' business includes making a variety of types of
loans to individuals. In making these loans, the Banks are subject to State
usury and regulatory laws and to various Federal statutes, such as the Equal
Credit Opportunity Act, Fair Credit Reporting Act, Truth in Lending Act, Real
Estate Settlement Procedures Act, and Home Mortgage Disclosure Act, and the
regulations promulgated thereunder. In receiving deposits, the Banks
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are subject to extensive regulation under state and federal law and
regulations, including the Truth in Savings Act, the Expedited Funds
Availability Act, the Bank Secrecy Act, the Electronic Funds Transfer Act, and
the Federal Deposit Insurance Act. Violation of these laws could result in the
imposition of significant damages and fines upon the Banks and their respective
directors and officers.
ITEM 1. BUSINESS (Continued)
Other. The Riegle-Neal Act allows bank holding companies to acquire banks
located in any state in the United States without regard to geographic
restrictions or reciprocity requirements imposed by state law, but subject to
certain conditions, including limitations on the aggregate amount of deposits
that may be held by the acquiring holding company and all of its insured
depository institution affiliates. The Riegle-Neal Act also allows banks to
establish interstate branch networks through acquisitions of other banks,
subject to certain conditions that include limitations on the aggregate amount
of deposits that may be held by the surviving bank and all of its insured
depository institution affiliates. The establishment of de novo interstate
branches or the acquisition of individual branches of a bank in another state
(rather than the acquisition of an out-of-state bank in its entirety) is allowed
by the Riegle-Neal Act only if specifically authorized by state law. The
legislation allowed individual states to "opt-out" of certain provisions of the
Riegle-Neal Act if appropriate legislation was enacted prior to June 1, 1997.
Michigan did not opt out of the Riegle-Neal Act, and now permits both U.S. and
non-U.S. banks to establish branch offices in Michigan. The Michigan Banking
Code permits, in appropriate circumstances and with the approval of the
Commissioner, (i) the acquisition of all or substantially all of the assets of a
Michigan-chartered bank by an FDIC-insured bank, savings bank, or savings and
loan association located in another state, (ii) the acquisition by a
Michigan-chartered bank of all or substantially all of the assets of an
FDIC-insured bank, savings bank or savings and loan association located in
another state, (iii) the consolidation of one or more Michigan-chartered banks
and FDIC-insured banks, savings banks or savings and loan associations located
in other states having laws permitting such consolidation, with the resulting
organization chartered by Michigan, (iv) the establishment by a foreign bank,
which has not previously designated any other state as its home state under the
International Banking Act of 1978, of branches located in Michigan, and (v) the
establishment or acquisition of branches in Michigan by FDIC-insured banks
located in other states, the District of Columbia or U.S. territories or
protectorates having laws permitting Michigan-chartered banks to establish
branches in such jurisdiction. Further, the Michigan Banking Code permits, upon
written notice to the Commissioner, (i) the acquisition by a Michigan-chartered
bank of one or more branches (not comprising all or substantially all of the
assets) of an FDIC-insured bank, savings bank or savings and loan association
located in another state, the District of Columbia, or a U.S. territory or
protectorate, (ii) the establishment by Michigan-chartered banks of branches
located in other states, the District of Columbia, or U.S. territories or
protectorates, and (iii) the consolidation of one or more Michigan-chartered
banks and FDIC-insured banks, savings banks or savings and loan associations
located in other states, with the resulting organization chartered by one of
such other states.
In addition to the authorization of interstate banking discussed above, Michigan
law permits banks to consolidate on a state-wide basis and to operate the
offices of merged banks as branches of a surviving bank. Also, with the written
approval of the Commissioner, banks may relocate their main office to any
location in the state, establish and operate branch banks anywhere in the state
and contract with other banks to act as branches thereof. To better serve their
customers, the Banks have entered into an interbank branching agreements,
whereby each of the Banks may act as a branch of the other three banks.
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ITEM 1. BUSINESS -- STATISTICAL DISCLOSURE
I. (A) DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY;
(B) INTEREST RATES AND INTEREST DIFFERENTIAL
The following table sets forth average balances for major categories of
interest earning assets and interest bearing liabilities, the interest earned
(on a tax equivalent basis) or paid on such amounts, and the average interest
rates earned or paid thereon for each of the years ended December 31,:
1997 1996 1995
------------------------- ------------------------------- --------------------------------
Average Yield/ Average Yield/ Average Yield/
ASSETS Balance Interest Rate Balance Interest Rate Balance Interest Rate
- ------ ------- -------- ---- ------- -------- ---- ------- -------- ----
(dollars in thousands)
Loans--all domestic $689,166 $65,478 9.50% $510,434 $49,478 9.69% $382,644 $37,654 9.84%
Securities
Taxable 115,046 7,922 6.89 100,945 6,710 6.65 93,064 5,919 6.36
Tax-exempt 52,139 4,423 8.48 39,393 3,433 8.72 31,516 2,914 9.25
Other investments 13,145 999 7.60 13,946 971 6.96 6,153 421 6.84
-------- ------- -------- ------- -------- -------
Interest earning 869,496 78,822 9.07 664,718 60,592 9.12 513,377 46,908 9.14
assets -------- -------- ----
Cash and due from
banks 26,251 21,573 16,091
Other assets, net 41,395 21,038 14,115
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Total assets $937,142 $707,329 $543,583
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LIABILITIES
Savings and NOW $331,959 8,480 2.55 $250,977 6,116 2.44 $217,721 5,515 2.53
Time deposits 263,046 14,134 5.37 187,117 10,022 5.36 141,292 6,955 4.92
Long-term debt 8,245 602 7.30 4,875 335 6.87
Other borrowings 187,519 11,559 6.16 144,703 8,340 5.76 89,048 5,430 6.10
-------- ------- -------- ------- -------- -------
Interest bearing
liabilities 790,769 34,775 4.40 587,672 24,813 4.22 448,061 17,900 4.00
------- ------- -------
Demand deposits 81,191 61,161 46,539
Other liabilities 9,444 8,597 5,296
Shareholders' equity 55,738 49,899 43,687
-------- -------- --------
Total liabilities and
shareholders'
equity $937,142 $707,329 $543,583
======== ======== ========
Net interest income $44,047 $35,779 $29,008
======= ======= =======
Net interest income as
a percent of
earning assets 5.07% 5.38% 5.65%
==== ==== ====
(1) Average loans outstanding includes the daily average balance of
non-performing loans. Interest on loans does not include additional
interest of approximately $252,000, $183,000 and $199,000 for 1997, 1996
and 1995, respectively, which would have been accrued based on the original
terms of such non-performing loans compared with the interest that was
actually recorded. Interest income on loans includes net origination fees
of $4,001,000 in 1997, $3,331,000 in 1996 and $2,702,000 in 1995.
(2) Interest on tax-exempt securities has been adjusted to reflect preferential
taxation. The adjustment assumes a marginal tax rate of 35% in 1997 and 34%
in 1996 and 1995. For purposes of this analysis, tax-exempt loans are
included in tax-exempt securities.
8
10
ITEM 1. BUSINESS -- STATISTICAL DISCLOSURE (Continued)
I. (C) INTEREST RATES AND DIFFERENTIAL
The following table summarizes the changes in interest income (on a tax
equivalent basis) and interest expense resulting from changes in volume and
changes in rates:
1997 Compared to 1996 1996 Compared to 1995
---------------------------------- ----------------------------------
Volume Rate Net Volume Rate Net
------ ---- --- ------ ---- ---
(in thousands)
Increase (decrease) in interest income (1)
Loans--all domestic $ 17,000 $ (1,000) $ 16,000 $ 12,395 $ (571) $ 11,824
Taxable securities 964 248 1,212 516 275 791
Tax-exempt securities (2) 1,083 (93) 990 695 (176) 519
Other investments (58) 86 28 542 8 550
-------- -------- -------- -------- -------- --------
Total interest income 18,989 (759) 18,230 14,148 (464) 13,684
-------- -------- -------- -------- -------- --------
Increase (decrease) in interest expense (1)
Savings and NOW 2,056 308 2,364 817 (216) 601
Time deposits 4,080 32 4,112 2,412 655 3,067
Long-term debt 245 22 267 335 335
Other borrowings 2,607 612 3,219 3,223 (313) 2,910
-------- -------- -------- -------- -------- --------
Total interest expense 8,988 974 9,962 6,787 126 6,913
-------- -------- -------- -------- -------- --------
Net interest income $ 10,001 $ (1,733) $ 8,268 $ 7,361 $ (590) $ 6,771
======== ======== ======== ======== ======== ========
(1) The change in interest due to both volume and rate has been allocated to
volume or rate changes in proportion to the relationship of the absolute
dollar amounts of the change in each.
(2) Interest on tax-exempt securities has been adjusted to reflect preferential
taxation. The adjustment assumes a marginal tax rate of 35% in 1997 and 34%
in 1996 and 1995.
II. INVESTMENT PORTFOLIO
(A) The following table sets forth the book value of securities at December
31:
1997 1996 1995
--------- -------- --------
(in thousands)
Held to maturity
U.S. Government agencies $ 997 $ 1,484 $ 2,559
States and political subdivisions 18,353 21,192 20,142
Mortgage-backed securities 2,785 3,688 4,487
Other securities 390 390 718
-------- -------- -------
Total $ 22,525 $ 26,754 $27,906
======== ======== =======
Available for sale
U.S. Treasury $ 7,105 $ 27,722 $23,272
U.S. Government agencies 15,492 21,159 6,623
States and political subdivisions 26,849 21,854 9,290
Mortgage-backed securities 53,147 57,528 37,722
Other securities 8,176 8,589 10,646
-------- -------- -------
Total $110,769 $136,852 $87,553
======== ======== =======
9
11
ITEM 1. BUSINESS -- STATISTICAL DISCLOSURE (Continued)
II. INVESTMENT PORTFOLIO (Continued)
(B) The following table sets forth contractual maturities of securities at
December 31, 1997 and the weighted average yield of such securities:
Maturing Maturing
Maturing After One After Five Maturing
Within But Within But Within After
One Year Five Years Ten Years Ten Years
------------------- ------------------ ------------------- -------------------
Amount Yield Amount Yield Amount Yield Amount Yield
------ ----- ------ ----- ------ ----- ------ -----
(dollars in thousands)
Held to maturity
U.S. Government agencies $ 997 7.53%
States and political
subdivisions $1,466 8.63% $12,139 9.45% $3,811 9.57% 937 9.09
Mortgage-backed securities --
guaranteed or issued by
U.S. Government agencies 469 7.29 1,886 7.45 430 8.83
Other securities 200 5.45 190 6.50
------ ------- ------ ------
Total $2,135 7.95% $14,215 9.01% $4,241 9.35% $1,934 8.20%
====== ======= ====== ======
Tax equivalent adjustment
for calculations of yield $44 $402 $128 $30
=== ==== ==== ===
Available for sale
U.S. Treasury $ 7,105 6.27%
U.S. Government agencies 1,000 6.00 $14,492 6.59%
States and political
subdivisions $1,433 8.20% 7,044 9.40 10,008 8.66 $ 8,364 8.26%
Mortgage backed securities
Guaranteed or issued by U.S.
Government agencies 1,944 7.57 34,765 7.17 2,717 6.90 8,337 7.18
Other mortgage-backed
securities 722 7.61 4,662 6.75
Other securities 5,201 6.68 2,975 6.88
------ ------- ------- -------
Total $4,099 7.75% $59,777 7.21% $27,217 7.33% $19,676 7.54%
====== ======= ======= =======
Tax equivalent adjustment
for calculations of yield $41 $232 $303 $242
=== ==== ==== ====
The rates set forth in the tables above for obligations of state and political
subdivisions have been restated on a tax equivalent basis assuming a marginal
tax rate of 35% in 1997 and 34% in 1996 and 1995. The amount of the adjustment
is as follows:
Tax-Exempt Rate on Tax
Held to maturity Rate Adjustment Equivalent Basis
- ----------------- ----------- ---------- ----------------
Under 1 year 5.61% 3.02% 8.63%
1-5 years 6.14 3.31 9.45
5-10 years 6.22 3.35 9.57
After 10 years 5.91 3.18 9.09
Available for sale
Under 1 year 5.33% 2.87% 8.20%
1-5 years 6.11 3.29 9.40
5-10 years 5.63 3.03 8.66
After 10 years 5.37 2.89 8.26
10
12
ITEM 1. BUSINESS -- STATISTICAL DISCLOSURE (Continued)
III. LOAN PORTFOLIO
(A) The following table sets forth loans outstanding at December 31:
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(in thousands)
Loans held for sale $ 21,754 $ 11,583 $ 16,047 $ 5,933 $ 6,376
Real estate mortgage 416,689 331,150 225,900 166,794 136,579
Commercial and agricultural 199,098 164,304 108,879 103,984 91,655
Installment 128,391 114,250 83,265 65,947 54,033
-------- -------- -------- -------- --------
Total Loans $765,932 $621,287 $434,091 $342,658 $288,643
======== ======== ======== ======== ========
The loan portfolio is periodically and systematically reviewed and the
results of these reviews are reported to the Boards of Directors of the
Registrant and the Banks. The purpose of these reviews is to assist in assuring
proper loan documentation, to provide for the early identification of potential
problem loans (which enhances collection prospects) and to evaluate the adequacy
of the allowance for loan losses.
(B) The following table sets forth scheduled loan repayments (excluding 1-4
family residential mortgages and installment loans) at December 31, 1997:
Due
Due After One Due
Within But Within After
One Year Five Years Five Years Total
-------- ---------- ---------- -----
(in thousands)
Real estate mortgage $ 13,977 $ 27,932 $ 37,109 $ 79,018
Commercial and agricultural 95,574 88,305 15,219 199,098
-------- -------- -------- --------
Total $109,551 $116,237 $ 52,328 $278,116
======== ======== ======== ========
The following table sets forth loans due after one year which have
predetermined (fixed) interest rates and/or adjustable (variable) interest rates
at December 31, 1997:
Fixed Variable
Rate Rate Total
-------- -------- ------
(in thousands)
Due after one but within five years $ 96,758 $19,479 $116,237
Due after five years 37,855 14,473 52,328
-------- ------- --------
Total $134,613 $33,952 $168,565
======== ======= ========
11
13
ITEM 1. BUSINESS -- STATISTICAL DISCLOSURE (Continued)
III. LOAN PORTFOLIO (Continued)
(C) The following table sets forth non-performing loans at December 31:
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(in thousands)
(a) Loans accounted for on a
non-accrual basis (1, 2) $3,298 $1,711 $1,886 $2,052 $1,707
(b) Aggregate amount of loans
ninety days or more past due
(excludes loans in (a) above) 1,904 1,994 427 254 408
(c) Loans not included above which
are "troubled debt restructurings"
as defined in Statement of Financial
Accounting Standards No. 15 (2) 184 197 247 528 1,098
------ ------ ------ ------ ------
Total non-performing loans $5,386 $3,902 $2,560 $2,834 $3,213
====== ====== ====== ====== ======
(1) The accrual of interest income is discontinued when a loan becomes 90 days
past due and/or the borrower's capacity to repay the loan and collateral
values appear insufficient. Non-accrual loans may be restored to accrual
status when interest and principal payments are current and the loan
appears otherwise collectible.
(2) Interest in the amount of $442,000 would have been earned in 1997 had loans
in categories (a) and (c) remained at their original terms, however, only
$190,000 was included in interest income for the year with respect to these
loans.
Other loans of concern identified by the loan review department which are
not included as non-performing totaled approximately $1,000,000 at December 31,
1997. These loans involve circumstances which have caused management to place
increased scrutiny on the credits and may, in some instances, represent an
increased risk of loss to the Banks.
At December 31, 1997, there was no concentration of loans exceeding 10% of
total loans which is not already disclosed as a category of loans in this
section "Loan Portfolio" (Item III(A)).
There were no other interest bearing assets at December 31, 1997, that
would be required to be disclosed above (Item III(C)), if such assets were
loans.
There were no foreign loans outstanding at December 31, 1997.
12
14
ITEM 1. BUSINESS -- STATISTICAL DISCLOSURE (Continued)
IV. SUMMARY OF LOAN LOSS EXPERIENCE
(A) The following table sets forth loan balances and summarizes the changes
in the allowance for loan losses for each of the years ended December 31:
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(dollars in thousands)
Loans outstanding at the end of
the year (net of unearned fees) $765,932 $621,287 $434,091 $342,658 $288,643
======== ======== ======== ======== ========
Average loans outstanding for
the year (net of unearned fees) $689,166 $510,434 $382,644 $294,968 $259,334
======== ======== ======== ======== ========
Balance of allowance for loan losses
at beginning of year $6,960 $5,243 $5,054 $5,053 $4,023
------ ------ ------ ------ ------
Loans charged-off
Real estate 78 24 24 14 38
Commercial and agricultural 262 66 113 311 306
Installment 1,285 1,046 575 546 370
----- ------ ------ ------ ------
Total loans charged-off 1,625 1,136 712 871 714
----- ------ ------ ------ ------
Recoveries of loans previously
charged-off
Real estate 1 8 28 6 11
Commercial and agricultural 149 138 115 151 156
Installment 435 294 122 242 164
--- ------ ------ --- ------
Total recoveries 585 440 265 399 331
--- ------ ------ --- ------
Net loans charged-off 1,040 696 447 472 383
Additions to allowance charged to
operating expense 1,750 1,233 636 473 657
Allowance on loans acquired 1,180 756
------ ------ ------ ------ ------
Balance at end of year $7,670 $6,960 $5,243 $5,054 $5,053
====== ====== ====== ====== ======
Net loans charged-off as a percent of
average loans outstanding for the year 0.15% 0.14% 0.12% 0.16% 0.15%
Allowance for loan losses as a
percent of loans outstanding at
the end of the year 1.00 1.12 1.21 1.48 1.75
The allowance for loan losses reflected above is a valuation allowance in
its entirety and the only allowance available to absorb future loan losses.
Further discussion of the provision and allowance for loan losses as well
as non-performing loans is presented in Management's Discussion and Analysis of
Financial Condition and Results of Operations, incorporated herein by reference
in Item 7, Part II of this report.
13
15
ITEM 1. BUSINESS -- STATISTICAL DISCLOSURE (Continued)
IV. SUMMARY OF LOAN LOSS EXPERIENCE (Continued)
(B) The Banks have allocated the allowance for loan losses to provide for
the possibility of losses being incurred within the categories of loans set
forth in the table below. The amount of the allowance that is allocated and the
ratio of loans within each category to total loans at December 31 follows:
1997 1996 1995
---- ---- ----
Percent Percent Percent
Allowance of Loans to Allowance of Loans to Allowance of Loans to
Amount Total Loans Amount Total Loans Amount Total Loans
-------------- ------------- -------------- ------------- -------------- -------------
(dollars in thousands)
Commercial and
agricultural $2,200 26.4% $2,176 26.4% $1,612 25.8%
Real estate
mortgage 322 56.8 257 55.2 162 55.0
Installment 892 16.8 834 18.4 597 19.2
Unallocated 4,256 3,693 2,872
------ ----- ------ ----- ------ -----
Total $7,670 100.0% $6,960 100.0% $5,243 100.0%
====== ===== ====== ===== ====== =====
1994 1993
---- ----
Percent Percent
Allowance of Loans to Allowance of Loans to
Amount Total Loans Amount Total Loans
-------------- ------------- -------------- -------------
(dollars in thousands)
Commercial and
agricultural $1,655 30.3% $2,222 31.8%
Real estate
mortgage 177 50.4 270 49.5
Installment 474 19.3 464 18.7
Unallocated 2,748 2,097
----- ----- ------ -----
Total $5,054 100.0% $5,053 100.0%
====== ===== ====== =====
V. DEPOSITS
The following table sets forth average deposit balances and the
weighted-average rates paid thereon for the years ended December 31:
1997 1996 1995
---- ---- ----
Average Average Average
Balance Rate Balance Rate Balance Rate
------- ---- ------- ---- ------- ----
(dollars in thousands)
Non-interest bearing demand $ 81,191 $ 61,161 $ 46,539
Savings and NOW 331,959 2.55% 250,977 2.44% 217,721 2.53%
Time deposits 263,046 5.37 187,117 5.36 141,292 4.92
-------- -------- --------
Total $676,196 3.34% $499,255 3.23% $405,552 3.08%
======== ======== ========
The following table summarizes time deposits in amounts of $100,000 or more
by time remaining until maturity as of December 31, 1997:
(in thousands)
Three months or less $24,375
Over three through six months 5,267
Over six months through one year 14,026
Over one year 8,937
-------
Total $52,605
=======
14
16
ITEM 1. BUSINESS -- STATISTICAL DISCLOSURE (Continued)
VI. RETURN ON EQUITY AND ASSETS
The ratio of net income to average shareholders' equity and to average
total assets, and certain other ratios, for the years ended December 31 follow:
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Net income as a percent of
Average common equity 16.01% 15.74% 15.59% 15.22% 15.21%
Average total assets 0.95 1.11 1.25 1.25 1.33
Dividends declared per share as a
percent of net income per share 36.79 36.76 37.20 34.78 25.58
Average shareholders' equity as a percent
of average total assets 5.95 7.05 8.04 8.22 8.72
Additional performance ratios are set forth in Selected Consolidated
Financial Data, incorporated herein by reference in Item 6, Part II of this
report. Any significant changes in the current trend of the above ratios are
reviewed in Management's Discussion and Analysis of Financial Condition and
Results of Operations, incorporated herein by reference in Item 7, Part II of
this report.
VII. SHORT-TERM BORROWINGS
Short-term borrowings are discussed in note 8 to the consolidated financial
statements incorporated herein by reference in Item 8, Part II of this report.
15
17
ITEM 2. PROPERTIES
The Registrant and the Banks operate a total of 69 facilities in Michigan. The
individual properties are not materially significant to the Registrants' or the
Banks' business or to the consolidated financial statements.
With the exception of the potential remodeling of certain facilities to provide
for the efficient use of work space or to maintain an appropriate appearance,
each property is considered reasonably adequate for current and anticipated
needs.
ITEM 3. LEGAL PROCEEDINGS
Due to the nature of their business, the Banks are often subject to numerous
legal actions. These legal actions, whether pending or threatened, arise through
the normal course of business and are not considered unusual or material.
Currently, no material legal procedures are pending which involve the Registrant
or the Banks.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
16
18
ADDITIONAL ITEM - EXECUTIVE OFFICERS
Executive officers of the Registrant are appointed annually by the Board of
Directors at the meeting of Directors following the Annual Meeting of
Shareholders. There are no family relationships among these officers and/or the
Directors of the Registrant nor any arrangement or understanding between any
officer and any other person pursuant to which the officer was elected.
The following sets forth certain information with respect to the Registrant's
executive officers and certain key officers of its subsidiaries (included for
information purposes only) as of December 31, 1997.
First elected
as an officer of
Name (Age) Position with Registrant the registrant
- ---------- ------------------------ --------------
Charles C. Van Loan (50) President, Chief Executive December, 1984
Officer and Director
William R. Kohls (40) Executive Vice President and May, 1985
Chief Financial Officer
Jeffrey A. Bratsburg (54) President and Chief Executive 1985
Officer - Independent Bank
West Michigan
Edward B. Swanson (44) President and Chief Executive 1989
Officer - Independent Bank
South Michigan
Michael M. Magee, Jr. (42) President and Chief Executive 1993
Officer - Independent Bank
Ronald L. Long (38) President and Chief Executive 1993
Officer - Independent Bank
East Michigan
Prior to being named President and Chief Executive Officer in 1993, Mr. Magee
was Executive Vice President of Independent Bank.
Prior to being named President and Chief Executive Officer in 1993, Mr. Long was
Vice President and Controller of the Registrant.
The President and Chief Executive Officer of each of the Registrant's subsidiary
banks serve as members of various committees of the Registrant.
17
19
PART II.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The information set forth under the caption "Quarterly Summary " on Page A-32 of
the Appendix to the Registrant's definitive proxy statement, dated March 13,
1998, relating to the April 21, 1998 Annual Meeting of Shareholders (as filed
with the commission and as filed as exhibit 13 to this report on Form 10-K) is
incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
The information set forth under the caption "Selected Consolidated Financial
Data" on Page A-12 of the Appendix to the Registrant's definitive proxy
statement, dated March 13, 1998, relating to the April 21, 1998 Annual Meeting
of Shareholders (as filed with the commission and as filed as exhibit 13 to this
report on Form 10-K) is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The information set forth under the caption "Management's Discussion and
Analysis of Financial Condition and Results of Operations" on pages A-2 through
A-10 of the Appendix to the Registrant's definitive proxy statement, dated March
13, 1998, relating to the April 21, 1998 Annual Meeting of Shareholders (as
filed with the commission and as filed as exhibit 13 to this report on Form
10-K) is incorporated herein by reference.
ITEM 7a. Quantitative and Qualitative Disclosures About Market Risk.
Asset/liability management. As a financial intermediary, the Registrant must
manage interest rate risk created by differences in the pricing characteristics
of the Banks' assets and funding sources. Options embedded in certain financial
instruments, including caps on adjustable-rate loans as well as borrowers'
rights to prepay fixed rate loans also entail interest rate risk.
The asset/liability management efforts of the Registrant and the Banks are
intended to identify and evaluate opportunities to structure the balance sheet
in a manner that is consistent with Management's mission to maintain profitable
financial leverage within established risk parameters. Management employs
simulation analyses to monitor the Banks' risk profiles and assess potential
changes in the Banks' net interest income and market value of portfolio equity
that may result from changes in interest rates. Such analyses further
incorporate assumptions relating to changes in the prepayment rates of certain
assets and liabilities. The magnitude of changes in net interest income and the
market value of portfolio equity under various levels of parallel market
interest rate changes is monitored by the asset/liability committees of the
Registrant and the Banks. During the year ended December 31, 1997, the changes
in net interest income and the market value of portfolio equity associated with
such changes in interest rates were within the policy limits established by the
Banks.
Derivative financial instruments may be employed to reduce the cost of alternate
funding sources while managing the Banks' exposure to changes in interest rates.
Interest rate caps, with a notional amount of $28,000,000, establish a maximum
cost of 6.97% on the associated short-term and variable rate borrowings, while
allowing borrowing costs to decline if market rates decrease. Interest rate
collars, with a notional amount of $10,000,000, establish a maximum cost of
6.42% and a minimum rate of 5.71% on the associated short-term and variable
rate borrowings.
Management's evaluation of various opportunities and alternate balance sheet
strategies carefully consider the likely impact on the Banks' risk profile as
well as the anticipated contribution to earnings. The marginal cost of alternate
funds is a principal consideration in the implementation of the Banks' balance
sheet management strategies, but such evaluations further consider interest rate
and liquidity risk as well as other relevant factors.
18
20
PART II.
Management has determined that the retention of 15- and 30-year fixed rate
mortgages is generally inconsistent with its goal to maintain profitable
leverage or the Banks' interest-rate risk profiles. Accordingly, the majority of
such loans are sold to mitigate exposure to changes in interest rates.
Generally, adjustable-rate and balloon real estate mortgage loans may be
profitable funded within established risk parameters and retention of such loans
has been a principal focus of the Banks' balance sheet management strategies.
The following table sets forth pricing characteristics of financial instruments
at December 31, 1997.
YEARS FAIR
1 2 3 4 5 5+ TOTAL VALUE YIELD
--------------------------------------------------------------------------------------------------
ASSETS(1,2) (dollars in thousands
Loans and loans held
for sale $397,809 $ 94,224 $82,741 $69,101 $26,313 $ 95,744 $765,932 $775,400 8.94%
Taxable securities 26,785 19,289 10,082 7,248 1,246 35,931 100,581 100,600 6.90
Tax-exempt securities 2,338 6,382 6,068 2,638 2,259 25,517 45,202 46,000 8.67
-------- -------- ------- ------- ------- -------- --------
Interest earning assets 426,932 119,895 98,891 78,987 29,818 157,192 911,715
-------- -------- ------- ------- ------- --------
Non-interest earning
assets 72,102
--------
Total assets $983,817
========
LIABILITIES AND SHARHOLDERS' EQUITY
Demand, savings and
NOW(3) 143,244 32,890 32,448 32,070 32,004 155,484 $428,140 $428,100 2.03%
Time deposits 176,794 58,117 18,430 8,519 5,001 5,479 272,340 274,000 5.47
Other borrowings 158,231 26,059 10,895 17,250 212,435 214,400 6.17
-------- -------- ------- ------- ------- -------- --------
Total deposits and other
borrowings 478,269 117,066 61,773 40,589 37,005 178,213 912,915
-------- -------- ------- ------- ------- --------
Shareholders' equity and
other liabilities 70,902
Total liabilities and --------
shareholders' equity $983,817
========
Caps and collars (38,000) 24,000 6,000 6,000 2,000
RATE SENSITIVITY GAP AND RATIOS
Gap for period $(13,337) $(21,171) $31,118 $32,398 $(9,187) $(21,021)
======== ======== ======= ======= ======= ========
Cumulative gap $(13,337) $(34,508) $(3,390) $29,008 $19,821 $ (1,200)
======== ======== ======= ======= ======= ========
Ratio of rate-sensitive
assets to rate-sensitive
liabilities for period 97.0% 85.0% 145.9% 169.5% 76.0% 88.2%
Cumulative ratio of rate-
sensitive assets to rate-
sensitive liabilities 97.0 94.1 99.5 104.2 106.0 99.9
(1) The information presented is a static analysis that does not consider
potential changes in pricing characteristics given
changes in interest rates and other influences that are beyond the control
of the Registrant. As a result, certain assets and liabilities may mature
or reprice in other periods or at different volumes.
(2) The analysis incorporates Management's assumptions for prepayments on
installment and real estate mortgage loans as well as mortgage-backed
securities.
(3) Non-maturity deposit repricing assumptions consider the estimated life of
the account along with Management's ability to set interest rates.
19
21
PART II.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following consolidated financial statements of the Registrant and the
independent auditor's report are set forth on pages A-13 through A-31 of the
Appendix to the Registrant's definitive proxy statement, dated March 13, 1998,
relating to the April 21, 1998 Annual Meeting of Shareholders (as filed with the
commission and as filed as exhibit 13 to this report on Form 10-K) is
incorporated herein by reference.
Consolidated Statements of Financial Condition at
December 31, 1997 and 1996
Consolidated Statements of Operations for the years ended
December 31, 1997, 1996 and 1995
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995
Consolidated Statements of Shareholders' Equity
for the years ended December 31, 1997, 1996 and 1995
Notes to Consolidated Financial Statements
Independent Auditor's Report
The supplementary data required by this item set forth under the caption
"Quarterly Financial Data" on page A-32 of the Appendix to the Registrant's
definitive proxy statement, dated March 13, 1998, relating to the April 21, 1998
Annual Meeting of Shareholders (as filed with the commission and as filed as
exhibit 13 to this report on Form 10-K) is incorporated herein by reference.
The portions of the Appendix to the Registrant's definitive proxy statement,
dated March 13, 1998, relating to the April 21, 1998 Annual Meeting of
Shareholders (as filed with the commission and as filed as exhibit 13 to this
report on Form 10-K) which are not specifically incorporated by reference as
part of this Form 10-K are not deemed to be a part of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS - The information with respect to Directors of the Registrant, set
forth under the caption "Election of Directors" on pages 2 through 4 of the
Registrant's definitive proxy statement, dated March 13, 1998, relating to the
April 21, 1998 Annual Meeting of Shareholders (as filed with the commission) is
incorporated herein by reference.
EXECUTIVE OFFICERS - Reference is made to additional item under Part I of this
report on Form 10-K.
20
22
PART III.
ITEM 11. EXECUTIVE COMPENSATION
The information set forth under the captions "Summary Compensation Table",
"Option Grants in 1997" and "Aggregated Stock Option Exercises in 1997 and Year
End Option Values" on pages 8 through 9 of the Registrant's definitive proxy
statement, dated March 13, 1998, relating to the April 21, 1998 Annual Meeting
of Shareholders (as filed with the commission) is incorporated herein by
reference. Information under the caption "Committee Report on Executive
Compensation" on pages 6 through 7 of the definitive proxy statement is not
incorporated by reference herein and is not deemed to be filed with the
Securities and Exchange Commission.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information set forth under the captions "Voting Securities and Record
Date", "Election of Directors" and "Securities Ownership of Management" on pages
1, 2 and 8, respectively, of the Registrant's definitive proxy statement, dated
March 13, 1998, relating to the April 21, 1998 Annual Meeting of Shareholders
(as filed with the commission) is incorporated herein by reference. Information
under the captions "Shareholder Return Performance Graph" and "Committee Report
on Executive Compensation" on pages 5 through 7 of the definitive proxy
statement is not incorporated by reference herein and is not deemed to be filed
with the Securities and Exchange Commission.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information set forth under the caption "Transactions Involving Management"
on page 10 of the Registrant's definitive proxy statement, dated March 13, 1998,
relating to the April 21, 1998 Annual Meeting of Shareholders (as filed with the
commission) is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
(a) 1. Financial Statements
All financial statements of the Registrant are incorporated herein
by reference as set forth in the Appendix to the Registrant's definitive proxy
statement, dated March 13, 1998, relating to the April 21, 1998 Annual Meeting
of Shareholders (filed as exhibit 13 to this report on Form 10-K.)
2. Financial Statement Schedules
Not applicable
3. Exhibits (Numbered in accordance with Item 601 of Regulation S-K)
The Exhibit Index is located on the final page of this report on
Form 10-K.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the fourth quarter of the
year ended December 31, 1997.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, dated March 17, 1998.
INDEPENDENT BANK CORPORATION
s/Charles C. Van Loan Charles C. Van Loan, President and Chief Executive
-------------------------- Officer (Principal Executive Officer)
s/William R. Kohls William R. Kohls, Executive Vice President and
-------------------------- Chief Financial Officer (Principal Financial
Officer)
s/James J. Twarozynski James J. Twarozynski, Vice President and Controller
-------------------------- (Principal Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated. Each director of the Registrant,
who's signature appears below hereby appoints Charles C. Van Loan and William R.
Kohls and each of them severally, as his attorney-in-fact, to sign in his name
and on his behalf, as a director of the Registrant, and to file with the
Commission any and all Amendments to this Report on Form 10-K.
Keith E. Bazaire, Director s/Keith E. Bazaire
----------------------
Terry L. Haske, Director s/Terry L. Haske
----------------------
Thomas F. Kohn, Director s/Thomas F. Kohn
----------------------
Robert J. Leppink, Director s/Robert J. Leppink
----------------------
Charles A. Palmer, Director s/Charles A. Palmer
----------------------
Charles C. Van Loan, Director s/Charles C. Van Loan
----------------------
Arch V. Wright, Jr., Director s/Arch V. Wright, Jr.
----------------------
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EXHIBIT INDEX
Exhibit number and description
EXHIBITS FILED HEREWITH
13 Appendix to the Registrant's definitive proxy statement, dated March 13,
1998, relating to the April 21, 1998 Annual Meeting of Shareholders.
This appendix was filed with the Commission as part of the Company's
proxy statement and was delivered to the Company's shareholders in
compliance with Rule 14(a)-3 of the Securities Exchange Act of
1934, as amended.
21 List of Subsidiaries.
23 Consent of Independent Accountants
24 Power of Attorney (Included on page 22).
27 Financial Data Schedule
EXHIBITS INCORPORATED BY REFERENCE
3.1 Restated Articles of Incorporation (incorporated herein by reference to
Exhibit 3(i) to the Registrant's report on Form 10-Q for the quarter ended June
30, 1994).
3.2 Amended and Restated Bylaws (incorporated herein by reference to Exhibit
3(ii) to the Registrant's report on Form 10-Q for the quarter ended June 30,
1994).
4 Automatic Dividend Reinvestment and Stock Purchase Plan, as amended
(incorporated herein by reference to the Registrant's Form S-3 Registration
Statement dated June 13, 1994, filed under Registration No. 33-80088).
4.1 Form of Indenture, dated as of December 17, 1996 (incorporated herein by
reference to the Registrant's Form S-2 Registration Statement dated December 6,
1996, filed under Registration No. 33-14507) .
4.2 Form of Subordinated Debenture (included as an exhibit to Exhibit 4.1),
(incorporated herein by reference to the Registrant's Form S-2 Registration
Statement dated December 6, 1996, filed under Registration No. 33- 14507).
4.3 Certificate of Trust of IBC Capital Finance (incorporated herein by
reference to the Registrant's Form S- 2 Registration Statement dated December 6,
1996, filed under Registration No. 33-14507).
4.4 Trust Agreement of IBC Capital Finance dated as of November 7, 1996
(incorporated herein by reference to the Registrant's Form S-2 Registration
Statement dated December 6, 1996, filed under Registration No. 33-14507).
4.5 Form of Amended and Restated Trust Agreement of IBC Capital Finance dated
as of December 17, 1996 (incorporated herein by reference to the Registrant's
Form S-2 Registration Statement dated December 6, 1996, filed under
Registration No. 33-14507).
4.6 Form of Preferred Security Certificate of IBC Capital Finance (included as
an exhibit to Exhibit 4.5.), (incorporated herein by reference to the
Registrant's Form S-2 Registration Statement dated December 6, 1996, filed under
Registration No. 33-14507).
4.7 Form of Preferred Securities Guarantee Agreement for IBC Capital Finance
(incorporated herein by reference to the Registrant's Form S-2 Registration
Statement dated December 6, 1996, filed under Registration No. 33-14507).
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4.8 Form of Agreement as to Expenses and Liabilities (included as an
exhibit to Exhibit 4.5), (incorporated herein by reference to the
Registrant's Form S-2 Registration Statement dated December 6, 1996,
filed under Registration No. 33-14507).
EXHIBIT INDEX (Continued)
10.1 Deferred Benefit Plan for Directors (incorporated herein by reference
to Exhibit 10(C) to the Registrant's report on Form 10-K for the year
ended December 31, 1984).
10.2 The form of Indemnity Agreement approved by the Registrant's
shareholders at its April 19, 1988 Annual Meeting, as executed with all of
the Directors of the Registrant (incorporated herein by reference to
Exhibit 10(F) to the Registrant's report on Form 10-K for the year ended
December 31, 1988).
10.3 Incentive Share Grant Plan, as amended, approved by the Registrant's
shareholders at its April 21, 1992 Annual Meeting (incorporated herein by
reference to Exhibit 10 to the Registrant's report on Form 10-K for the
year ended December 31, 1992).
10.4 Non-Employee Director Stock Option Plan, as amended, approved by the
Registrant's shareholders at its April 15, 1997 Annual Meeting
(incorporated herein by reference to Exhibit 4 to the Registrant's Form
S-8 Registration Statement dated July 28, 1997, filed under registration
No. 333-32269).
10.5 Employee Stock Option Plan, as amended, approved by the Registrant's
shareholders at its April 15, 1997 Annual Meeting (incorporated herein by
reference to Exhibit 4 to the Registrant's Form S-8 Registration Statement
dated July 28, 1997, filed under registration No. 333-32267).
10.6 Agreement and Plan of Reorganization among the Registrant, IBC
Interim Co., and North Bank Corporation, dated February 2, 1996
(incorporated by reference to Exhibit 2.1 to the Company's Current Report
on 8-K filed June 16, 1996).
10.7 Agreement to Purchase Assets and Assume Liabilities By and Between
the Registrant and First of America Bank--Michigan, National Association,
dated September 18, 1996 (incorporated herein by reference to the
Registrant's Form S-2 Registration Statement dated December 6, 1996, filed
under Registration No. 33- 14507).
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