LETTER FROM THE PRESIDENT AND CEO
Dear Shareholders:
2015 HIGHLIGHTS
As we look back on 2015, we continued to execute on our operating plan, which yielded a double-digit increase in both
net income and earnings per share, growth in revenue, continued growth in loan and deposit balances, and continued
improvements in asset quality. For the year ended December 31, 2015, the Company reported net income of $20.0 million, or
$0.86 per diluted share, compared to net income of $18.0 million, or $0.77 per diluted share, in 2014. This represents annual
increases of 11.1% and 11.7% in net income and diluted earnings per share, respectively. These results were directly related
to an increase in net interest income of $1.7 million and a reduction in non-interest expenses of $1.5 million. Total assets were
$2.41 billion as of December 31, 2015, an increase of $160.3 million from December 31, 2014. Commercial, mortgage, and
installment loans all increased over the prior year, with total net portfolio loan growth of $105.1 million, or 7.5% (adjusted to
5.2% when excluding a bulk mortgage loan purchase). In addition to the growth in our loan portfolio, we also originated $337
million in residential mortgages, selling $281 million for gains of $7.4 million, as compared to 2014, in which we originated
$265 million in residential mortgage loans, selling $224 million for gains of $5.6 million. Also during 2015, we generated a
$161.7 million, or 8.4%, increase in total deposits. This growth was spread amongst non-interest bearing, savings, and
interest-bearing checking as well as time deposits.
The credit quality of our loan portfolios continues to be strong and positively trending with a $3.8 million, or 17.6%, decrease
in non-performing assets. We finished the year with total non-performing loans to total loans at 0.71%, an improvement from
the prior year’s 1.08%. Our loan net charge-offs for the year were $0.7 million, or 0.05%, of total loans. This represents a
77.9% decline in loan net charge-offs from the prior year. The 0.05% loan net charge-off rate is our lowest in well over a decade.
We continue to maintain very strong capital levels with a tangible common equity to tangible assets ratio of 10.34% as of
December 31, 2015, as compared to 11.03% as of the end of the prior year. For 2015, we returned almost 100% of our
earnings through a combination of dividends and share repurchases. During 2015, we increased our dividend rate from $0.06
per share to $0.08 per share and we repurchased 967,199 shares at a weighted average price of $13.96 per share. Our
tangible book value is $11.18 as of December 31, 2015, up 3.6% over the prior year end. Over the past three years our
tangible book value growth (plus dividends) has been 6.0% in 2015, 9.6% in 2014, and 94.4% in 2013.
This past year we were very pleased to announce the addition of Ms. Joan Budden, President and CEO of Priority Health,
to our Board of Directors. Joan is very familiar with our markets and what it takes to operate in a highly competitive and
regulated industry undergoing significant change. In addition, her marketing expertise and general business and leadership
experience make her an important addition to our Board.
COMMUNITY BANKING AND THE MICHIGAN MARKET
Late in 2015, the Federal Open Market Committee decided to raise the target range for the federal funds rate, marking the
end of a seven-year period during which the federal funds rate was held near zero. However, as we begin the seventh year of
the current economic expansion, inflation continues to run below the Fed’s 2% target level, and the Fed continues to maintain
a very accommodative monetary policy. GDP growth for the full year of 2015 was 2.4%, however the growth rate was trending
weaker during the year with 3.9% growth in the second quarter, 2.0% in the third quarter, and 1.0% in the fourth quarter.
Overall, Michigan market conditions remain solid as compared to one year ago. The Michigan unemployment rate at 5.0%,
compares favorably to the U.S. unemployment rate of 5.1%, and as compared to the Michigan rate of 6.4% one year ago.
Michigan’s nonfarm payrolls grew by 79,800, or 1.9% over 2014. The increase has been led by gains in construction,
professional and business services, manufacturing, and wholesale trade. Michigan housing conditions also continue to trend
upward as measured by total housing sales, housing starts, and the median sales price of single-family homes. Michigan
building permits for new houses are up 26.1% over one year ago. Commercial real estate vacancy rates in Grand Rapids,
Lansing, and Detroit continue to be positively trending or flat as compared to one year ago. Michigan motor vehicle
production totaled 158,600 units in December of 2015, which was down 8.8% from one year ago. However, forecasts are
favorable for vehicle production in 2016.
We believe that our footprint, a combination of rural, mid-sized, and urban markets across Michigan’s Lower Peninsula,
combined with our size, provides meaningful and exciting growth opportunities. Moreover, our strong market position in many
rural communities and lesser market position in some of the more densely populated communities enhances our growth
potential. Independent Bank, the fifth-largest bank headquartered in Michigan, fills a need in each of these markets; we have
the scale to meet the demands of the heightened regulatory environment, combined with the local knowledge to compete
with the larger banks, whose headquarters and decision makers are located outside of Michigan. In addition, recent bank
1
mergers have and will continue to create some level of market disruption that, in turn, creates opportunities for us to attract
new customers and new professionals to our team.
2016 AND BEYOND
We are very optimistic about the future of Independent Bank Corporation. For the full year, our return on average assets was
0.86%, up from 0.80% in 2014. Our return on average equity was 7.89% in 2015, up from 7.43% in 2014. Our management
team recognizes that we need to continue to grow revenue and improve our overall earnings as we work toward our next
performance milestones of 1% or better return on assets, and 10% or better return on equity. As we look ahead, we will
continue to execute on strategies and initiatives designed to increase long-term shareholder value and returns. The foundation
of our Company is built on our values of trust, accountability, exceptional service, customer focus, and extraordinary teamwork.
Growth
Our first strategy is revenue growth through asset migration from lower-yielding investment securities into higher-yielding
loans. We believe that our existing balance sheet has the room to absorb this change in the earning-asset mix, with a current
loans-to-assets ratio of 63%. Our commercial banking team, with a target market of small- to medium-size businesses,
$1 million to $10 million in borrowings, and $1 million to $100 million in sales, should continue to lead our efforts in growing
interest income and loan fee income. We have an experienced team that has produced strong results each of the last two
years and are well positioned for growth, particularly in our more urban markets. Our retail banking team has undergone
significant change in recent years as we have shed branches, consolidated our branch network, adapted to regulatory
changes that impacted our service charges on deposits, and matured in our sales culture. We believe that our retail bank-
ing team, targeting consumer checking and payment needs, is well positioned to grow our fee income in both interchange
and service charge categories. For many years, we have had a strong indirect lending business with a special emphasis on
financing recreational vehicles and marine and power-sports products. In 2015, this team produced very solid results, and
we are optimistic about their prospects for continued success in 2016.
Independent Bank’s total deposits were $2.09 billion at the end of 2015. A bank’s core deposit base is often viewed as the
real value of a community bank franchise. Independent Bank’s deposit base is substantially all core funding, with $1.66 billion
or 80% in transaction accounts. In the near-term, we believe the present compressed interest rate environment (both low
rates and a relatively flat yield curve) makes it difficult to optimize the full value of our core deposit base, at least until we
move to a higher loans-to-assets ratio. However, we continue to invest in growing the deposit base, and incent and reward
our staff for doing so.
Efficiency
Our second strategy is to improve our efficiency ratio, primarily through revenue increases but also by continuing to
aggressively reduce our cost structure. A little background on this subject may be helpful in understanding where we have
been, and where we are headed. As a result of some of the business segments with which we have chosen to compete,
particularly branch banking and mortgage banking, our efficiency ratio will have a tendency to run higher than banks focused
exclusively on commercial banking. In addition, coming out of the recession, we consciously made several strategic
decisions that impacted both our size, scale, and earning asset mix. These decisions included the exiting, or scaling back,
of several out-of-market lines of business, and the sale of twenty-one branches. These decisions were made to improve the
risk profile of the institution for the long run, and I believe we accomplished this, but at a cost of earnings in the short run. We
have made significant progress on this front each of the last three years. For 2015, our efficiency ratio was 77%, as compared
to 80% in 2014, and 83% in 2013. Our near-term target is 70%, while our longer-term target is 65%. We believe that our
efficiency ratio is an important barometer of our improvements, and accordingly, it is one of our four performance metrics in
our annual incentive plan.
As I discuss efficiency with our shareholders, industry experts, and other interested parties, I am asked: “Why don’t we just
shed more branches?” I respond by sharing the fact that we have executed on a branch optimization strategy over the last
three years, that has reduced our footprint from 106 branches to the present 63 branches in 21 counties. Since the end
of 2011, we have improved the average profitability per branch, and increased the average deposits per branch, from $20
million to just over $33 million as of the end of 2015. While we continue to review and consider further branch optimization
scenarios, we are at a point where the cost reduction benefits are more than offset by the likely loss of revenue. Concurrent
with reductions in our physical infrastructure, we have made investments in our technology driven platforms, i.e. debit cards
and electronic banking (Internet banking, mobile banking, person to person, and remote capture). Internally, we have focused
on two objectives, first, to make it easy for our customers to bank with us, and second, to make it easy for our staff to service
our customers. We believe this hybrid approach of physical infrastructure and technology platforms to be relevant to meeting
the demands of our customers going forward, and toward us achieving our efficiency goals.
2
Risk Management
Our third strategy is to have in place and ensure that we have an effective enterprise-wide risk management function. In 2012,
we created a Chief Risk Officer position at the executive team level, and each year thereafter we have built on this infrastructure
to create a very strong and effective risk management system. Today, we monitor, report, and manage our credit risk, market
risk, operational risk, regulatory risk, legal risk, and reputational risk in a fully-integrated risk management framework. This
framework has been very important in building our balance sheet with an acceptable risk-return profile, implementing many
new regulatory requirements, and continually working to earn and retain the trust of our customers in a global marketplace
with heighted cybersecurity risk.
Talent Development
When discussing our future plans, I would be remiss if I did not speak to the retention of our talented associates, their
ongoing development, and the attraction of new talent. The senior leadership of our team has on average, over 30 years of
experience in the industry and 20 years of experience with our Company. This group has been instrumental in the successful
turnaround of the Company and into its current phase of growth. At the same time, we have many talented associates on the
team working hard, and with career aspirations to be the next generation of leaders within our Company. We are committed
to continue to invest in this group of professionals, with on-going sales and leadership development training, as well as
continuing to build their skill set and career experiences to assist them in reaching their full potential.
Capital Management
As it relates to our capital, our near-term target for the ratio of tangible common equity to tangible assets is 9.5% to 10.5%,
and our longer-term target is to range between 8.5% and 9.5%. As of December 31, 2015, our ratio of tangible common
equity to tangible assets was 10.34%. In setting these targeted capital ranges, consideration is given to our cost of capital,
the profile of our balance sheet (including a large deferred tax asset and an elevated restructured loan portfolio), the current
economic environment, and uncertainty surrounding the implications of the proposed current expected credit loss (or CECL)
accounting requirement. Our plan is to retain capital for organic loan growth and return capital through a consistent dividend
payout and share repurchase plan. Our 2015 share repurchase plan expired on December 31, 2015. On January 21, 2016, the
Board of Directors of the Company authorized a 2016 share repurchase plan. Under the terms of the 2016 share repurchase
plan, the Company is authorized to buy back up to 5% of its outstanding common stock. The repurchase plan is authorized
to last through December 31, 2016.
Our strong capital position also allows us to consider, and more actively explore acquisition opportunities. Our management
team has a proven track record of effectively acquiring and integrating financial institutions. While the success of our
operating plan is not necessarily contingent on acquired growth, selective acquisitions could accelerate our growth and
create enhanced economies of scale. As such, we will continue to monitor and evaluate attractive acquisition opportunities.
CLOSING
Virtual Shareholder Meeting
For the second consecutive year, in order for Independent Bank Corporation to reach a greater number of shareholders, we
are pleased to announce that we will conduct our Annual Meeting of Shareholders in an online format. This is an increasing
trend among public companies, and we believe that it is a more cost-effective and efficient means to communicate with our
shareholders. To attend the April 26, 2016 meeting, please log on to the Internet at www.virtualshareholdermeeting.com/
IBCP2016.
Recognition of Directors Hetzler and Palmer
Finally, on behalf of our entire Board, I would like to recognize and thank two much esteemed individuals (Mr. Robert Hetzler
and Mr. Charles Palmer) who served our Company well as directors for many years, and who retired from the Board at the
end of 2015.
In closing, as we begin our 152nd year of serving individuals and businesses in our communities, I would like to acknowledge
the commitment and ongoing effort of your Board of Directors, our Bank officers, and all of our Bank associates. Their
dedication and service is exemplary, and each is truly making a positive difference in the lives of our customers, our
shareholders, and the communities we serve.
Sincerely,
William B. (Brad) Kessel
President and CEO
3
FINANCIAL HIGHLIGHTS (dollars in thousands, except per share data)
FOR THE YEAR
Interest income
Interest expense
Net interest income
Provision for loan losses
Net gains on securities
Other non-interest income
Non-interest expense
Income before income tax
Income tax expense
Net income
2015
2014
CHANGE
AMOUNT
CHANGE
PERCENT
$ 80,842
$ 80,555
5,856
74,986
(2,714)
20
40,110
88,450
29,380
9,363
7,299
73,256
(3,136)
320
38,455
89,951
25,216
7,195
$ 287
(1,443)
1,730
422
(300)
1,655
(1,501)
4,164
2,168
0.36 %
(19.77 )
2.36
13.46
(93.75 )
4.30
(1.67 )
16.51
30.13
$ 20,017
$ 18,021
$1,996
11.08 %
PER COMMON SHARE DATA
Net income per common share
Basic
Diluted
$ 0.88
0.86
Cash dividends declared
0.26
$ 0.79
$ 0.09
11.39 %
0.77
0.18
0.09
0.08
11.69
44.44
AT YEAR END
Assets
Loans
Deposits
Interest-earning assets
Shareholders’ equity
Book value per common share
RATIOS
Net income to
Average common equity
Average assets
As a percent of average interest-earning assets
Interest income
Interest expense
Net interest income
$ 2,409,066
$ 2,248,730
$ 160,336
7.13 %
1,515,050
2,085,963
2,187,408
251,092
11.28
1,409,962
1,924,302
2,026,175
250,371
10.91
105,088
161,661
161,233
721
0.37
7.45
8.40
7.96
0.29
3.39
7.43%
0.80
0.46 %
0.06
6.19 %
7.50
4.03%
(0.17)%
(4.22 ) %
0.36
3.67
(0.08)
(0.09)
(22.22)
(2.45)
7.89%
0.86
3.86%
0.28
3.58
4
Performance Graph . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Selected Consolidated Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Management’s Discussion and Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Management’s Annual Report on Internal Control Over Financial Reporting . . . . . . . . . . . . . . . . . . .
Report of Independent Registered Public Accounting Firm . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Quarterly Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6
7
8
35
36
37
42
102
5
PERFORMANCE GRAPH
The graph below compares the total returns (assuming reinvestment of dividends) of Independent Bank Corporation
common stock, the NASDAQ Composite Index and the NASDAQ Bank Stock Index. The graph assumes $100
invested in Independent Bank Corporation common stock (returns based on stock prices per the NASDAQ) and each
of the indices on December 31, 2010 and the reinvestment of all dividends during the periods presented. The
performance shown on the graph is not necessarily indicative of future performance.
Total Return Performance
Independent Bank Corporation
Independent Bank Corporation
NASDAQ Composite
NASDAQ Composite
NASDAQ Bank
NASDAQ Bank
$1,300
1,300
$1,200
1,200
$1,100
1,100
$1,000
1,000
$900
900
$800
800
$700
700
$600
600
$500
500
$400
400
$300
300
$200
200
$100
100
e
u
e
l
u
a
l
V
a
V
x
e
x
d
e
n
d
n
I
I
$0
0
12/31/10
40543
12/31/11
40908
12/31/12
41274
12/31/13
41639
12/31/14
42004
12/31/15
42369
Index
12/31/10
12/31/11
12/31/12
12/31/13
12/31/14
12/31/15
Independent Bank Corporation . . . . . . . .
NASDAQ Composite . . . . . . . . . . . . . . . .
NASDAQ Bank . . . . . . . . . . . . . . . . . . . .
$100.00
100.00
100.00
$102.31
99.17
74.57
$269.23
116.48
100.48
$923.08
163.21
137.27
$1,018.77
187.27
153.50
$1,211.04
200.31
156.89
Period Ending
6
SELECTED CONSOLIDATED FINANCIAL DATA (1)
Year Ended December 31,
2015
2014
2013
(Dollars in thousands, except per share amounts)
2012
2011
SUMMARY OF OPERATIONS
Interest income . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . .
Net interest income . . . . . . . . . . . . . . . . . .
Provision for loan losses . . . . . . . . . . . . . . . .
Net gains (losses) on securities . . . . . . . . . . .
Net gain on branch sale . . . . . . . . . . . . . . . . .
Gain on extinguishment of debt . . . . . . . . . .
Other non-interest income . . . . . . . . . . . . . . .
Non-interest expenses. . . . . . . . . . . . . . . . . . .
Income (loss) before income tax . . . . . . . .
Income tax expense (benefit). . . . . . . . . . . . .
Net income (loss) . . . . . . . . . . . . . . . . . .
Preferred Stock Dividends . . . . . . . . . . . . . . .
Preferred Stock Discount . . . . . . . . . . . . . . . .
Net income (loss) applicable to
$
$
$
$
80,842
5,856
74,986
(2,714)
20
1,193
—
38,917
88,450
29,380
9,363
20,017
—
—
$
$
80,555
7,299
73,256
(3,136)
320
—
500
37,955
89,951
25,216
7,195
18,021
—
—
87,121
9,162
77,959
(3,988)
369
—
—
44,460
104,118
22,658
(54,851)
77,509
(3,001)
7,554
$
$
99,398
13,143
86,255
6,887
887
5,402
—
57,276
116,735
26,198
—
26,198
$ 114,762
20,193
94,569
27,946
(511)
—
—
47,424
133,948
(20,412)
(212)
$ (20,200)
(4,347)
—
(4,157)
—
common stock. . . . . . . . . . . . . . . . . . .
$
20,017
$
18,021
$
82,062
$
21,851
$ (24,357)
PER COMMON SHARE DATA
Net income (loss) per common share
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash dividends declared. . . . . . . . . . . . . . . . .
Book value . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
SELECTED BALANCES
$
0.88
0.86
0.26
11.28
$
0.79
0.77
0.18
10.91
$
5.87
3.55
0.00
10.15
$
2.51
0.80
0.00
5.58
(2.94)
(2.94)
0.00
2.68
Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Allowance for loan losses . . . . . . . . . . . . . . .
Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Shareholders’ equity . . . . . . . . . . . . . . . . . . . .
Long-term debt - FHLB advances. . . . . . . . .
Subordinated debentures . . . . . . . . . . . . . . . .
$2,409,066
1,515,050
22,570
2,085,963
251,092
11,954
35,569
$2,248,730
1,409,962
25,990
1,924,302
250,371
12,470
35,569
$2,209,943
1,374,570
32,325
1,884,806
231,581
17,188
40,723
$2,023,867
1,419,139
44,275
1,779,537
134,975
17,622
50,175
$2,307,406
1,576,608
58,884
2,086,125
102,627
33,384
50,175
SELECTED RATIOS
Net interest income to average interest
earning assets . . . . . . . . . . . . . . . . . . . . . . .
3.58%
3.67%
4.11%
4.04%
4.46%
Net income (loss) to (2)
Average common equity . . . . . . . . . . . . . .
Average assets . . . . . . . . . . . . . . . . . . . . . .
Average shareholders’ equity to average
assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tier 1 capital to average assets . . . . . . . . . . .
Non-performing loans to Portfolio Loans . . .
7.89
0.86
10.93
10.91
0.71
7.43
0.80
10.83
11.18
1.08
64.22
3.87
8.69
10.61
1.30
68.29
0.92
4.82
8.08
2.32
(68.44)
(1.02)
4.76
6.25
3.80
(1) The significant variations in the results of operations for the five years presented above is a result of a number
of factors, including asset quality challenges, our consolidation, closing or sale of 36 branches in 2012, our exit
from the Troubled Asset Relief Program in 2013, and a significant income tax benefit realized in 2013. Please
read ‘‘Management’s Discussion and Analysis of Financial Condition and Results of Operations’’ below for
more information regarding these factors and others.
(2) These amounts are calculated using net income (loss) applicable to common stock.
7
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Disclaimer Regarding Forward-Looking Statements. Statements in this report that are not statements of
historical fact, including 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, 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; statements about our business and
growth strategies; and expectations about economic and market conditions and trends. These forward-looking
statements express our current expectations, forecasts of future events, or long-term goals. They are based on
assumptions, estimates, and forecasts that, although believed to be reasonable, may turn out to be incorrect. Actual
results could differ materially from those discussed in the forward-looking statements for a variety of reasons,
including:
•
•
•
•
•
•
•
•
•
economic, market, operational, liquidity, credit, and interest rate risks associated with our business;
economic conditions generally and in the financial services industry, particularly economic conditions
within Michigan and the regional and local real estate markets in which our bank operates;
the failure of assumptions underlying the establishment of, and provisions made to, our allowance for loan
losses;
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;
increased competition in the financial services industry, either nationally or regionally;
our ability to achieve loan and deposit growth;
volatility and direction of market interest rates;
the continued services of our management team; and
implementation of new legislation, which may have significant effects on us and the financial services
industry.
This list provides examples of factors that could affect the results described by forward-looking statements
contained in this report, but the list is not intended to be all-inclusive. The risk factors disclosed in Part I – Item 1A
of our Annual Report on Form 10-K for the year ended December 31, 2015, as updated by any new or modified risk
factors disclosed in Part II – Item 1A of any subsequently filed Quarterly Report on Form 10-Q, include all known
risks our management believes could materially affect the results described by forward-looking statements in this
report. However, those risks may not be the only risks we face. Our results of operations, cash flows, financial
position, and 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 report 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.
Introduction. The following section presents additional information to assess the financial condition and results
of operations of Independent Bank Corporation, its wholly-owned bank, Independent Bank (the ‘‘Bank’’), and their
subsidiaries. This section should be read in conjunction with the consolidated financial statements and the
supplemental financial data contained elsewhere in this annual report. We also encourage you to read our Annual
Report on Form 10-K filed with the U.S. Securities and Exchange Commission (‘‘SEC’’). That report includes a list
of risk factors that you should consider in connection with any decision to buy or sell our securities.
8
Overview. We provide banking services to customers located primarily in Michigan’s Lower Peninsula. As a
result, our success depends to a great extent upon the economic conditions in Michigan’s Lower Peninsula. At times,
we have experienced a difficult economy in Michigan which in turn had an adverse effect on our performance. As
a result of the recession, we incurred net losses from 2008 through 2011 and found it necessary to take certain steps
to preserve capital and maintain our regulatory capital ratios.
Economic conditions in Michigan began to show signs of improvement during 2010. Generally,
these
improvements have continued into 2015, albeit at an uneven pace. There has been an overall decline in the
unemployment rate as well as generally improving housing prices and other related statistics (such as home sales and
new building permits). In addition, since early- to mid-2009, we have seen an improvement in our asset quality
metrics. In particular, since early 2012, we have generally experienced a decline in non-performing assets, reduced
levels of new loan defaults, and reduced levels of loan net charge-offs. As a result of the foregoing factors and others,
we returned to profitability in 2012 and have now been profitable for 16 consecutive quarters. In addition, during
2013, we completed various transactions to improve our capital structure.
Recent Developments. On April 29, 2015 the Bank entered into a Purchase and Assumption Agreement (‘‘PAA’’)
with Isabella Bank (based in Mt. Pleasant, Michigan). Pursuant to the PAA, on August 28, 2015, we sold the fixed
assets, real property and certain other assets of our bank branch located in Midland, Michigan (the ‘‘Midland
Branch’’) to Isabella Bank. The deposit liabilities of the Midland Branch were assumed by Isabella Bank. Under the
terms of the PAA, Isabella Bank paid a premium of $0.6 million (which was equal to 6.0% of the average deposit
liabilities of $9.7 million based on the 20-day average ending two business days prior to the closing date of
August 28, 2015) and $0.85 million for the real property and fixed assets (including the ATM). The real property and
the fixed assets had a net book value of approximately $0.2 million as of August 28, 2015. We recorded a net gain
of $1.2 million in the third quarter of 2015 on the sale of the Midland Branch.
In January 2015, we adopted a plan to consolidate certain branch offices (the ‘‘Branch Consolidation’’). This
Branch Consolidation reflects our ongoing cost reduction initiatives and undertakings to further improve the overall
efficiency of our operations. The Branch Consolidation resulted in the closing of six of our branch offices on April 30,
2015. We also undertook certain additional staffing reductions related to our retail banking operations. In connection
with the Branch Consolidation and these staffing reductions, we recorded $0.2 million of severance expenses in the
first quarter of 2015. We recorded a net gain of approximately $0.2 million in the second quarter of 2015 (included
in Other Non-Interest Income) that was comprised of a $0.3 million gain on the sale of the real property of two of
the branches that was partially offset by $0.1 million of write-downs of the fixed assets (including real property) of
the other four branches. We donated two of these four remaining branches to community groups during 2015 and the
other two branches are for sale.
Regulation. On July 2, 2013, the Federal Reserve Board (the ‘‘FRB’’) approved a final rule that establishes an
integrated regulatory capital framework (the ‘‘New Capital Rules’’). The rule implements in the United States the
Basel III regulatory capital reforms from the Basel Committee on Banking Supervision and certain changes required
by the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act (the ‘‘Dodd-Frank Act’’). In general,
under the New Capital Rules, minimum requirements have increased for both the quantity and quality of capital held
by banking organizations. Consistent with the international Basel framework, the New Capital Rules include a new
minimum ratio of common equity tier 1 capital to risk-weighted assets of 4.5% and a common equity tier 1 capital
conservation buffer of 2.5% of risk-weighted assets that applies to all supervised financial institutions. The 2.5%
capital conservation buffer is being phased in over a four-year period beginning in 2016. The rule also raises the
minimum ratio of tier 1 capital to risk-weighted assets from 4% to 6% and includes a minimum leverage ratio of 4%
for all banking organizations. As to the quality of capital, the New Capital Rules emphasize common equity tier
1 capital, the most loss-absorbing form of capital, and implements strict eligibility criteria for regulatory capital
instruments. The New Capital Rules also change the methodology for calculating risk-weighted assets to enhance risk
sensitivity. Under the New Capital Rules our existing trust preferred securities are grandfathered as qualifying
regulatory capital. We were subject to the New Capital Rules beginning on January 1, 2015, and as of December 31,
2015 we exceeded all of the capital ratio requirements of the New Capital Rules.
It is against this backdrop that we discuss our results of operations and financial condition in 2015 as compared
to earlier periods.
9
RESULTS OF OPERATIONS
Summary. We recorded net income of $20.0 million, or $0.86 per diluted share, in 2015, as compared to
$18.0 million, or $0.77 per diluted share, in 2014. We recorded net income applicable to common stock of
$82.1 million, or $3.55 per diluted share, in 2013. The significantly higher earnings in 2013, as compared to 2015
and 2014, primarily reflects the income tax benefit associated with the reversal of substantially all of the valuation
allowance on our deferred tax assets (see ‘‘Income tax benefit’’) and the discount on our redemption of our preferred
stock.
KEY PERFORMANCE RATIOS
Year Ended December 31,
2014
2013
2015
Net income to
Average common equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Average assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income per common share
7.89% 7.43% 64.22%
0.86
3.87
0.80
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$0.88
0.86
$0.79
0.77
$ 5.87
3.55
Net interest income. Net interest income is the most important source of our earnings and thus is critical in
evaluating our results of operations. Changes in our net interest income are primarily influenced by our level of
interest-earning assets and the income or yield that we earn on those assets and the manner and cost of funding our
interest-earning assets. Certain macro-economic factors can also influence our net interest income such as the level
and direction of interest rates, the difference between short-term and long-term interest rates (the steepness of the
yield curve) and the general strength of the economies in which we are doing business. Finally, risk management
plays an important role in our level of net interest income. The ineffective management of credit risk and interest-rate
risk in particular can adversely impact our net interest income.
Net interest income totaled $75.0 million during 2015, compared to $73.3 million and $78.0 million during 2014
and 2013, respectively. The increase in net interest income in 2015 compared to 2014 primarily reflects a
$96.5 million increase in average interest-earning assets that was partially offset by a nine basis point decrease in our
tax equivalent net interest income as a percent of average interest-earning assets (the ‘‘net interest margin’’).
The decline in our net interest margin is primarily due to the prolonged low interest rate environment that has
pushed our average yield on loans lower.
Interest rates have generally been at extremely low levels since 2008 due primarily to the Federal Reserve
Bank’s (‘‘FRB’’) monetary policies and its efforts to stimulate the U.S. economy. This very low interest rate
environment has generally had an adverse impact on our interest income and net interest income. The FRB did move
the target federal funds rate up by 0.25% in mid-December 2015. Future changes in the target federal funds rate are
uncertain, however, we anticipate that any upward movements in short-term interest rates will be very gradual. Given
the repricing characteristics of our interest-earning assets and interest-bearing liabilities (and our level of non-interest
bearing demand deposits), we would expect that our net interest margin will generally benefit on a long-term basis
from rising interest rates.
The decrease in net interest income in 2014 compared to 2013 primarily reflects a 44 basis point decrease in our
net interest margin that was partially offset by a $100.3 million increase in average interest-earning assets.
Our net interest income is also impacted by our level of non-accrual loans. Average non-accrual loans totaled
$13.8 million, $17.9 million and $24.1 million in 2015, 2014 and 2013, respectively.
10
AVERAGE BALANCES AND RATES
2015
2014
2013
Average
Balance
Interest
Rate
Average
Balance
Interest
Rate
Average
Balance
Interest
Rate
(Dollars in thousands)
5.71%
6.45
1.33
5.24
0.28
4.16
4.59
ASSETS (1)
Taxable loans . . . . . . . . . .
Tax-exempt loans (2) . . . . .
Taxable securities . . . . . . .
Tax-exempt securities (2) . .
Interest bearing cash and
repurchase agreement. . .
Other investments . . . . . . .
$1,457,508
3,972
529,571
34,039
$70,770
246
7,805
1,388
4.86% $1,383,883
4,889
6.19
475,917
1.47
40,200
4.08
$71,621
310
6,341
1,510
5.18% $1,408,305
6.34
5,491
305,468
1.33
32,051
3.76
$80,434
354
4,059
1,680
66,595
17,171
275
925
Interest earning assets . . . .
2,108,856
81,409
Cash and due from banks . .
Other assets, net . . . . . . . .
44,842
166,363
Total assets . . . . . . . . . . . .
$2,320,061
0.41
5.39
3.86
84,244
23,252
282
1,118
2,012,385
81,182
0.33
4.81
4.03
139,082
21,673
396
901
1,912,070
87,824
45,213
182,099
$2,239,697
44,745
164,281
$2,121,096
LIABILITIES
Savings and interest-
bearing checking . . . . . .
Time deposits . . . . . . . . . .
Other borrowings . . . . . . .
$ 988,504
386,035
47,842
Interest bearing liabilities . .
1,422,381
Non-interest bearing
deposits . . . . . . . . . . . .
Other liabilities . . . . . . . . .
Shareholders’ equity. . . . . .
619,206
24,840
253,634
Total liabilities and
shareholders’ equity . . . .
$2,320,061
1,056
2,953
1,847
5,856
0.11
0.76
3.86
0.41
$ 951,745
413,729
60,225
1,425,699
1,064
3,903
2,332
7,299
0.11
0.94
3.87
0.51
$ 908,740
423,291
65,517
1,397,548
1,131
4,575
3,456
9,162
0.12
1.08
5.27
0.66
540,107
31,247
242,644
500,673
38,462
184,413
$2,239,697
$2,121,096
Net interest income . . . . . .
$75,553
$73,883
$78,662
Net interest income as a
percent of average
interest earning assets . .
(1) All domestic.
3.58%
3.67%
4.11%
(2)
Interest on tax-exempt loans and securities is presented on a fully tax equivalent basis assuming a marginal tax rate of 35%.
11
CHANGE IN NET INTEREST INCOME
Increase (decrease) in interest income (1, 2)
Taxable loans . . . . . . . . . . . . . . . . . . . . . . . . .
Tax-exempt loans (3) . . . . . . . . . . . . . . . . . . .
Taxable securities . . . . . . . . . . . . . . . . . . . . . .
Tax-exempt securities (3). . . . . . . . . . . . . . . .
Interest bearing cash and repurchase
agreement . . . . . . . . . . . . . . . . . . . . . . . . . .
Other investments. . . . . . . . . . . . . . . . . . . . . .
Total interest income . . . . . . . . . . . . . . . . . . .
Increase (decrease) in interest expense (1)
2015 compared to 2014
Rate
Net
Volume
2014 compared to 2013
Rate
Volume
Net
(In thousands)
$3,701
(57)
754
(244)
$(4,552)
(7)
710
122
$ (851)
(64)
1,464
(122)
$(1,374)
(38)
2,271
370
$(7,439)
(6)
11
(540)
$(8,813)
(44)
2,282
(170)
(66)
(316)
3,772
59
123
(3,545)
(7)
(193)
227
(175)
69
1,123
61
148
(7,765)
(114)
217
(6,642)
Savings and interest bearing checking . . . . .
Time deposits . . . . . . . . . . . . . . . . . . . . . . . . .
Other borrowings . . . . . . . . . . . . . . . . . . . . . .
Total interest expense. . . . . . . . . . . . . . . . . . .
Net interest income . . . . . . . . . . . . . . . . . . . .
40
(248)
(478)
(686)
$4,458
(48)
(702)
(7)
(757)
$(2,788)
(8)
(950)
(485)
(1,443)
$ 1,670
52
(101)
(262)
(311)
$ 1,434
(119)
(571)
(862)
(1,552)
$(6,213)
(67)
(672)
(1,124)
(1,863)
$(4,779)
(1) The change in interest due to changes in both balance and rate has been allocated to change due to balance and
change due to rate in proportion to the relationship of the absolute dollar amounts of change in each.
(2) All domestic.
(3)
Interest on tax-exempt loans and securities is presented on a fully tax equivalent basis assuming a marginal tax
rate of 35%.
COMPOSITION OF AVERAGE INTEREST EARNING ASSETS AND INTEREST BEARING
LIABILITIES
Year Ended December 31,
2014
2013
2015
As a percent of average interest earning assets
Loans (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other interest earning assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Average interest earning assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
69.0%
69.3%
30.7
31.0
100.0% 100.0% 100.0%
73.9%
26.1
Savings and NOW . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Time deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Brokered CDs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other borrowings and long-term debt. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Average interest bearing liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Earning asset ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Free-funds ratio (2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
46.9%
18.2
0.1
2.2
67.4%
90.9%
32.6
47.3%
19.9
0.6
3.0
70.8%
89.9%
29.2
47.5%
21.4
0.8
3.4
73.1%
90.1%
26.9
(1) All domestic.
(2) Average interest earning assets less average interest bearing liabilities.
Provision for loan losses. The provision for loan losses was a credit in each of 2015, 2014 and 2013, of
$2.7 million, $3.1 million and $4.0 million, respectively. The provision reflects our assessment of the allowance for
loan losses taking into consideration factors such as loan mix, levels of non-performing and classified loans and loan
net charge-offs. While we use relevant information to recognize losses on loans, additional provisions for related
12
losses may be necessary based on changes in economic conditions, customer circumstances and other credit risk
factors. See ‘‘Portfolio Loans and asset quality’’ for a discussion of the various components of the allowance for loan
losses and their impact on the provision for loan losses.
Non-interest income. Non-interest income is a significant element in assessing our results of operations. We
regard net gains on mortgage loans as a core recurring source of revenue but they are quite cyclical and thus can be
volatile. We regard net gains (losses) on securities as a ‘‘non-operating’’ component of non-interest income.
Non-interest income totaled $40.1 million during 2015 compared to $38.8 million and $44.8 million during 2014
and 2013, respectively. The components of non-interest income are as follows:
NON-INTEREST INCOME
2015
Year Ended December 31,
2014
(In thousands)
2013
Service charges on deposit accounts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interchange income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net gains (losses) on assets
Mortgage loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other than temporary impairment loss on securities:
Total impairment loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss recognized in other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . .
Net impairment loss recognized in earnings. . . . . . . . . . . . . . . . . . . . . . . . . .
Mortgage loan servicing, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment and insurance commissions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Bank owned life insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Title insurance fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net gain on branch sale. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain on extinguishment of debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Increase in fair value of U.S. Treasury warrant . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$12,389
8,481
$13,446
8,164
$14,076
7,362
7,448
20
—
—
—
1,751
1,827
1,282
1,156
1,193
—
—
4,583
5,628
329
10,022
395
(9)
—
(26)
—
(9)
791
1,814
1,371
995
—
500
(26)
3,806
1,709
1,363
1,682
—
—
— (1,025)
5,465
5,746
Total non-interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$40,130
$38,775
$44,829
Service charges on deposit accounts totaled $12.4 million during 2015, compared to $13.4 million and
$14.1 million during 2014 and 2013, respectively. The decreases in such service charges principally reflect a decline
in non-sufficient funds (‘‘NSF’’) occurrences and related NSF fees. We believe the decline in NSF occurrences is
primarily due to our customers managing their finances more closely in order to reduce NSF activity and avoid the
associated fees.
Interchange income totaled $8.5 million in 2015 compared to $8.2 million in 2014 and $7.4 million in 2013. The
increase in interchange income primarily results from a new Debit Brand Agreement with MasterCard (which
replaces our former agreement with VISA) that we executed in January 2014. We began converting our debit card
base to MasterCard in June 2014 and completed the conversion in September 2014. Certain volume incentives under
the new Debit Brand Agreement began to abate in the fourth quarter of 2015, and as a result, absent transaction
volume growth, further increases in interchange income could be a near-term challenge.
The Dodd-Frank Act includes a provision under which interchange fees for debit cards are set by the FRB under
a restrictive ‘‘reasonable and proportional cost’’ per transaction standard. On June 29, 2011, the FRB issued final rules
(that were effective October 1, 2011) on interchange fees for debit cards. Overall, these final rules established price
caps for debit card interchange fees that were significantly lower than previous averages. However, debit card issuers
13
with less than $10 billion in assets (like us) are exempt from this rule. On a long-term basis, it is not clear how
competitive market factors may impact debit card issuers who are exempt from the rule. However, we have been
experiencing some reduction in per transaction interchange revenue due to certain transaction routing changes,
particularly at large merchants.
We realized net gains of $7.4 million on mortgage loans during 2015, compared to $5.6 million and
$10.0 million during 2014 and 2013 respectively. The volume of loans sold is dependent upon our ability to originate
mortgage loans as well as the demand for fixed-rate obligations and other loans that we choose to not put into our
portfolio because of our established interest-rate risk parameters. (See ‘‘Portfolio Loans and asset quality.’’) Net gains
on mortgage loans are also dependent upon economic and competitive factors as well as our ability to effectively
manage exposure to changes in interest rates and thus can often be a volatile part of our overall revenues.
MORTGAGE LOAN ACTIVITY
2015
Year Ended December 31,
2014
(Dollars in thousands)
2013
Mortgage loans originated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mortgage loans sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mortgage loans sold with servicing rights released . . . . . . . . . . . . . . . . . . . . .
Net gains on the sale of mortgage loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net gains as a percent of mortgage loans sold (‘‘Loan Sales Margin’’) . . . . .
Fair value adjustments included in the Loan Sales Margin . . . . . . . . . . . . . . .
$336,618
281,494
4,897
7,448
2.65%
0.16
$265,494
223,580
37,476
5,628
2.52%
0.01
$419,494
407,235
57,099
10,022
2.46%
(0.55)
Net gains on mortgage loans increased in 2015 as compared to 2014 due primarily to a decrease in mortgage
loan interest rates during parts of 2015 that resulted in an increase in mortgage loan refinance volumes as well as an
improving housing market which has resulted in an increase in purchase money mortgage origination volume. Net
gains on mortgage loans declined in 2014 as compared to 2013 due primarily to decreases in mortgage loan
originations and sales. These declines in mortgage loan originations and sales are due primarily to significantly lower
mortgage loan refinance volumes.
Net gains as a percentage of mortgage loans sold (our ‘‘Loan Sales Margin’’) are impacted by several factors
including competition and the manner in which the loan is sold (with servicing rights retained or released). Our
decision to sell or retain mortgage loan servicing rights is primarily influenced by an evaluation of the price being
paid for mortgage loan servicing by outside third parties compared to our calculation of the economic value of
retaining such servicing. Gains on mortgage loans are also impacted by recording fair value accounting adjustments.
Excluding these fair value accounting adjustments, the Loan Sales Margin would have been 2.49% in 2015, 2.51%
in 2014 and 3.01% in 2013. The lower Loan Sales Margins in 2015 and 2014, as compared to 2013, were principally
due to less favorable competitive conditions including narrower primary-to-secondary market pricing spreads. In
general, as overall industry-wide mortgage loan origination levels drop, pricing becomes more competitive. The
changes in the fair value accounting adjustments are primarily due to changes in the amount of commitments to
originate mortgage loans for sale during each period.
We generated securities net gains of $0.02 million in 2015, and $0.3 million and $0.4 million in 2014 and 2013,
respectively. The 2015 net securities gain was due primarily to the sales of U.S. agency residential mortgage-backed
securities that were partially offset by a $0.06 million decline in the fair value of trading securities. The 2014
securities net gain was primarily due to the sales of U.S. Government agency securities and municipal securities as
well as fair value adjustments on a U.S. treasury short sale position that were partially offset by a $0.3 million decline
in the fair value of trading securities. The 2013 securities net gain was due to a $0.4 million increase in the fair value
of trading securities.
We recorded no net impairment losses in 2015 as compared to net impairment losses of $0.01 million and
$0.03 million in 2014 and 2013, respectively, related to other than temporary impairment of securities available for
sale. The 2014 and 2013 impairment charges related to private label residential mortgage-backed securities.
14
GAINS AND LOSSES ON SECURITIES
Year Ended December 31,
Proceeds
Gains (1)
Losses (2)
Net
(In thousands)
2015. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2014. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2013. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$12,037
14,633
2,940
$ 75
624
402
$ 55
304
33
$ 20
320
369
(1) Gains in 2014 include $0.295 million relating to a U.S. Treasury short position and gains in 2013 include
$0.388 million related to an increase in the fair value of trading securities.
(2) Losses in 2014 and 2013 include $0.009 million and $0.026 million, respectively of other than temporary
impairment charges and 2015 and 2014 includes $0.055 million and $0.295 million, respectively related to a
decrease in the fair value of trading securities.
Mortgage loan servicing generated net earnings of $1.8 million, $0.8 million and $3.8 million in 2015, 2014 and
2013, respectively. These yearly comparative variances are primarily due to changes in the valuation allowance on
capitalized mortgage loan servicing rights and the level of amortization of this asset. The period end valuation
allowance is based on the valuation of the mortgage loan servicing portfolio and the amortization is primarily
impacted by prepayment activity. The changes in the valuation allowance are principally due to changes in the
estimated future prepayment rates being used in the period end valuations.
CAPITALIZED MORTGAGE LOAN SERVICING RIGHTS
2015
2014
(In thousands)
2013
Balance at January 1, . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Originated servicing rights capitalized . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$12,106
2,697
(2,868)
501
$13,710
1,823
(2,509)
(918)
$11,013
3,210
(3,745)
3,232
Balance at December 31, . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$12,436
$12,106
$13,710
Valuation allowance at December 31, . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 3,272
$ 3,773
$ 2,855
At December 31, 2015, we were servicing approximately $1.64 billion in mortgage loans for others on which
servicing rights have been capitalized. This servicing portfolio had a weighted average coupon rate of 4.32% and a
weighted average service fee of approximately 25.4 basis points. Remaining capitalized mortgage loan servicing
rights at December 31, 2015 totaled $12.4 million, representing approximately 76 basis points on the related amount
of mortgage loans serviced for others. The capitalized mortgage loan servicing rights had an estimated fair market
value of $12.9 million at December 31, 2015.
Investment and insurance commissions have been relatively unchanged and totaled $1.8 million, $1.8 million
and $1.7 million in 2015, 2014 and 2013, respectively.
We earned $1.3 million, $1.4 million and $1.4 million in 2015, 2014 and 2013, respectively, on our separate
account bank owned life insurance principally as a result of increases in the cash surrender value. Our separate
account is primarily invested in agency mortgage-backed securities and managed by PIMCO. The crediting rate (on
which the earnings are based) reflects the performance of the separate account. The total cash surrender value of our
bank owned life insurance was $54.4 million and $53.6 million at December 31, 2015 and 2014, respectively.
Title insurance fees totaled $1.2 million in 2015, $1.0 million in 2014 and $1.7 million in 2013. The fluctuation
in title insurance fees is primarily a function of the level of mortgage loans that we originated.
15
In the third quarter of 2015, we recorded a $1.2 million gain on the sale of our Midland Branch as described
earlier.
On December 1, 2014, we entered into a Securities Purchase Agreement with EJF Capital LLC. Under the terms
of this agreement, we purchased 5,000 shares of trust preferred securities (liquidation amount of $1,000 per security)
that were issued by IBC Capital Finance IV, a special purpose entity whose common stock we own. The trust
preferred securities have been retired along with certain related common stock issued by IBC Capital Finance IV and
subordinated debentures issued by us. We paid $4.5 million for the trust preferred securities that had a par value of
$5.0 million, as well as $0.033 million in accrued and unpaid interest. We recorded a gain on the extinguishment of
debt of $0.5 million in the fourth quarter of 2014.
Changes in the fair value of the Amended Warrant issued to the United States Department of the Treasury
(‘‘UST’’) in April 2010 had been recorded as a component of non-interest income. Up until April 16, 2013, the fair
value of this Amended Warrant was included in accrued expenses and other liabilities in our Condensed Consolidated
Statements of Financial Condition. The provision in the Amended Warrant which caused it to be accounted for as a
derivative and included in accrued expenses and other liabilities expired on April 16, 2013. As a result, the Amended
Warrant was reclassified into shareholders’ equity on that date at its then fair value (which was approximately
$1.5 million). (See ‘‘Liquidity and capital resources.’’) We purchased (and subsequently cancelled) the Amended
Warrant from the UST on August 30, 2013.
Two significant inputs in the valuation model for the Amended Warrant were our common stock price and the
probability of triggering anti-dilution provisions in this instrument related to certain equity transactions. The fair
value of the Amended Warrant increased by $1.0 million in 2013 (through April 16) due primarily to a rise in our
common stock price during the relevant period.
Other non-interest income totaled $4.6 million, $5.7 million and $5.5 million in 2015, 2014 and 2013,
respectively. The decrease in 2015 compared to 2014 is primarily due to declines in rental income on other real estate
(‘‘ORE’’) and income from merchant card processing that was partially offset by an increase in swap fee income. The
decline in rental income on ORE is due to the sales of income-producing properties. The decline in income from
merchant card processing is due principally to a change in our third-party processing provider and the timeframe
required to transition customers from the prior provider. The increase in 2014 compared to 2013 is primarily due to
the change in results of our private mortgage insurance (‘‘PMI’’) reinsurance captive ($0.1 million of income in 2014
as compared to a $0.2 million loss in 2013). Our PMI reinsurance captive (which we originally formed in 2002) was
placed into run-off during 2013.
Non-interest expense. Non-interest expense is an important component of our results of operations. We strive to
efficiently manage our cost structure and management is focused on a number of initiatives to reduce and contain
non-interest expenses.
16
Non-interest expense totaled $88.5 million in 2015, $90.0 million in 2014, and $104.1 million in 2013. The
components of non-interest expense are as follows:
NON-INTEREST EXPENSE
2015
Year ended December 31,
2014
(In thousands)
2013
Compensation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $33,346 $33,833 $ 33,515
6,507
Performance-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
7,902
Payroll taxes and employee benefits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5,154
8,234
6,732
8,108
Compensation and employee benefits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Occupancy, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Data processing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Furniture, fixtures and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loan and collection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Communications. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Advertising . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Legal and professional. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
FDIC deposit insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interchange expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Supplies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Credit card and bank service fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vehicle service contract counterparty contingencies . . . . . . . . . . . . . . . . . . . . . . . . .
(Costs) recoveries related to unfunded lending commitments . . . . . . . . . . . . . . . . . .
Provision for loss reimbursement on sold loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net (gains) losses on other real estate and repossessed assets . . . . . . . . . . . . . . . . .
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
48,186
8,369
7,944
3,892
3,609
2,957
2,121
2,013
1,366
1,125
809
797
347
119
113
(59)
(180)
4,922
47,221
8,912
7,532
4,137
5,392
2,926
2,193
1,969
1,567
1,291
993
946
536
199
31
(466)
(500)
5,072
47,924
8,845
8,019
4,293
6,886
2,919
2,433
2,459
2,435
1,645
1,028
1,263
812
4,837
(90)
2,152
1,237
5,021
Total non-interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $88,450 $89,951 $104,118
Compensation expense, which is primarily salaries, totaled $33.3 million, $33.8 million and $33.5 million in
2015, 2014 and 2013, respectively. The decrease in 2015 as compared to 2014 is due to a decline in total full-time
equivalent employees related to the Branch Consolidation and other staffing reductions. The increase in 2014 as
compared to 2013 is due to a $0.6 million decline in the amount of compensation that was deferred as direct loan
origination costs principally resulting from the reduced levels of new mortgage loan volume in 2014. 2015 average
total full-time equivalent employee levels have fallen by 4.1% compared to 2014 and by 7.7% compared to 2013.
Performance-based compensation expense totaled $6.7 million, $5.2 million and $6.5 million in 2015, 2014 and
2013, respectively. The increase in 2015 as compared to 2014 is primarily related to an increase in compensation of
$1.0 million under our Management Incentive Compensation Plan based on our actual 2015 financial performance
relative to plan targets and a $0.4 million increase under our Long-Term Incentive Plan. The decrease in 2014 as
compared to 2013 is primarily related to a decline in compensation of $0.7 million under our Management Incentive
Compensation Plan based on our actual 2014 financial performance relative to plan targets, a decline in loan
production related compensation of $0.3 million due to reduced levels of new mortgage loan volume, and a decline
of $0.3 million in the estimated employee stock ownership plan (‘‘ESOP’’) contribution. During 2014, we decreased
our ESOP contribution from 3% to 2% of eligible compensation and increased our 401(k) plan match from 1% to
2% of eligible compensation.
17
We maintain performance-based compensation plans. In addition to commissions and cash incentive awards,
such plans include an ESOP and a long-term equity based incentive plan. The amount of expense recognized in 2015,
2014 and 2013 for share-based awards under our long-term equity based incentive plan was $1.4 million, $1.0 million
and $0.9 million, respectively. In 2015 and 2014, there were new grants of restricted stock and performance share
awards. In 2013, there were new grants of restricted stock units, stock options and salary stock.
Payroll taxes and employee benefits expense totaled $8.1 million, $8.2 million and $7.9 million in 2015, 2014
and 2013, respectively. The decrease in 2015 as compared to 2014 is primarily due to a $0.3 million decrease in health
insurance costs that was partially offset by a $0.2 million increase in the 401(k) match. In 2015 we added
auto-enrollment to our 401(k) plan. The increase in 2014 as compared to 2013 is primarily due to a $0.2 million
increase in health insurance costs and a $0.1 million increase in the 401(k) plan match.
Occupancy expenses, net, totaled $8.4 million, $8.9 million and $8.8 million in 2015, 2014 and 2013,
respectively. The decrease in 2015 as compared to 2014 is primarily due to the Branch Consolidation and lower snow
removal costs. The slight increase in 2014 as compared to 2013 is primarily due to higher snow removal costs
associated with a harsh Michigan winter in 2014.
Data processing expenses totaled $7.9 million, $7.5 million, and $8.0 million in 2015, 2014 and 2013,
respectively. The increase in 2015 as compared to 2014 is due primarily to the addition of new products and services
(desktop software, sales management software and a new mortgage loan origination platform) as well as increased
costs due to growth in mobile banking usage. The decline in 2014 as compared to 2013 is due primarily to the impact
of a new seven-year core data processing contract that we executed in March 2014. Under the terms of the new
contract, we reduced core data processing and interchange costs by approximately $1 million annually.
Loan and collection expenses primarily reflect costs related to the management and collection of non-performing
loans and other problem credits. These expenses have declined steadily during the past several years primarily due
to decreases in non-performing loans, new loan defaults and watch/problem credits. 2015, 2014 and 2013 also
included $0.02 million, $0.5 million and $0.7 million, respectively, of collection related costs at Mepco Finance
Corporation (‘‘Mepco’’) primarily associated with the acquisition and management of collateral that related to
receivables from vehicle service contract counterparties.
Furniture, fixtures and equipment expense declined by $0.2 million in 2015 from 2014 and declined by
$0.2 million in 2014 from 2013. These declines are due primarily to our cost reduction initiatives and the closing or
consolidation of certain branch offices. A portion of these expense reductions were offset by additional depreciation
expense related to the replacement of substantially all of our ATMs during 2013 to meet applicable Americans with
Disabilities Act requirements.
Communications expense has been relatively unchanged and totaled $3.0 million, $2.9 million, and $2.9 million
in 2015, 2014 and 2013, respectively.
Advertising expense totaled $2.1 million, $2.2 million, and $2.4 million in 2015, 2014 and 2013, respectively.
The slight decrease in 2015 as compared to 2014 is due primarily to reductions in outdoor (billboard) advertising.
The 2014 decline was due to a reduction in direct mail costs.
Legal and professional fees totaled $2.0 million, $2.0 million, and $2.5 million in 2015, 2014 and 2013,
respectively. The decrease in 2014 as compared to 2013 was due primarily to declines in consulting fees, legal fees
and external audit fees due, in part, to our cost reduction initiatives.
FDIC deposit insurance expense totaled $1.4 million, $1.6 million, and $2.4 million in 2015, 2014 and 2013,
respectively. The declines in 2015 and 2014 as compared to 2013 reflect reductions in the Bank’s risk based premium
rate due to our improved financial metrics.
Interchange expense primarily represents fees paid to our core information systems processor and debit card
licensor related to debit card and ATM transactions. The decrease in this expense in 2015 and 2014 as compared to
2013 is primarily due to the impact of our new seven-year core data processing contract that we executed in March
2014.
18
Supplies expense has declined over the past two years consistent with our cost reduction initiatives and the
smaller size of the organization resulting from the closing or consolidation of branches.
The decline in credit card and bank service fees is primarily due to a decrease in the number of payment plans
being administered by Mepco.
The amortization of intangible assets primarily relates to branch acquisitions and the amortization of the deposit
customer relationship value, including core deposit value, which was acquired in connection with those acquisitions.
We had remaining unamortized intangible assets of $2.3 million and $2.6 million at December 31, 2015 and 2014,
respectively. See note #7 to the Consolidated Financial Statements for a schedule of future amortization of intangible
assets.
We record estimated incurred losses associated with Mepco’s vehicle service contract payment plan receivables
in our provision for loan losses and establish a related allowance for loan losses. (See ‘‘Portfolio Loans and asset
quality.’’) We record estimated incurred losses associated with defaults by Mepco’s counterparties as ‘‘vehicle service
contract counterparty contingencies expense,’’ which is included in non-interest expenses in our Consolidated
Statements of Operations. Such expenses totaled $0.1 million, $0.2 million and $4.8 million in 2015, 2014 and 2013,
respectively. The higher level of expense in 2013 was due to write-downs of or additional reserves on vehicle service
contract counterparty receivables. We reached settlements in certain litigation in 2013 to collect these receivables.
Given the costs and uncertainty of continued litigation, we determined it was in our best interest to resolve these
matters.
Our estimate of probable incurred losses from vehicle service contract counterparty contingencies requires a
significant amount of judgment 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, our evaluation of
collateral that may be available to recover funds due from our counterparties, and our assessment of the amount that
may ultimately be collected from counterparties in connection with their contractual obligations. We apply a rigorous
process, based upon historical payment plan activity and past experience, to estimate probable incurred losses and
quantify the necessary reserves for our vehicle service contract counterparty contingencies, but there can be no
assurance that our modeling process will successfully identify all such losses. We believe our assumptions regarding
the collection of vehicle service contract counterparty receivables are reasonable, and we based them on our good
faith judgments using data currently available. We also believe the current amount of reserves we have established
and the vehicle service contract counterparty contingencies expense that we have recorded are appropriate given our
estimate of probable incurred losses at the applicable Statement of Financial Condition date. However, because of the
uncertainty surrounding the numerous and complex assumptions made, actual losses could exceed the charges we
have taken to date.
Upon the cancellation of a service contract and the completion of the billing process to the counterparties for
amounts due to Mepco, there is a decrease in the amount of ‘‘payment plan receivables’’ and an increase in the
amount of ‘‘vehicle service contract counterparty receivables’’ until such time as the amount due from the
counterparty is collected. These amounts represent funds due to Mepco from its counterparties for cancelled service
contracts. 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 contingency expense, totaled
$7.2 million at both December 31, 2015 and 2014.
We face continued 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. Further, Mepco has
incurred elevated legal and collection expenses, in general, in dealing with defaults by its counterparties in recent
years. In particular, Mepco has had to initiate litigation against certain counterparties to collect amounts owed to
Mepco as a result of those parties’ dispute of their contractual obligations. In addition, see note #11 to the
Consolidated Financial Statements included within this report for more information about Mepco’s business, certain
risks and difficulties we currently face with respect to that business, and reserves we have established (through
vehicle service contract counterparty contingencies expense) for losses related to the business.
19
The changes in costs (recoveries) related to unfunded lending commitments are primarily impacted by changes
in the amounts of such commitments to originate portfolio loans as well as (for commercial loan commitments) the
grade (pursuant to our loan rating system) of such commitments.
The provision for loss reimbursement on sold loans was a credit of $0.06 million and $0.5 million in 2015 and
2014, respectively, and an expense of $2.2 million in 2013. This provision represents our estimate of incurred losses
related to mortgage loans that we have sold to investors (primarily Fannie Mae, Freddie Mac and Ginnie Mae). The
credit provisions in 2015 and 2014 are due primarily to the reduction or rescission of certain loss reimbursement
requests that had been pending and accrued for in earlier periods. Since we sell mortgage loans without recourse, loss
reimbursements only occur in those instances where we have breached a representation or warranty or other
contractual requirement related to the loan sale. Historically, loss reimbursements on mortgage loans sold without
recourse were rare. Prior to 2009, we had years in which we incurred no such loss reimbursements. However, our
loss reimbursements increased from 2010 to 2013 as Fannie Mae and Freddie Mac, in particular, were doing more
reviews of mortgage loans where they had incurred or expected to incur a loss and were more aggressive in pursuing
loss reimbursements from the sellers of such mortgage loans. In November 2013, we executed a Resolution
Agreement with Fannie Mae to resolve our existing and future repurchase and make whole obligations (collectively
‘‘Repurchase Obligations’’) related to mortgage loans originated between January 1, 2000 and December 31, 2008
and delivered to them by January 31, 2009. Under the terms of the Resolution Agreement, we paid Fannie Mae
approximately $1.5 million in November 2013 with respect to the Repurchase Obligations. We believe that it was in
our best interest to execute the Resolution Agreement in order to bring finality to the loss reimbursement exposure
with Fannie Mae for these years and reduce the resources spent on individual file reviews and defending loss
reimbursement requests. In addition, we were notified by Freddie Mac in January 2014 that they had completed their
review of mortgage loans that we originated between January 1, 2000 and December 31, 2008 and delivered to them.
The reserve for loss reimbursements on sold mortgage loans totaled $0.5 million and $0.7 million at December 31,
2015 and 2014, respectively. This reserve is included in accrued expenses and other liabilities in our Consolidated
Statements of Financial Condition. This reserve is based on an analysis of mortgage loans that we have sold which
are further categorized by delinquency status, loan to value, and year of origination. The calculation includes factors
such as probability of default, probability of loss reimbursement (breach of representation or warranty) and estimated
loss severity. The reserve levels at December 31, 2015 and 2014 also reflect the resolution of the mortgage loan
origination years of 2000 to 2008 with Fannie Mae and Freddie Mac. We believe that the amounts that we have
accrued for incurred losses on sold mortgage loans are appropriate given our analyses. However, future losses could
exceed our current estimate.
Net (gains) losses on ORE and repossessed assets represent the gain or loss on the sale or additional write downs
on these assets subsequent to the transfer of the asset from our loan portfolio. This transfer occurs at the time we
acquire the collateral that secured the loan. At the time of acquisition, the other real estate or repossessed asset is
valued at fair value, less estimated costs to sell, which becomes the new basis for the asset. Any write-downs at the
time of acquisition are charged to the allowance for loan losses. The net gains of $0.2 million and $0.5 million in
2015 and 2014, respectively, as compared to a net loss of $1.2 million recorded in 2013, primarily reflect greater
stability in real estate prices during the last two years, with many markets even experiencing price increases.
Other non-interest expenses have been relatively consistent over the past three years and totaled $4.9 million in
2015, compared to $5.1 million in 2014, and $5.0 million in 2013.
We are subject to an industry-specific tax based on net capital (the Michigan Business Tax [‘‘MBT’’]). The MBT
is recorded in other non-interest expenses. Our MBT expense was $0.3 million, $0.2 million and $0.2 million in 2015,
2014 and 2013, respectively.
Income tax expense (benefit). We recorded an income tax expense of $9.4 million and $7.2 million in 2015 and
2014, respectively, as compared to an income tax benefit of $54.9 million in 2013. Prior to the second quarter of 2013,
we had established a deferred tax asset valuation allowance against all of our net deferred tax assets.
We assess whether a valuation allowance on our deferred tax assets is necessary each quarter. Reversing or
reducing the valuation allowance requires us to conclude that the realization of the deferred tax assets is ‘‘more likely
20
than not.’’ The ultimate realization of this asset is primarily based on generating future income. As of June 30, 2013,
we concluded that the realization of substantially all of our deferred tax assets was more likely than not. That
conclusion was primarily based upon the following factors:
•
•
•
Achieving a sixth consecutive quarter of profitability;
A forecast of future profitability that supported the conclusion that the realization of the deferred tax assets
was more likely than not; and
A forecast that future asset quality continued to be stable to improving and that other factors did not exist
that could cause a significant adverse impact on future profitability.
The reversal of substantially all of the valuation allowance on our deferred tax assets resulted in our recording
an income tax benefit of $57.6 million in the second quarter of 2013. In addition, during the second quarter of 2013,
we recorded $1.4 million of income tax expense to clear from accumulated other comprehensive loss (‘‘AOCL’’) the
disproportionate tax effects from cash flow hedges. These disproportionate tax effects had been charged to other
comprehensive income and credited to income tax expense due to our valuation allowance on deferred tax assets as
more fully discussed in Note #13 to the Consolidated Financial Statements.
We have also concluded subsequent to June 30, 2013, that the realization of substantially all of our deferred tax
assets continues to be more likely than not for substantially the same reasons as enumerated above, including ten
additional profitable quarters since the second quarter of 2013.
The valuation allowance against our deferred tax assets totaled approximately $1.1 million and $1.0 million at
December 31, 2015 and 2014, respectively. The portion of the valuation allowance on our deferred tax assets that we
did not reverse primarily relates to state income taxes at our Mepco segment. In this instance, we determined that the
future realization of these particular deferred tax assets was not more likely than not. This conclusion was primarily
based on the uncertainty of Mepco’s future earnings attributable to particular states (given the various apportionment
criteria) and the significant reduction in the size of Mepco’s business over the past few years.
Because of our net operating loss and tax credit carryforwards, we are still subject to the rules of Section 382
of the Internal Revenue Code of 1986, as amended. An ownership change, as defined by these rules, would negatively
affect our ability to utilize our net operating loss carryforwards and other deferred tax assets in the future. If such an
ownership change were to occur, we may suffer higher-than-anticipated tax expense, and consequently lower net
income and cash flow, in those future years. Although we cannot control market purchases or sales of our common
stock, we have in place a Tax Benefits Preservation Plan to dissuade any movement in our stock that would trigger
an ownership change, and we limited the size of our common stock offering in 2013 to avoid triggering any
Section 382 limitations.
Our actual federal income tax expense (benefit) is different than the amount computed by applying our statutory
federal income tax rate to our pre-tax income (loss) primarily due to tax-exempt interest income and tax-exempt
income from the increase in the cash surrender value on life insurance and also, for 2013 the impact of changes in
the deferred tax asset valuation allowance. In addition, 2014 income tax expense was reduced by a credit of
approximately $0.7 million due to a true-up of the amount of unrecognized tax benefits relative to certain net
operating loss carryforwards and the reversal of a valuation allowance on a capital loss carryforward that was
believed to not be more likely than not to be realized prior to a strategy executed during the second quarter of 2014
that generated capital gains.
The income tax benefit in the Consolidated Statements of Operations also includes income taxes in a variety of
other states due primarily to Mepco’s operations. The amounts of such state income taxes were an expense (benefit)
of $(0.014) million, $0.005 million, and $(0.2) million in 2015, 2014 and 2013, respectively.
Business segments. Our reportable segments are based upon legal entities. We currently have two reportable
segments: Independent Bank and Mepco. These business segments are also differentiated based on the products and
services provided. We evaluate performance based principally on net income (loss) of the respective reportable
segments.
21
The following table presents net income (loss) by business segment.
BUSINESS SEGMENTS
2015
Year ended December 31,
2014
(In thousands)
2013
Independent Bank. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mepco . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Elimination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$21,727
(712)
(936)
(62)
$18,550
366
(712)
(183)
$74,313
(1,801)
5,092
(95)
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$20,017
$18,021
$77,509
(1)
Includes amounts relating to our parent company and certain insignificant operations.
The substantial change in the Bank’s results in 2015 and 2014 compared to 2013 is primarily due to the change
in income tax expense (benefit) as 2013 included the reversal of the valuation allowance on deferred tax assets
resulting in the recording of a significant income tax benefit that year. In addition, declines in net interest income and
non-interest income in 2014 were only partially offset by a decline in non-interest expense. The increase in 2015 as
compared to 2014 is primarily due to increases in net interest income and non-interest income as well as a decline
in non-interest expense. (See ‘‘Net
income,’’
‘‘Non-interest expense,’’ ‘‘Income tax expense (benefit),’’ and ‘‘Portfolio Loans and asset quality.’’)
income,’’ ‘‘Provision for loan losses,’’ ‘‘Non-interest
interest
The changes in Mepco’s results are due primarily to changes in the level of vehicle service contract counterparty
contingencies expense (see ‘‘Non-interest expense’’) as well as changes in its level of net interest income. All of
Mepco’s funding is provided by its parent company (Independent Bank) through an intercompany loan (that is
eliminated in consolidation). The rate on this intercompany loan is based on the Prime Rate (currently 3.50%). Mepco
might not be able to obtain such favorable funding costs on its own in the open market. Mepco’s 2014 results also
included a $0.3 million gain on the sale of ORE and repossessed assets compared to a loss of $0.5 million in 2013.
There was no gain or loss on ORE at our Mepco segment in 2015.
‘‘Other’’ is essentially our parent company only results. The change between the various periods is primarily due
to the change in the amount of income tax benefit recorded in each year, as 2013 included the reversal of the valuation
allowance on deferred tax assets resulting in recording a significant income tax benefit at the parent company. (See
‘‘Income tax expense (benefit).’’) Interest expense at the parent company has declined in 2015 and 2014 as compared
to 2013 due to the reduction in the balance of subordinated debentures. ‘‘Other’’ in 2014 also includes a $0.5 million
gain on the extinguishment of debt. In addition, 2013 included a $1.0 million increase (which reduced income before
income taxes) in the fair value of the Amended Warrant issued to the UST. (See ‘‘Non-interest income.’’)
22
FINANCIAL CONDITION
Summary. Our total assets increased to $2.41 billion at December 31, 2015, compared to $2.25 billion at
December 31, 2014, primarily due to increases in securities available for sale and loans. Loans, excluding loans held
for sale (‘‘Portfolio Loans’’), totaled $1.52 billion at December 31, 2015, an increase of 7.5% from $1.41 billion at
December 31, 2014. (See ‘‘Portfolio Loans and asset quality’’).
Deposits totaled $2.09 billion at December 31, 2015, compared to $1.92 billion at December 31, 2014. The
increase in deposits during 2015 is primarily due to growth in checking, savings and time account balances.
Securities. We maintain diversified securities portfolios, which include obligations of U.S. government-
sponsored agencies, securities issued by states and political subdivisions, residential and commercial mortgage-
backed securities, asset-backed securities, corporate securities and trust preferred securities. We regularly evaluate
asset/liability management needs and attempt to maintain a portfolio structure that provides sufficient liquidity and
cash flow. Except as discussed below, we believe that the unrealized losses on securities available for sale are
temporary in nature and are expected to be recovered within a reasonable time period. We believe that we have the
ability to hold securities with unrealized losses to maturity or until such time as the unrealized losses reverse. (See
‘‘Asset/liability management.’’)
Securities available for sale increased during 2015 due primarily to the purchase of U.S. agency, corporate, and
asset-backed securities. The securities were purchased to utilize funds generated from the increase in total deposits.
(See ‘‘Deposits’’ and ‘‘Liquidity and capital resources.’’)
Our portfolio of securities available for sale is reviewed quarterly for impairment in value. In performing this
review, management considers (1) the length of time and extent that fair value has been less than cost, (2) the
financial condition and near term prospects of the issuer, (3) the impact of changes in market interest rates on the
market value of the security and (4) an assessment of whether we intend to sell, or it is more likely than not that we
will be required to sell, a security in an unrealized loss position before recovery of its amortized cost basis. For
securities that do not meet these recovery criteria, the amount of impairment recognized in earnings is limited to the
amount related to credit losses, while impairment related to other factors is recognized in other comprehensive
income or loss.
We recorded net impairment losses related to other than temporary impairment on securities available for sale
of zero, $0.009 million, and $0.026 million, in 2015, 2014, and 2013, respectively. These net other than temporary
impairment charges are all related to private label residential mortgage-backed securities. In these instances, we
believe that the decline in value is directly due to matters other than changes in interest rates, are not expected to be
recovered within a reasonable timeframe based upon available information and are therefore other than temporary in
nature. (See ‘‘Non-interest income’’ and ‘‘Asset/liability management.’’)
SECURITIES
Amortized
Cost
Unrealized
Gains
Losses
(In thousands)
Fair
Value
Securities available for sale
December 31, 2015. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31, 2014. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$585,851
532,930
$3,152
3,317
$3,519
3,069
$585,484
533,178
lending markets also include nearby communities and metropolitan areas. Subject
Portfolio Loans and asset quality. In addition to the communities served by our Bank branch network, our
principal
to established
underwriting criteria, we also may participate in commercial lending transactions with certain non-affiliated banks
and make whole loan purchases from other financial institutions. In December 2015, we purchased $32.6 million of
single-family residential fixed rate jumbo mortgage loans from another Michigan-based financial institution. These
mortgage loans were all on properties located in Michigan, had a weighted average interest rate (after a 0.25%
servicing fee) of 3.94% and a weighted average remaining contractual maturity of 344 months.
23
The senior management and board of directors of our Bank retain authority and responsibility for credit
decisions and we have adopted uniform underwriting standards. Our loan committee structure and the loan review
process attempt to provide requisite controls and promote compliance with such established underwriting standards.
However, there can be no assurance that our lending procedures and the use of uniform underwriting standards will
prevent us from incurring significant credit losses in our lending activities.
We generally retain loans that may be profitably funded within established risk parameters. (See ‘‘Asset/liability
management.’’) As a result, we may hold adjustable-rate mortgage loans as Portfolio Loans, while 15- and 30-year,
fixed-rate obligations are generally sold to mitigate exposure to changes in interest rates. (See ‘‘Non-interest
income.’’)
LOAN PORTFOLIO COMPOSITION
December 31,
2015
2014
(In thousands)
Real estate (1)
Residential first mortgages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Residential home equity and other junior mortgages. . . . . . . . . . . . . . . . . . . . . . .
Construction and land development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other (2). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payment plan receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Agricultural . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 432,215
106,297
62,629
498,706
193,350
180,424
34,599
6,830
$ 411,423
108,162
54,644
447,837
154,591
186,875
40,001
6,429
Total loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,515,050
$1,409,962
(1)
Includes both residential and non-residential commercial loans secured by real estate.
(2)
Includes loans secured by multi-family residential and non-farm, non-residential property.
Future growth of overall Portfolio Loans is dependent upon a number of competitive and economic factors.
Further, it is our desire to reduce or restrict certain loan categories for risk management reasons.
NON-PERFORMING ASSETS (1)
Non-accrual loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans 90 days or more past due and still accruing interest. . . . . . . . . . . . . . .
Total non-performing loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other real estate and repossessed assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2015
December 31,
2014
(Dollars in thousands)
2013
$10,607
116
10,723
7,150
$15,231
7
15,238
6,454
$17,905
—
17,905
18,282
Total non-performing assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$17,873
$21,692
$36,187
As a percent of Portfolio Loans
Non-performing loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Allowance for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-performing assets to total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Allowance for loan losses as a percent of non-performing loans . . . . . . . . . .
0.71%
1.49
0.74
210.48
1.08%
1.84
0.96
170.56
1.30%
2.35
1.64
180.54
(1) Excludes loans classified as ‘‘troubled debt restructured’’ that are performing and vehicle service contract
counterparty receivables, net.
24
TROUBLED DEBT RESTRUCTURINGS
Performing TDR’s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-performing TDR’s (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Performing TDR’s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-performing TDR’s (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31, 2015
Commercial
Retail
Total
(In thousands)
$13,318
3,041
$16,359
$68,194
3,777(2)
$81,512
6,818
$71,971
$88,330
Commercial
December 31, 2014
Retail
(In thousands)
Total
$29,475
1,978
$31,453
$73,496
5,225(2)
$102,971
7,203
$78,721
$110,174
(1)
Included in non-performing loans table above.
(2) Also includes loans on non-accrual at the time of modification until six payments are received on a timely basis.
Non-performing loans declined by $4.5 million, or 29.6%, in 2015 and by $2.7 million, or 14.9%, in 2014 due
principally to declines in non-performing commercial loans and residential mortgage loans. These declines primarily
reflect reduced levels of new loan defaults as well as loan charge-offs, pay-offs, negotiated transactions, and the
migration of loans into ORE. In general, improving economic conditions in our market areas, as well as our collection
and resolution efforts, have resulted in a downward trend in non-performing loans. However, we are still experiencing
some loan defaults, particularly related to commercial loans secured by income-producing property and mortgage
loans secured by resort/vacation property.
Non-performing loans exclude performing loans that are classified as troubled debt restructurings (‘‘TDRs’’).
Performing TDRs totaled $81.5 million, or 5.4% of total Portfolio Loans, and $103.0 million, or 7.3% of total
Portfolio Loans, at December 31, 2015 and 2014, respectively. The decrease in the amount of performing TDRs
during 2015 reflects declines in both commercial loan and retail loan TDRs.
ORE and repossessed assets totaled $7.2 million at December 31, 2015, compared to $6.5 million at
December 31, 2014. The slight increase in ORE during 2015 primarily reflects the migration of some income-
producing commercial properties into ORE during the last quarter of the year.
We will place a loan that is 90 days or more past due on non-accrual, unless we believe the loan is both well
secured and in the process of collection. Accordingly, we have determined that the collection of the accrued and
unpaid interest on any loans that are 90 days or more past due and still accruing interest is probable.
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
Specific allocations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other adversely rated commercial loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Historical loss allocations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additional allocations based on subjective factors . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2015
$10,983
1,053
5,262
5,272
$22,570
December 31,
2014
(In thousands)
$13,233
761
6,773
5,223
$25,990
2013
$15,158
1,358
9,849
5,960
$32,325
Some loans will not be repaid in full. Therefore, an allowance for loan losses (‘‘AFLL’’) is maintained at a level
which represents our best estimate of losses incurred. In determining the AFLL and the related provision for loan
25
losses, we consider four principal elements: (i) specific allocations based upon probable losses identified during the
review of the loan portfolio, (ii) allocations established for other adversely rated commercial loans, (iii) allocations
based principally on historical loan loss experience, and (iv) additional allowances based on subjective factors,
including local and general economic business factors and trends, portfolio concentrations and changes in the size
and/or the general terms of the loan portfolios.
The first AFLL element (specific allocations) reflects our estimate of probable incurred losses based upon our
systematic review of specific loans. These estimates are based upon a number of factors, such as payment history,
financial condition of the borrower, discounted collateral exposure and discounted cash flow analysis. Impaired
commercial, mortgage and installment loans are allocated allowance amounts using this first element. The second
AFLL element (other adversely rated commercial loans) reflects the application of our commercial loan rating
system. This rating system is similar to those employed by state and federal banking regulators. Commercial loans
that are rated below a certain predetermined classification are assigned a loss allocation factor for each loan
classification category that is based upon a historical analysis of both the probability of default and the expected loss
rate (‘‘loss given default’’). The lower the rating assigned to a loan or category, the greater the allocation percentage
that is applied. The third AFLL element (historical loss allocations) is determined by assigning allocations to higher
rated (‘‘non-watch credit’’) commercial loans using a probability of default and loss given default similar to the
second AFLL element and to homogenous mortgage and installment loan groups based upon borrower credit score
and portfolio segment. For homogenous mortgage and installment
loans, a probability of default for each
homogenous pool is calculated by way of credit score migration. Historical loss data for each homogenous pool
coupled with the associated probability of default is utilized to calculate an expected loss allocation rate. The fourth
AFLL element (additional allocations based on subjective factors) is based on factors that cannot be associated with
a specific credit or loan category and reflects our attempt to ensure that the overall allowance for loan losses
appropriately reflects a margin for the imprecision necessarily inherent in the estimates of expected credit losses. We
consider a number of subjective factors when determining this fourth element, including local and general economic
business factors and trends, portfolio concentrations and changes in the size, mix and the general terms of the overall
loan portfolio.
Increases in the AFLL are recorded by a provision for loan losses charged to expense. Although we periodically
allocate portions of the AFLL to specific loans and loan portfolios, the entire AFLL is available for incurred losses.
We generally charge-off commercial, homogenous residential mortgage and installment loans and payment plan
receivables when they are deemed uncollectible or reach a predetermined number of days past due based on product,
industry practice and other factors. Collection efforts may continue and recoveries may occur after a loan is charged
against the allowance.
While we use relevant information to recognize losses on loans, additional provisions for related losses may be
necessary based on changes in economic conditions, customer circumstances and other credit risk factors.
Mepco’s allowance for losses is determined in a similar manner as discussed above, and primarily takes into
account historical loss experience and other subjective factors deemed relevant to Mepco’s payment plan business.
Estimated incurred losses associated with Mepco’s outstanding vehicle service contract payment plans are included
in the provision for loan losses. Mepco recorded credits of $0.009 million, $0.038 million and $0.097 million for its
provision for loan losses in 2015, 2014 and 2013, respectively, due primarily to declines in the balance of payment
plan receivables ($5.4 million, or 13.5%, $20.6 million, or 34.0%, and $24.1 million, or 28.4%, in 2015, 2014 and
2013, respectively). Mepco’s allowance for loan losses totaled $0.063 million and $0.072 million at December 31,
2015 and 2014, respectively. Mepco has established procedures for vehicle service contract payment plan servicing,
administration and collections, including the timely cancellation of the vehicle service contract, in order to protect
our position in the event of payment default or voluntary cancellation by the customer. Mepco has also established
procedures to attempt to prevent and detect fraud since the payment plan origination activities and initial customer
contacts are done entirely through unrelated third parties (vehicle service contract administrators and sellers or
automobile dealerships). However, there can be no assurance these risk management policies and procedures will
prevent us from incurring significant credit or fraud related losses in this business segment. The estimated incurred
losses described in this paragraph should be distinguished from the possible losses we may incur from counterparties
failing to pay their obligations to Mepco. (See note #11 to the Consolidated Financial Statements included within this
report.)
26
The AFLL decreased $3.4 million to $22.6 million at December 31, 2015 from $26.0 million at December 31,
2014 and was equal to 1.49% of total Portfolio Loans at December 31, 2015 compared to 1.84% at December 31,
2014. Two of the four components of the allowance for loan losses outlined above declined during 2015. The
allowance for loan losses related to specific loans decreased $2.3 million in 2015 due primarily to a $24.0 million,
or 21.6%, decline in the balance of individually impaired loans as well as charge-offs. The allowance for loan losses
related to other adversely rated commercial loans increased $0.3 million in 2015. Although the total balance of such
loans included in this component decreased to $27.8 million at December 31, 2015, from $30.6 million at
December 31, 2014, the allowance related to such loans increased slightly due to the use of higher loss given default
rates. The allowance for loan losses related to historical losses decreased $1.5 million during 2015 due principally
to the use of a lower estimated probability of default for homogenous mortgage and installment loans (resulting from
lower loan net charge-offs and reduced levels of new defaults on loans). The allowance for loan losses related to
subjective factors was relatively unchanged (increased by just $0.05 million during 2015).
All four components of the allowance for loan losses outlined above declined during 2014. The allowance for
loan losses related to specific loans decreased $1.9 million in 2014 due primarily to a $12.5 million, or 10.0%, decline
in the balance of individually impaired loans as well as charge-offs. The allowance for loan losses related to other
adversely rated commercial loans decreased $0.6 million in 2014 primarily due to lower expected loss given default
rates. The total balance of such loans included in this component also decreased to $30.6 million at December 31,
2014, from $39.4 million at December 31, 2013. In addition, the mix improved, with the balance of loans with more
adverse ratings declining to $12.7 million at December 31, 2014, from $18.1 million at December 31, 2013. The
allowance for loan losses related to historical losses decreased $3.1 million during 2014 due principally to the use
of a lower estimated probability of default for homogenous mortgage and installment loans (resulting from lower loan
net charge-offs and reduced levels of new defaults on loans). The allowance for loan losses related to subjective
factors decreased $0.7 million during 2014 primarily due to the improvement of various economic indicators used
in computing this portion of the allowance.
ALLOWANCE FOR LOSSES ON LOANS AND UNFUNDED COMMITMENTS
2015
2014
2013
Loan
Losses
Unfunded
Commitments
Loan
Losses
(Dollars in thousands)
Unfunded
Commitments
Loan
Losses
Unfunded
Commitments
Balance at beginning of year . . . . . . . . . . . . $25,990
Additions (deductions)
Provision for loan losses . . . . . . . . . . . . . .
Recoveries credited to allowance . . . . . . .
Loans charged against the allowance . . . .
(2,714)
5,022
(5,728)
Additions (deductions) included in non-
interest expense . . . . . . . . . . . . . . . . . . . . .
—
Balance at end of year . . . . . . . . . . . . . . . . . $22,570
$539
$ 32,325
$508
$ 44,275
$598
—
—
—
113
$652
(3,136)
7,420
(10,619)
—
—
—
—
31
(3,988)
8,270
(16,232)
—
—
—
—
(90)
$ 25,990
$539
$ 32,325
$508
Net loans charged against the allowance to
average Portfolio Loans . . . . . . . . . . . . . .
0.05%
0.23%
0.58%
The ratio of loan net charge-offs to average loans was 0.05% in 2015 (or $0.7 million) compared to 0.23% in
2014 (or $3.2 million) and 0.58% in 2013 (or $8.0 million). The decreases in loan net charge-offs occurred across
all loan categories. These decreases primarily reflect reduced levels of non-performing loans and improvement in
collateral liquidation values.
27
Deposits and borrowings. Historically, the loyalty of our customer base has allowed us to price deposits
competitively, contributing to a net interest margin that compares favorably to our peers. However, we still face a
significant amount of competition for deposits within many of the markets served by our branch network, which
limits our ability to materially increase deposits without adversely impacting the weighted-average cost of core
deposits.
To attract new core deposits, we have implemented various account acquisition strategies as well as branch staff
sales training. Account acquisition initiatives have historically generated increases in customer relationships. Over the
past several years, we have also expanded our treasury management products and services for commercial businesses
and municipalities or other governmental units and have also increased our sales calling efforts in order to attract
additional deposit relationships from these sectors. We view long-term core deposit growth as an important objective.
Core deposits generally provide a more stable and lower cost source of funds than alternative sources such as
short-term borrowings. (See ‘‘Liquidity and capital resources.’’)
Deposits totaled $2.09 billion and $1.92 billion at December 31, 2015 and 2014, respectively. The
$161.7 million increase in deposits in 2015 is due to growth in checking, savings and time deposit account balances.
Reciprocal deposits totaled $50.2 million and $53.7 million at December 31, 2015 and 2014, respectively. These
deposits represent demand, money market and time deposits from our customers that have been placed through
Promontory Interfinancial Network’s Insured Cash Sweep® service and Certificate of Deposit Account Registry
Service®. These services allow our customers to access multi-million dollar FDIC deposit insurance on deposit
balances greater than the standard FDIC insurance maximum.
We cannot be sure that we will be able to maintain our current level of core deposits. In particular, those deposits
that are uninsured may be susceptible to outflow. At December 31, 2015, we had approximately $492.5 million of
uninsured deposits. A reduction in core deposits would likely increase our need to rely on wholesale funding sources.
We have also implemented strategies that incorporate using federal funds purchased, other borrowings and
Brokered CDs to fund a portion of our interest-earning assets. The use of such alternate sources of funds supplements
our core deposits and is also a part of our asset/liability management efforts.
Other borrowings, comprised almost entirely of advances from the Federal Home Loan Bank (the ‘‘FHLB’’),
totaled $12.0 million and $12.5 million at December 31, 2015 and 2014, respectively.
As described above, we utilize wholesale funding, including FHLB borrowings and Brokered CDs to augment
our core deposits and fund a portion of our assets. At December 31, 2015, our use of such wholesale funding sources
(including reciprocal deposits) amounted to approximately $62.2 million, or 3.0% of total funding (deposits and total
borrowings, excluding subordinated debentures). Because wholesale funding sources are affected by general market
conditions, the availability of such funding may be dependent on the confidence these sources have in our financial
condition and operations. The continued availability to us of these funding sources is not certain, and Brokered CDs
may be difficult for us to retain or replace at attractive rates as they mature. Our liquidity may 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. Our financial performance could also be affected if we are unable to maintain our access
to funding sources 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 could be adversely affected.
We historically employed derivative financial instruments to manage our exposure to changes in interest rates.
We discontinued the active use of derivative financial instruments during 2008. In June 2013, we terminated our last
remaining interest-rate swap, which had an aggregate notional amount of $10.0 million. We have begun to again
utilize interest-rate swaps in 2014, relating to our commercial lending activities. During 2015 and 2014, we entered
into $24.3 million and $3.3 million (aggregate notional amounts), respectively, of interest rate swaps with commercial
loan customers, which were offset with interest rate swaps that the Bank entered into with a broker-dealer. We
recorded $0.412 million and $0.070 million of fee income related to these transactions during 2015 and 2014,
respectively.
Liquidity and capital resources. Liquidity risk is the risk of being unable to timely meet obligations as they come
due at a reasonable funding cost or without incurring unacceptable losses. Our liquidity management involves the
measurement and monitoring of a variety of sources and uses of funds. Our Consolidated Statements of Cash Flows
28
categorize these sources and uses into operating, investing and financing activities. We primarily focus our liquidity
management on maintaining adequate levels of liquid assets (primarily funds on deposit with the FRB and certain
investment securities) as well as developing access to a variety of borrowing sources to supplement our deposit
gathering activities and provide funds for purchasing investment securities or originating Portfolio Loans as well as
to be able to respond to unforeseen liquidity needs.
Our primary sources of funds include our deposit base, secured advances from the FHLB, a federal funds
purchased borrowing facility with another commercial bank, and access to the capital markets (for Brokered CDs).
At December 31, 2015, we had $302.1 million of time deposits that mature in the next 12 months. Historically,
a majority of these maturing time deposits are renewed by our customers. Additionally, $1.66 billion of our deposits
at December 31, 2015, were in account types from which the customer could withdraw the funds on demand.
Changes in the balances of deposits that can be withdrawn upon demand are usually predictable and the total balances
of these accounts have generally grown or have been stable over time as a result of our marketing and promotional
activities. However, there can be no assurance that historical patterns of renewing time deposits or overall growth or
stability in deposits will continue in the future.
We have developed contingency funding plans that stress test our liquidity needs that may arise from certain
events such as an adverse change in our financial metrics (for example, credit quality or regulatory capital ratios).
Our liquidity management also includes periodic monitoring that measures quick assets (defined generally as
short-term assets with maturities less than 30 days and loans held for sale) to total assets, short-term liability
dependence and basic surplus (defined as quick assets compared to short-term liabilities). Policy limits have been
established for our various liquidity measurements and are monitored on a monthly basis. In addition, we also prepare
cash flow forecasts that include a variety of different scenarios.
We believe that we currently have adequate liquidity at our Bank because of our cash and cash equivalents, our
portfolio of securities available for sale, our access to secured advances from the FHLB, our ability to issue Brokered
CDs and our improved financial metrics.
We also believe that
the parent company (including time deposits) of
approximately $15.8 million as of December 31, 2015 provides sufficient liquidity resources at the parent company
to meet operating expenses, to make interest payments on the subordinated debentures and to pay a cash dividend
on our common stock for the foreseeable future.
the available cash on hand at
In the normal course of business, we enter into certain contractual obligations. Such obligations include
requirements to make future payments on debt and lease arrangements, contractual commitments for capital
expenditures, and service contracts. The table below summarizes our significant contractual obligations at
December 31, 2015.
CONTRACTUAL COMMITMENTS (1)
1 Year or Less
1-3 Years
3-5 Years
(In thousands)
After
5 Years
Total
Time deposit maturities . . . . . . . . . . . . . . . . . . . . . . . .
Other borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Subordinated debentures . . . . . . . . . . . . . . . . . . . . . . .
Operating lease obligations . . . . . . . . . . . . . . . . . . . . .
Purchase obligations (2) . . . . . . . . . . . . . . . . . . . . . . .
$302,136
2,526
—
1,054
1,385
$ 93,655
6,629
—
1,671
2,771
$27,195
2,799
$ 3,234
—
— 35,569
253
346
1,386
2,771
$426,220
11,954
35,569
4,364
7,273
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$307,101
$104,726
$34,151
$39,402
$485,380
(1) Excludes approximately $0.6 million of accrued tax and interest relative to uncertain tax benefits due to the high
degree of uncertainty as to when, or if, those amounts would be paid.
(2)
Includes contracts with a minimum annual payment of $1.0 million and are not cancellable within one year.
29
Effective management of capital resources is critical to our mission to create value for our shareholders. In
addition to common stock, our capital structure also currently includes cumulative trust preferred securities.
CAPITALIZATION
Subordinated debentures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amount not qualifying as regulatory capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amount qualifying as regulatory capital. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Shareholders’ equity
December 31,
2015
2014
(In thousands)
$ 35,569
(1,069)
34,500
$ 35,569
(1,069)
34,500
Common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
339,462
(82,334)
(6,036)
251,092
352,462
(96,455)
(5,636)
250,371
Total capitalization. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$285,592
$284,871
We currently have three special purpose entities that originally issued $39.5 million of cumulative trust preferred
securities. These special purpose entities issued common securities and provided cash to our parent company that in
turn issued subordinated debentures to these special purpose entities equal to the trust preferred securities and
common securities. The subordinated debentures represent the sole asset of the special purpose entities. The common
securities and subordinated debentures are included in our Consolidated Statements of Financial Condition.
On December 1, 2014, we purchased 5,000 shares of trust preferred securities (liquidation amount of $1,000 per
security, representing a total of $5.0 million) that were issued by IBC Capital Finance IV. The trust preferred
securities have been retired along with certain related common stock issued by IBC Capital Finance IV and
subordinated debentures issued by us.
At both December 31, 2015 and 2014, we had $34.5 million of cumulative trust preferred securities remaining
outstanding.
The FRB 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) are 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 can be included in Tier 2 capital, subject
to restrictions. At the parent company, all of these securities qualified as Tier 1 capital at December 31, 2015 and
2014. Although the Dodd-Frank Act further limited Tier 1 treatment for trust preferred securities, those new limits
did not apply to our outstanding trust preferred securities. Further, the New Capital Rules grandfathered the treatment
of our trust preferred securities as qualifying regulatory capital.
On August 30, 2013, we redeemed the Series B Preferred Stock and the Amended Warrant from the UST and
exited TARP by making an $81.0 million payment to the UST. See note #12 to the Consolidated Financial Statements
included within this report for additional information about the Series B Preferred Stock and the Amended Warrant.
Common shareholders’ equity increased to $251.1 million at December 31, 2015 from $250.4 million at
December 31, 2014 due primarily to our net income in 2015 that was substantially offset by share repurchases and
dividends paid on our common stock. Our tangible common equity (‘‘TCE’’) totaled $248.8 million and
$247.7 million, respectively, at those same dates. Our ratio of TCE to tangible assets was 10.34% and 11.03% at
December 31, 2015 and 2014, respectively.
On January 21, 2015, our Board of Directors authorized a share repurchase plan. Under the terms of this share
repurchase plan, we were authorized to buy back up to 5% of our outstanding common stock. This repurchase plan
expired on December 31, 2015. During 2015, we repurchased 967,199 shares of our comment stock pursuant to this
plan at an average price of $13.96 per share.
30
On January 21, 2016, our Board of Directors authorized another share repurchase plan. Under the terms of the
2016 share repurchase plan, we are authorized to buy back up to 5% of our outstanding common stock. This
repurchase plan is authorized to last through December 31, 2016.
We resumed a quarterly cash dividend on our common stock of six cents per share in May 2014 and have
continued to pay regular quarterly dividends at that amount through August 2015. In October 2015, our Board of
Directors increased the quarterly cash dividend on our common stock to eight cents per share.
Because the Bank currently has negative ‘‘undivided profits’’ (i.e. a retained deficit) of $10.1 million at
December 31, 2015, under Michigan banking regulations, the Bank is not currently permitted to pay a dividend. We
can request regulatory approval for a return of capital from the Bank to the parent company. During the first quarter
of 2016, we requested regulatory approval for an $18.0 million return of capital from the Bank to the parent company.
This return of capital request was approved by our banking regulators on February 24, 2016, and the Bank returned
$18.0 million of capital to the parent company on February 25, 2016. Our banking regulators approved previous
return of capital requests totaling $41.0 million during the three-year period ended December 31, 2015. Also see note
#20 to the Consolidated Financial Statements included within this report.
As of December 31, 2015 and 2014, our Bank (and holding company) continued to meet the requirements to
be considered ‘‘well-capitalized’’ under federal regulatory standards (also see note #20 to the Consolidated Financial
Statements included within this report).
Asset/liability management. Interest-rate risk is created by differences in the cash flow characteristics of our
assets and liabilities. Options embedded in certain financial instruments, including caps on adjustable-rate loans as
well as borrowers’ rights to prepay fixed-rate loans, also create interest-rate risk.
Our asset/liability management efforts identify and evaluate opportunities to structure our statement of financial
condition in a manner that is consistent with our mission to maintain profitable financial leverage within established
risk parameters. We evaluate various opportunities and alternate asset/liability management strategies carefully and
consider the likely impact on our risk profile as well as the anticipated contribution to earnings. The marginal cost
of funds is a principal consideration in the implementation of our asset/liability management strategies, but such
evaluations further consider interest-rate and liquidity risk as well as other pertinent factors. We have established
parameters for interest-rate risk. We regularly monitor our interest-rate risk and report at least quarterly to our board
of directors.
We employ simulation analyses to monitor our interest-rate risk profile and evaluate potential changes in our net
interest income and market value of portfolio equity that result from changes in interest rates. The purpose of these
simulations is to identify sources of interest-rate risk inherent in our Statement of Financial Condition. The
simulations do not anticipate any actions that we might initiate in response to changes in interest rates and,
accordingly, the simulations do not provide a reliable forecast of anticipated results. The simulations are predicated
on immediate, permanent and parallel shifts in interest rates and generally assume that current loan and deposit
pricing relationships remain constant. The simulations further incorporate assumptions relating to changes in
customer behavior, including changes in prepayment rates on certain assets and liabilities.
31
CHANGES IN MARKET VALUE OF PORTFOLIO EQUITY AND NET INTEREST INCOME
Change in Interest Rates
December 31, 2015
200 basis point rise . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
100 basis point rise . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Base-rate scenario . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
100 basis point decline . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31, 2014
200 basis point rise . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
100 basis point rise . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Base-rate scenario . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
100 basis point decline . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Market
Value of
Portfolio
Equity (1)
$419,600
407,300
387,000
356,500
$421,700
406,800
384,900
355,000
Net
Interest
Income (2)
Percent
Change
(Dollars in thousands)
Percent
Change
8.42% $80,700
78,700
5.25
75,900
—
72,000
(7.88)
9.56% $75,600
73,600
5.69
71,300
—
69,200
(7.77)
6.32%
3.69
—
(5.14)
6.03%
3.23
—
(2.95)
(1) Simulation analyses calculate the change in the net present value of our assets and liabilities, including debt and
related financial derivative instruments, under parallel shifts in interest rates by discounting the estimated future
cash flows using a market-based discount rate. Cash flow estimates incorporate anticipated changes in
prepayment speeds and other embedded options.
(2) Simulation analyses calculate the change in net interest income under immediate parallel shifts in interest rates
over the next twelve months, based upon a static Statement of Financial Condition, which includes debt and
related financial derivative instruments, and do not consider loan fees.
Accounting Standards Update. See note #1 to the Consolidated Financial Statements included elsewhere in this
report for details on recently issued accounting pronouncements and their impact on our financial statements.
FAIR VALUATION OF FINANCIAL INSTRUMENTS
Financial Accounting Standards Board (‘‘FASB’’) Accounting Standards Codification (‘‘ASC’’) topic 820 -
‘‘Fair Value Measurements and Disclosures’’ (‘‘FASB ASC topic 820’’) defines fair value as the exchange price that
would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous
market for the asset or liability in an orderly transaction between market participants on the measurement date.
We utilize fair value measurements to record fair value adjustments to certain financial instruments and to
determine fair value disclosures. FASB ASC topic 820 differentiates between those assets and liabilities required to
be carried at fair value at every reporting period (‘‘recurring’’) and those assets and liabilities that are only required
to be adjusted to fair value under certain circumstances (‘‘nonrecurring’’). Trading securities, securities available-
for-sale, loans held for sale, and derivatives are financial instruments recorded at fair value on a recurring basis.
Additionally, from time to time, we may be required to record at fair value other financial assets on a nonrecurring
basis, such as loans held for investment, capitalized mortgage loan servicing rights and certain other assets. These
nonrecurring fair value adjustments typically involve application of lower of cost or market accounting or
write-downs of individual assets. See note #21 to the Consolidated Financial Statements for a complete discussion
on our use of fair valuation of financial instruments and the related measurement techniques.
LITIGATION MATTERS
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 amounts we have accrued. At this time, we
estimate the maximum amount of additional losses that are reasonably possible is approximately $1.0 million.
However, because of a number of factors, including the fact that certain of these litigation matters are still in their
early stages, this maximum amount may change in the future.
32
The litigation matters described in the preceding paragraph primarily include claims that have been brought
against us for damages, but do not include litigation matters where 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 we will not collect the full amount owed to us, net of reserves, are disclosed elsewhere in this report.
CRITICAL ACCOUNTING POLICIES
Our accounting and reporting policies are in accordance with accounting principles generally accepted in the
United States of America and conform to general practices within the banking industry. Accounting and reporting
policies for other than temporary impairment of investment securities, the allowance for loan losses, originated
mortgage loan servicing rights, vehicle service contract payment plan counterparty contingencies, and income taxes
are deemed critical since they involve the use of estimates and require significant management judgments.
Application of assumptions different than those that we have used could result in material changes in our financial
position or results of operations.
We are required to assess our investment securities for ‘‘other than temporary impairment’’ on a periodic basis.
The determination of other than temporary impairment for an investment security requires judgment as to the cause
of the impairment, the likelihood of recovery and the projected timing of the recovery. On January 12, 2009, the
FASB issued ASC 325-40-65-1 (formerly Staff Position No. EITF 99-20-1 — ‘‘Amendments to the Impairment
Guidance of EITF Issue No. 99-20.’’) This standard has been applicable to our financial statements since
December 31, 2008. In particular, this standard struck the language that required the use of market participant
assumptions about future cash flows from previous guidance. This change now permits the use of reasonable
management judgment about whether it is probable that all previously projected cash flows will not be collected in
determining other than temporary impairment. Our assessment process resulted in recording net other than temporary
impairment charges on securities of zero, $0.009 million, and $0.03 million, in 2015, 2014 and 2013, respectively.
We believe that our assumptions and judgments in assessing other than temporary impairment for our investment
securities are reasonable and conform to general industry practices. Prices for investment securities are largely
provided by a pricing service. These prices consider benchmark yields, reported trades, broker / dealer quotes and
issuer spreads. Furthermore, prices for mortgage-backed securities consider: TBA prices, monthly payment
information and collateral performance. At December 31, 2015 and 2014, the estimated fair value of our investment
securities classified as available for sale was (less than)/exceeded their cost basis at that same date by $(0.4) million
and $0.2 million, respectively. These amounts are included in the accumulated other comprehensive loss section of
shareholders’ equity.
Our methodology for determining the allowance and related provision for loan losses is described above in
‘‘Portfolio Loans and asset quality.’’ In particular, this area of accounting requires a significant amount of judgment
because a multitude of factors can influence the ultimate collection of a loan or other type of credit. It is extremely
difficult to precisely measure the amount of probable incurred losses in our loan portfolio. We use a rigorous process
to attempt to accurately quantify the necessary allowance and related provision for loan losses, but there can be no
assurance that our modeling process will successfully identify all of the probable incurred losses in our loan portfolio.
As a result, we could record future provisions for loan losses that may be significantly different than the levels that
we recorded in prior periods.
At December 31, 2015 and 2014, we had approximately $12.4 million and $12.1 million, respectively, of
mortgage loan servicing rights capitalized on our Consolidated Statements of Financial Condition. There are several
critical assumptions involved in establishing the value of this asset including estimated future prepayment speeds on
the underlying mortgage loans, the interest rate used to discount the net cash flows from the mortgage loan servicing,
the estimated amount of ancillary income that will be received in the future (such as late fees) and the estimated cost
to service the mortgage loans. We believe the assumptions that we utilize in our valuation are reasonable based upon
accepted industry practices for valuing mortgage loan servicing rights and represent neither the most conservative or
aggressive assumptions. We recorded an increase in the valuation allowance on capitalized mortgage loan servicing
rights of $0.9 million in 2014 compared to decreases of $0.5 million and $3.2 million in 2015 and 2013, respectively.
33
Mepco purchases payment plans 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 payment 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. 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 in vehicle service contract counterparty contingencies
expense, included in non-interest expenses, for estimated defaults by these counterparties in their obligations to
Mepco. These losses (which totaled $0.1 million, $0.2 million and $4.8 million in 2015, 2014 and 2013, respectively)
are titled ‘‘vehicle service contract counterparty contingencies’’ in our Consolidated Statements of Operations. This
area of accounting requires a significant amount of judgment 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, our evaluation of collateral that may be available to recover funds due from our counterparties, and our
assessment of the amount that may ultimately be collected from counterparties in connection with their contractual
obligations. We apply a rigorous process, based upon historical payment plan activity and past experience, to estimate
probable incurred losses and quantify the necessary reserves for our vehicle service contract counterparty
contingencies, but there can be no assurance that our modeling process will successfully identify all such losses. As
a result, we could record future losses associated with vehicle service contract counterparty contingencies that may
be materially different than the levels that we recorded in prior periods.
Our accounting for income taxes involves the valuation of deferred tax assets and liabilities primarily associated
with net operating loss carryforwards and differences in the timing of the recognition of revenues and expenses for
financial reporting and tax purposes. At December 31, 2015 we had gross deferred tax assets of $45.5 million, gross
deferred tax liabilities of $4.8 million and a valuation allowance of $1.1 million. This compares to gross deferred tax
assets of $54.6 million, gross deferred tax liabilities of $4.9 million and a valuation allowance of $1.0 million at
December 31, 2014. We are required to assess whether a valuation allowance should be established against our
deferred tax assets based on the consideration of all available evidence using a ‘‘more likely than not’’ standard. In
2008, we first established a valuation allowance against substantially all of our net deferred tax assets due to a number
of factors, including our then declining operating performance, overall negative trends in the banking industry and
our expectation that our operating results would continue to be negatively affected by the overall economic
environment. During 2012, 2011, 2010 and 2009, we concluded that we needed to continue to carry a valuation
allowance based on similar factors. However, at June 30, 2013, we concluded that the realization of substantially all
of our deferred tax assets was more likely than not. Subsequent to June 30, 2013, we concluded that the realization
of substantially all of our deferred tax assets continues to be more likely than not [see ‘‘Income tax expense
(benefit).’’]. We will continue to evaluate the realization of our net deferred tax assets in future periods. In making
such judgments, significant weight will be given to evidence that can be objectively verified. We will analyze changes
in near-term market conditions and consider both positive and negative evidence as well as other factors which may
impact future operating results in making any decision to adjust our valuation allowance. In addition, changes in tax
laws and changes in tax rates as well as our future level of earnings can impact the ultimate realization of our net
deferred tax asset as well as the valuation allowance that we have established.
34
MANAGEMENT’S ANNUAL REPORT ON INTERNAL CONTROL
OVER FINANCIAL REPORTING
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.
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, 2015. In
making this assessment, we used the criteria established in the 2013 Internal Control – Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on our assessment,
management has concluded that as of December 31, 2015, 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,
2015, that have materially affected, or are reasonably likely to materially affect, our internal control over financial
reporting.
Our independent registered public accounting firm has issued an audit report on the effectiveness of the
Company’s internal control over financial reporting as of December 31, 2015. Their report immediately follows our
report.
William B. Kessel
President and
Chief Executive Officer
Independent Bank Corporation
March 7, 2016
Robert N. Shuster
Executive Vice President
and Chief Financial Officer
35
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
Independent Bank Corporation
Grand Rapids, Michigan
We have audited the accompanying consolidated statements of financial condition of Independent Bank
Corporation as of December 31, 2015 and 2014, and the related consolidated statements of operations,
comprehensive income, shareholders’ equity and cash flows for each of the years in the three-year period ended
December 31, 2015. We also have audited Independent Bank Corporation’s internal control over financial reporting
as of December 31, 2015, based on criteria established in the 2013 Internal Control – Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Independent Bank
Corporation’s management is responsible for these financial statements, for maintaining effective internal control
over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting,
included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our
responsibility is to express an opinion on these financial statements and an opinion on the company’s internal control
over financial reporting based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about
whether the financial statements are free of material misstatement and whether effective internal control over
financial reporting was maintained in all material respects. Our audits of the financial statements included examining,
on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, and evaluating the overall financial statement
presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the
design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing
such other procedures as we considered necessary in the circumstances. We believe that our audits provide a
reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed 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. A company’s internal control over financial reporting
includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with
generally accepted accounting principles, and that receipts and expenditures of the company are being made only in
accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that
could have a material effect on the financial statements.
Because of its inherent
internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies
or procedures may deteriorate.
limitations,
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial
position of Independent Bank Corporation as of December 31, 2015 and 2014, and the results of its operations and
its cash flows for each of the years in the three-year period ended December 31, 2015 in conformity with accounting
principles generally accepted in the United States of America. Also in our opinion, Independent Bank Corporation
maintained, in all material respects, effective internal control over financial reporting as of December 31, 2015, based
on criteria established in the 2013 Internal Control – Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission.
Grand Rapids, Michigan
March 7, 2016
36
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
December 31,
2015
2014
(In thousands, except share amounts)
ASSETS
Cash and due from banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest bearing deposits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash and Cash Equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest bearing deposits - time . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Trading securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Securities available for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal Home Loan Bank and Federal Reserve Bank stock, at cost. . . . . . . .
Loans held for sale, carried at fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans
Commercial. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mortgage. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Installment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payment plan receivables. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Allowance for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other real estate and repossessed assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Bank-owned life insurance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capitalized mortgage loan servicing rights . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vehicle service contract counterparty receivables, net . . . . . . . . . . . . . . . . . . .
Other intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued income and other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
54,260
31,523
85,783
11,866
148
585,484
15,471
27,866
748,398
500,454
231,599
34,599
1,515,050
(22,570)
1,492,480
7,150
43,103
54,402
39,635
12,436
7,229
2,280
23,733
$2,409,066
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits
Non-interest bearing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Savings and interest-bearing checking . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reciprocal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Time . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Deposits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Subordinated debentures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vehicle service contract counterparty payables. . . . . . . . . . . . . . . . . . . . . . . . .
Accrued expenses and other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 659,793
988,174
50,207
387,789
2,085,963
11,954
35,569
797
23,691
2,157,974
$
48,326
25,690
74,016
13,561
203
533,178
19,919
23,662
690,955
472,628
206,378
40,001
1,409,962
(25,990)
1,383,972
6,454
45,948
53,625
48,632
12,106
7,237
2,627
23,590
$2,248,730
$ 576,882
943,734
53,668
350,018
1,924,302
12,470
35,569
1,977
24,041
1,998,359
Commitments and contingent liabilities
Shareholders’ Equity
Preferred stock, no par value, 200,000 shares authorized; none issued or
outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Common stock, no par value, 500,000,000 shares authorized; issued and
outstanding: 22,251,373 shares at December 31, 2015 and 22,957,323
shares at December 31, 2014. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Shareholders’ Equity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Liabilities and Shareholders’ Equity . . . . . . . . . . . . . . . . . . . . . . . .
—
—
339,462
(82,334)
(6,036)
251,092
$2,409,066
352,462
(96,455)
(5,636)
250,371
$2,248,730
See accompanying notes to consolidated financial statements
37
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31,
2014
(In thousands, except per share amounts)
2015
2013
$70,930
$71,823
$ 80,664
INTEREST INCOME
Interest and fees on loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest on securities
Taxable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax-exempt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Interest Income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
INTEREST EXPENSE
Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Interest Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net Interest Income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net Interest Income After Provision for Loan Losses . . . . . . . . . . . . . . . . . . . . . . . .
NON-INTEREST INCOME
Service charges on deposit accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interchange income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net gains (losses) on assets
Mortgage loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other than temporary impairment loss on securities
Total impairment loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss recognized in other comprehensive income (loss) . . . . . . . . . . . . . . . . . . . . .
Net impairment loss recognized in earnings . . . . . . . . . . . . . . . . . . . . . . . . . .
Mortgage loan servicing, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Title insurance fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net gain on branch sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain on extinguishment of debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Increase in fair value of U.S. Treasury warrant . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Non-interest Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
NON-INTEREST EXPENSE
Compensation and employee benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Occupancy, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Data processing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Furniture, fixtures and equipment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loan and collection. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Communications. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Advertising . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Legal and professional . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
FDIC deposit insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interchange expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Credit card and bank service fees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vehicle service contract counterparty contingencies . . . . . . . . . . . . . . . . . . . . . . . . . . .
Costs (recoveries) related to unfunded lending commitments . . . . . . . . . . . . . . . . . . . . .
Provision for loss reimbursement on sold loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net (gains) losses on other real estate and repossessed assets. . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Non-interest Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income Before Income Tax. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax expense (benefit) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Preferred stock dividends and discount accretion . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Preferred stock discount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net Income Applicable to Common Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
7,805
907
1,200
80,842
4,009
1,847
5,856
74,986
(2,714)
77,700
12,389
8,481
7,448
20
—
—
—
1,751
1,156
1,193
—
—
7,692
40,130
48,186
8,369
7,944
3,892
3,609
2,957
2,121
2,013
1,366
1,125
797
119
113
(59)
(180)
6,078
88,450
29,380
9,363
$20,017
—
—
$20,017
Net income per common share
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 0.88
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 0.86
Cash dividends declared per common share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 0.26
See accompanying notes to consolidated financial statements
38
6,341
991
1,400
80,555
4,967
2,332
7,299
73,256
(3,136)
76,392
13,446
8,164
5,628
329
(9)
—
(9)
791
995
—
500
—
8,931
38,775
47,221
8,912
7,532
4,137
5,392
2,926
2,193
1,969
1,567
1,291
946
199
31
(466)
(500)
6,601
89,951
25,216
7,195
$18,021
—
—
$18,021
$ 0.79
$ 0.77
$ 0.18
4,059
1,101
1,297
87,121
5,706
3,456
9,162
77,959
(3,988)
81,947
14,076
7,362
10,022
395
(26)
—
(26)
3,806
1,682
—
—
(1,025)
8,537
44,829
47,924
8,845
8,019
4,293
6,886
2,919
2,433
2,459
2,435
1,645
1,263
4,837
(90)
2,152
1,237
6,861
104,118
22,658
(54,851)
$ 77,509
(3,001)
7,554
$ 82,062
$
$
$
5.87
3.55
—
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
2015
Year Ended December 31,
2014
(In thousands)
2013
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive income (loss)
$20,017
$18,021
$77,509
Securities available for sale
Unrealized gain (loss) arising during period. . . . . . . . . . . . . . . . . . . . . . .
Change in unrealized losses for which a portion of other than
temporary impairment has been recognized in earnings . . . . . . . . . . .
Reclassification adjustment for other than temporary impairment
included in earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reclassification adjustments for gains included in earnings . . . . . . . . . .
Unrealized gains (losses) recognized in other comprehensive
(540)
5,095
(4,698)
—
—
(75)
398
270
9
(329)
26
(7)
income (loss) on securities available for sale . . . . . . . . . . . . . . . .
Income tax expense (benefit). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(615)
(215)
5,173
1,811
(4,409)
(1,544)
Unrealized gains (losses) recognized in other comprehensive
income (loss) on securities available for sale, net of tax . . . . . . .
(400)
3,362
(2,865)
Derivative instruments
Unrealized loss arising during period . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reclassification adjustment for expense recognized in earnings . . . . . . .
Reclassification adjustment for accretion on settled derivatives . . . . . . .
Unrealized gains recognized in other comprehensive income
(loss) on derivative instruments. . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax expense (benefit). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unrealized gains recognized in other comprehensive income
(loss) on derivative instruments, net of tax. . . . . . . . . . . . . . . . . .
—
—
—
—
—
—
Other comprehensive income (loss) . . . . . . . . . . . . . . . . . . . . . . .
(400)
—
—
380
380
133
247
3,609
(37)
208
189
360
(1,318)
1,678
(1,187)
Comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$19,617
$21,630
$76,322
See accompanying notes to consolidated financial statements
39
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
Preferred
Stock
Common
Stock
Balances at January 1, 2013 . . . . . . . . . . . . . . . . . . $ 84,204 $251,237
—
Net income for 2013 . . . . . . . . . . . . . . . . . . . . . . . .
—
Dividends on Preferred, 5%. . . . . . . . . . . . . . . . . . .
Issuance of 13,604,963 shares of common stock . .
— 99,075
Share based compensation (issuance of 175,789
—
2,856
Accumulated
Other
Comprehensive
Loss
Accumulated
Deficit
(In thousands)
$(192,408)
77,509
(2,856)
—
$(8,058)
—
—
—
shares of common stock) . . . . . . . . . . . . . . . . . . .
Share based compensation withholding obligation
(withholding of 55,348 shares of common
stock). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accretion of preferred stock discount . . . . . . . . . . .
Common stock warrant . . . . . . . . . . . . . . . . . . . . . .
Redemption of convertible preferred stock and
—
1,238
—
—
146
—
(513)
—
1,484
—
(146)
—
common stock warrant . . . . . . . . . . . . . . . . . . . . .
Other comprehensive loss . . . . . . . . . . . . . . . . . . . .
(87,206)
—
(1,348)
—
Balances at December 31, 2013 . . . . . . . . . . . . . . .
Net income for 2014 . . . . . . . . . . . . . . . . . . . . . . . .
Cash dividends declared, $.18 per share . . . . . . . . .
Issuance of 30,828 shares of common stock . . . . .
Share based compensation (issuance of 107,359
shares of common stock) . . . . . . . . . . . . . . . . . . .
Other comprehensive income. . . . . . . . . . . . . . . . . .
Balances at December 31, 2014 . . . . . . . . . . . . . . .
Net income for 2015 . . . . . . . . . . . . . . . . . . . . . . . .
Cash dividends declared, $.26 per share . . . . . . . . .
Repurchase of 967,199 shares of common stock . .
Issuance of 39,610 shares of common stock . . . . .
Share based compensation (issuance of 299,263
shares of common stock) . . . . . . . . . . . . . . . . . . .
Share based compensation withholding obligation
(withholding of 77,624 shares of common
stock). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive loss . . . . . . . . . . . . . . . . . . . .
— 351,173
—
—
—
—
97
—
—
—
1,192
—
— 352,462
—
—
—
—
— (13,498)
112
—
—
1,477
— (1,091)
—
—
7,554
—
(110,347)
18,021
(4,129)
—
—
—
(96,455)
20,017
(5,896)
—
—
—
—
—
Total
Shareholders’
Equity
$134,975
77,509
—
99,075
1,238
(513)
—
1,484
(81,000)
(1,187)
231,581
18,021
(4,129)
97
1,192
3,609
250,371
20,017
(5,896)
(13,498)
112
—
—
—
—
—
(1,187)
(9,245)
—
—
—
—
3,609
(5,636)
—
—
—
—
—
1,477
—
(400)
(1,091)
(400)
Balances at December 31, 2015 . . . . . . . . . . . . . . . $
— $339,462
$ (82,334)
$(6,036)
$251,092
See accompanying notes to consolidated financial statements
40
CONSOLIDATED STATEMENTS OF CASH FLOWS
Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH FROM OPERATING
ACTIVITIES
Proceeds from sales of loans held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Disbursements for loans held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred federal income tax expense (benefit) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred loan fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation, amortization of intangible assets and premiums and accretion of discounts on
securities, loans and interest bearning deposits - time . . . . . . . . . . . . . . . . . . . . . . . . .
Net gains on mortgage loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net gains on securities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Securities impairment recognized in earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net (gains) losses on other real estate and repossessed assets. . . . . . . . . . . . . . . . . . . . . .
Vehicle service contract counterparty contingencies . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Share based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net gain on branch sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain on extinguishment of debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(Increase) decrease in accrued income and other assets. . . . . . . . . . . . . . . . . . . . . . . . . .
Decrease in accrued expenses and other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net Cash From Operating Activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
CASH FLOW USED IN INVESTING ACTIVITIES
Proceeds from the sale of securities available for sale . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from the maturity of securities available for sale . . . . . . . . . . . . . . . . . . . . . . .
Principal payments received on securities available for sale . . . . . . . . . . . . . . . . . . . . . . .
Purchases of securities available for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchases of interest bearing deposits - time . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from the maturity of interest bearing deposits - time . . . . . . . . . . . . . . . . . . . . .
Redemption of Federal Home Loan Bank and Federal Reserve Bank stock. . . . . . . . . . . . .
Purchase of Federal Reserve Bank stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net (increase) decrease in portfolio loans (loans originated, net of principal payments) . . . . .
Purchase of portfolio loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net proceeds from sale of watch, substandard and non-performing loans . . . . . . . . . . . . . .
Net cash from (paid for) branch sale. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from the collection of vehicle service contract counterparty receivables. . . . . . . . .
Proceeds from the sale of other real estate and repossessed assets. . . . . . . . . . . . . . . . . . .
Proceeds from the sale of property and equipment. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net Cash Used in Investing Activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
CASH FLOW FROM FINANCING ACTIVITIES
Net increase in total deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net increase (decrease) in other borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from Federal Home Loan Bank advances . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payments of Federal Home Loan Bank advances. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net decrease in vehicle service contract counterparty payables . . . . . . . . . . . . . . . . . . . . .
Dividends paid. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from issuance of common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repurchase of common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Share based compensation withholding obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Redemption of subordinated debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . .
Redemption of convertible preferred stock and common stock warrant
Net Cash From Financing Activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net Increase (Decrease) in Cash and Cash Equivalents . . . . . . . . . . . . . . . . . . . . . . . .
Cash and Cash Equivalents at Beginning of Year . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash and Cash Equivalents at End of Year. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash paid during the year for
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Transfers to other real estate and repossessed assets. . . . . . . . . . . . . . . . . . . . . . . . . . . .
Transfer of payment plan receivables to vehicle service contract counterparty receivables . . .
Purchase of securities available for sale and interest bearing deposits - time not yet settled . .
2015
Year Ended December 31,
2014
(In thousands)
$ 18,021
2013
$ 77,509
$ 20,017
288,852
(285,608)
(2,714)
8,997
(1,234)
228,906
(226,550)
(3,136)
8,918
(753)
4,553
(7,448)
(20)
—
(180)
119
1,477
(1,193)
—
(1,387)
(196)
4,018
24,035
12,037
36,808
130,232
(234,693)
(4,595)
6,222
4,906
(458)
(74,343)
(32,872)
—
(7,229)
1,092
6,179
555
(4,354)
(160,513)
170,314
(1)
100
(615)
(1,180)
(5,896)
112
(13,498)
(1,091)
—
—
148,245
11,767
74,016
$ 85,783
$
5,769
295
6,694
1,203
—
3,014
(5,628)
(329)
9
(500)
199
1,192
—
(500)
(2,579)
(7,213)
(4,950)
13,071
14,633
58,220
84,487
(224,946)
(2,401)
6,719
3,814
(314)
(37,195)
—
—
—
385
18,471
309
(4,298)
(82,116)
39,496
(1)
100
(4,817)
(2,112)
(4,129)
97
—
—
(4,654)
—
23,980
(45,065)
119,081
$ 74,016
$
7,365
216
6,143
180
265
415,442
(378,323)
(3,988)
(57,550)
17
(2,197)
(10,022)
(395)
26
1,237
4,837
1,238
—
—
7,747
(3,508)
(25,439)
52,070
2,940
29,866
43,702
(332,060)
(20,260)
2,142
—
(2,581)
33,192
—
6,721
3,292
6,751
13,546
52
(8,371)
(221,068)
105,269
4
100
(541)
(3,636)
—
98,066
—
(513)
(9,452)
(81,000)
108,297
(60,701)
179,782
$ 119,081
$ 15,914
43
6,932
792
4,146
See accompanying notes to consolidated financial statements
41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – ACCOUNTING POLICIES
The accounting and reporting policies and practices of Independent Bank Corporation and subsidiaries conform
to accounting principles generally accepted in the United States of America and prevailing practices within the
banking industry. Our critical accounting policies include the assessment for other than temporary impairment
(‘‘OTTI’’) on investment securities, the determination of the allowance for loan losses, the determination of vehicle
service contract counterparty contingencies, the valuation of originated mortgage loan servicing rights and the
valuation of deferred tax assets. We are required to make material estimates and assumptions that are particularly
susceptible to changes in the near term as we prepare the consolidated financial statements and report amounts for
each of these items. Actual results may vary from these estimates.
Our subsidiary Independent Bank (‘‘Bank’’) transacts business in the single industry of commercial banking.
Our Bank’s activities cover traditional phases of commercial banking, including checking and savings accounts,
commercial lending, direct and indirect consumer financing and mortgage lending. Our principal markets are the rural
and suburban communities across Lower Michigan that are served by our Bank’s branches and loan production
offices. We also purchase payment plans from companies (which we refer to as ‘‘counterparties’’) that provide vehicle
service contracts and similar products to consumers,
through our wholly owned subsidiary, Mepco Finance
Corporation (‘‘Mepco’’). At December 31, 2015, 72.6% of our Bank’s loan portfolio was secured by real estate.
PRINCIPLES OF CONSOLIDATION — The consolidated financial statements include the accounts of
Independent Bank Corporation and its subsidiaries. The income, expenses, assets and liabilities of the subsidiaries are
included in the respective accounts of the consolidated financial statements, after elimination of all material
intercompany accounts and transactions.
STATEMENTS OF CASH FLOWS — For purposes of reporting cash flows, cash and cash equivalents include
cash on hand, amounts due from banks, interest bearing deposits and federal funds sold. Generally, federal funds are
sold for one-day periods. We report net cash flows for customer loan and deposit transactions, for short-term
borrowings and for vehicle service contract counterparty payables.
INTEREST BEARING DEPOSITS — Interest bearing deposits consist of overnight deposits with the Federal
Reserve Bank.
INTEREST BEARING DEPOSITS - TIME — Interest bearing deposits - time consist of deposits with original
maturities of 3 months or more.
LOANS HELD FOR SALE — Mortgage loans originated and intended for sale in the secondary market are
carried at fair value. Fair value adjustments, as well as realized gains and losses, are recorded in current earnings.
MORTGAGE LOAN SERVICING RIGHTS — We recognize as separate assets the rights to service mortgage
loans for others. The fair value of originated mortgage loan servicing rights has been determined based upon fair
value indications for similar servicing. The mortgage loan servicing rights are amortized in proportion to and over
the period of estimated net loan servicing income. We assess mortgage loan servicing rights for impairment based on
the fair value of those rights. For purposes of measuring impairment, the characteristics used include interest rate,
term and type. Amortization of and changes in the impairment reserve on originated mortgage loan servicing rights
are included in mortgage loan servicing, net in the Consolidated Statements of Operations. The fair values of
mortgage loan servicing rights are subject to significant fluctuations as a result of changes in estimated and actual
prepayment speeds and default rates and losses. Mortgage loan servicing income is recorded for fees earned for
servicing loans previously sold. The fees are generally based on a contractual percentage of the outstanding principal
and are recorded as income when earned. Mortgage loan servicing fees, excluding amortization of and changes in the
impairment reserve on originated mortgage loan servicing rights, totaled $4.1 million, $4.2 million and $4.3 million
for the years ended December 31, 2015, 2014 and 2013, respectively. Late fees and ancillary fees related to loan
servicing are not material.
TRANSFERS OF FINANCIAL ASSETS — Transfers of financial assets are accounted for as sales when control
over the assets has been relinquished. Control over transferred assets is deemed to be surrendered when the assets
42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
have been isolated from us, the transferee obtains the right (free of conditions that constrain it from taking advantage
of that right) to pledge or exchange the transferred assets, and we do not maintain effective control over the
transferred assets through an agreement to repurchase them before their maturity.
SECURITIES — We classify our securities as trading, held to maturity or available for sale. Trading securities
are bought and held principally for the purpose of selling them in the near term and are reported at fair value with
realized and unrealized gains and losses included in earnings. Securities held to maturity represent those securities
for which we have the positive intent and ability to hold until maturity and are reported at cost, adjusted for
amortization of premiums and accretion of discounts computed on the level-yield method. We did not have any
securities held to maturity at December 31, 2015 and 2014. Securities available for sale represent those securities not
classified as trading or held to maturity and are reported at fair value with unrealized gains and losses, net of
applicable income taxes reported in other comprehensive income (loss).
We evaluate securities for OTTI at least on a quarterly basis and more frequently when economic or market
conditions warrant such an evaluation. In performing this evaluation, management considers (1) the length of time
and extent that fair value has been less than cost, (2) the financial condition and near term prospects of the issuer,
(3) the impact of changes in market interest rates on the market value of the security and (4) an assessment of whether
we intend to sell, or it is more likely than not that we will be required to sell a security in an unrealized loss position
before recovery of its amortized cost basis. For securities that do not meet the aforementioned recovery criteria, the
amount of impairment recognized in earnings is limited to the amount related to credit losses, while impairment
related to other factors is recognized in other comprehensive income (loss). The credit loss is defined as the difference
between the present value of the cash flows expected to be collected and the amortized cost basis.
Gains and losses realized on the sale of securities available for sale are determined using the specific
identification method and are recognized on a trade-date basis.
FEDERAL HOME LOAN BANK (‘‘FHLB’’) STOCK — Our Bank subsidiary is a member of the FHLB system.
Members are required to own a certain amount of stock based on the level of borrowings and other factors, and may
invest in additional amounts. FHLB stock is carried at cost, classified as a restricted security, and periodically
evaluated for impairment based on ultimate recovery of par value. Both cash and stock dividends are reported as
income in interest income-other investments on the Consolidated Statements of Operations.
FEDERAL RESERVE BANK (‘‘FRB’’) STOCK — Our Bank subsidiary is a member of its regional Federal
Reserve Bank. FRB stock is carried at cost, classified as a restricted security, and periodically evaluated for
impairment based on ultimate recovery of par value. Both cash and stock dividends are reported as income in interest
income-other investments on the Consolidated Statements of Operations.
LOAN REVENUE RECOGNITION — Interest on loans is accrued based on the principal amounts outstanding.
In general, the accrual of interest income is discontinued when a loan becomes 90 days past due for commercial loans
and installment loans and when a loan misses four consecutive payments for mortgage loans and the borrower’s
capacity to repay the loan and collateral values appear insufficient for each loan class. However, loans may be placed
on non-accrual status regardless of whether or not such loans are considered past due if, in management’s opinion,
the borrower is unable to meet payment obligations as they become due or as required by regulatory provisions. All
interest accrued but not received for all loans placed on non-accrual is reversed from interest income. Payments on
such loans are generally applied to the principal balance until qualifying to be returned to accrual status. A
non-accrual loan may be restored to accrual status when interest and principal payments are current and the loan
appears otherwise collectible. Delinquency status for all classes in the commercial and installment loan segments is
based on the actual number of days past due as required by the contractual terms of the loan agreement while
delinquency status for mortgage loan segment classes is based on the number of payments past due.
Certain loan fees and direct loan origination costs are deferred and recognized as an adjustment of yield
generally over the contractual life of the related loan. Fees received in connection with loan commitments are
deferred until the loan is advanced and are then recognized generally over the contractual life of the loan as an
adjustment of yield. Fees on commitments that expire unused are recognized at expiration. Fees received for letters
of credit are recognized as revenue over the life of the commitment.
43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
PAYMENT PLAN RECEIVABLE REVENUE RECOGNITION — Payment plan receivables are acquired by our
Mepco segment at a discount and reported net of this discount in the Consolidated Statements of Financial Condition.
This discount is accreted into interest and fees on loans over the life of the receivable computed on a level-yield
method. All classes of payment plan receivables that have been canceled and are 90 days or more past due as required
by the contractual terms of the payment plan are classified as non-accrual.
ALLOWANCE FOR LOAN LOSSES — Portfolios are disaggregated into segments for purposes of determining
the allowance for loan losses (‘‘AFLL’’) which include commercial, mortgage and installment loans and payment
plan receivables. These segments are further disaggregated into classes for purposes of monitoring and assessing
credit quality based on certain risk characteristics. Classes within the commercial loan segment include (i) income
producing – real estate, (ii) land, land development and construction – real estate and (iii) commercial and industrial.
Classes within the mortgage loan segment include (i) 1-4 family, (ii) resort lending, (iii) home equity – 1st lien,
(iv) home equity – 2nd lien and beginning in 2015 (v) purchased loans. Classes within the installment loan segment
include (i) home equity – 1st lien, (ii) home equity – 2nd lien, (iii) loans not secured by real estate and (iv) other.
Classes within the payment plan receivables segment include (i) full refund, (ii) partial refund and (iii) other.
Commercial loans are subject to adverse market conditions which may impact the borrower’s ability to make
repayment on the loan or could cause a decline in the value of the collateral that secures the loan. Mortgage and
installment loans and payment plan receivables are subject to adverse employment conditions in the local economy
which could increase default rates. In addition, mortgage loans and real estate based installment loans are subject to
adverse market conditions which could cause a decline in the value of collateral that secures the loan. For an analysis
of the AFLL by portfolio segment and credit quality information by class, see note #4.
Some loans will not be repaid in full. Therefore, an AFLL is maintained at a level which represents our best
estimate of losses incurred. In determining the allowance and the related provision for loan losses, we consider four
principal elements: (i) specific allocations based upon probable losses identified during the review of the loan
portfolio, (ii) allocations established for other adversely rated commercial loans, (iii) allocations based principally on
historical loan loss experience, and (iv) additional allocations based on subjective factors, including local and general
economic business factors and trends, portfolio concentrations and changes in the size and/or the general terms of the
loan portfolios.
The first AFLL element (specific allocations) reflects our estimate of probable incurred losses based upon our
systematic review of specific loans. These estimates are based upon a number of objective factors, such as payment
history, financial condition of the borrower, discounted collateral exposure and discounted cash flow analysis.
Impaired commercial, mortgage and installment loans are allocated allowance amounts using this first element. The
second AFLL element (other adversely rated commercial loans) reflects the application of our loan rating system.
This rating system is similar to those employed by state and federal banking regulators. Commercial loans that are
rated below a certain predetermined classification are assigned a loss allocation factor for each loan classification
category that is based upon a historical analysis of both the probability of default and the expected loss rate (‘‘loss
given default’’). The lower the rating assigned to a loan or category, the greater the allocation percentage that is
applied. The third AFLL element (historical loss allocations) is determined by assigning allocations to higher rated
(‘‘non-watch credit’’) commercial loans using a probability of default and loss given default similar to the second
AFLL element and to homogenous mortgage and installment loan groups based upon borrower credit score and
portfolio segment. For homogenous mortgage and installment loans a probability of default for each homogenous
pool is calculated by way of credit score migration. Historical loss data for each homogenous pool coupled with the
associated probability of default is utilized to calculate an expected loss allocation rate. The fourth AFLL element
(additional allocations based on subjective factors) is based on factors that cannot be associated with a specific credit
or loan category and reflects our attempt to ensure that the overall allowance for loan losses appropriately reflects
a margin for the imprecision necessarily inherent in the estimates of expected credit losses. We consider a number
of subjective factors when determining this fourth element, including local and general economic business factors and
trends, portfolio concentrations and changes in the size, mix and the general terms of the overall loan portfolio.
Increases in the AFLL are recorded by a provision for loan losses charged to expense. Although we periodically
allocate portions of the AFLL to specific loans and loan portfolios, the entire AFLL is available for incurred losses.
44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
We generally charge-off commercial, homogenous residential mortgage and installment loans and payment plan
receivables when they are deemed uncollectible or reach a predetermined number of days past due based on loan
product, industry practice and other factors. Collection efforts may continue and recoveries may occur after a loan
is charged against the AFLL.
While we use relevant information to recognize losses on loans, additional provisions for related losses may be
necessary based on changes in economic conditions, customer circumstances and other credit risk factors.
A loan is impaired when full payment under the loan terms is not expected. Generally, those loans included in
each commercial
loan class that are rated substandard, classified as non-performing or were classified as
non-performing in the preceding quarter, are evaluated for impairment. Those loans included in each mortgage loan
or installment class whose terms have been modified and considered a troubled debt restructuring are also impaired.
Loans which have been modified resulting in a concession, and which the borrower is experiencing financial
difficulties, are considered troubled debt restructurings (‘‘TDR’’) and classified as impaired. We measure our
investment in an impaired loan based on one of three methods: the loan’s observable market price, the fair value of
the collateral or the present value of expected future cash flows discounted at the loan’s effective interest rate. Large
groups of smaller balance homogeneous loans, such as those loans included in each installment and mortgage loan
class and each payment plan receivable class, are collectively evaluated for impairment and accordingly, they are not
separately identified for impairment disclosures. TDR loans are measured at the present value of estimated future
cash flows using the loan’s effective interest rate at inception of the loan. If a TDR is considered to be a collateral
dependent loan, the loan is reported net, at the fair value of collateral. A loan can be removed from TDR status if it
is subsequently restructured and the borrower is no longer experiencing financial difficulties and the newly
restructured agreement does not contain any concessions to the borrower. The new agreement must specify market
terms, including a contractual interest rate not less than a market interest rate for new debt with similar credit risk
characteristics, and other terms no less favorable to us than those we would offer for similar new debt.
PROPERTY AND EQUIPMENT — Property and equipment is stated at cost less accumulated depreciation and
amortization. Depreciation and amortization is computed using both straight-line and accelerated methods over the
estimated useful lives of the related assets. Buildings are generally depreciated over a period not exceeding 39 years
and equipment is generally depreciated over periods not exceeding 7 years. Leasehold improvements are depreciated
over the shorter of their estimated useful life or lease period.
BANK OWNED LIFE INSURANCE — We have purchased a group flexible premium non-participating variable
life insurance contract on approximately 270 lives (who were salaried employees at the time we purchased the
contract) in order to recover the cost of providing certain employee benefits. Bank owned life insurance is recorded
at its cash surrender value or the amount that can be currently realized.
OTHER REAL ESTATE AND REPOSSESSED ASSETS — Other real estate at the time of acquisition is recorded
at fair value, less estimated costs to sell, which becomes the property’s new basis. Fair value is typically determined
by a third party appraisal of the property. Any write-downs at date of acquisition are charged to the allowance for
loan losses. Expense incurred in maintaining other real estate and subsequent write-downs to reflect declines in value
and gains or losses on the sale of other real estate are recorded in the Consolidated Statements of Operations. Non-real
estate repossessed assets are treated in a similar manner.
OTHER INTANGIBLE ASSETS — Other intangible assets consist of core deposits. They are initially measured
at fair value and then are amortized on both straight-line and accelerated methods over their estimated useful lives,
which range from 10 to 15 years.
VEHICLE SERVICE CONTRACT COUNTERPARTY RECEIVABLES, NET — These amounts represent funds
due to Mepco from its counterparties for cancelled service contracts. Upon the cancellation of a service contract and
the completion of the billing process to the counterparties for amounts due to Mepco, there is a decrease in the amount
of ‘‘payment plan receivables’’ and an increase in the amount of ‘‘vehicle service contract counterparty receivables’’
until such time as the amount due from the counterparty is collected.
INCOME TAXES — We employ the asset and liability method of accounting for income taxes. This method
establishes deferred tax assets and liabilities for the temporary differences between the financial reporting basis and
45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
the tax basis of our assets and liabilities at tax rates expected to be in effect when such amounts are realized or settled.
Under this method, the effect of a change in tax rates is recognized in the period that includes the enactment date.
The deferred tax asset is subject to a valuation allowance for that portion of the asset for which it is more likely than
not that it will not be realized.
A tax position is recognized as a benefit only if it is ‘‘more likely than not’’ that the tax position would be
sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest
amount of tax benefit that is greater than 50% likely of being realized on examination.
We recognize interest and/or penalties related to income tax matters in income tax expense.
We file a consolidated federal income tax return. Intercompany tax liabilities are settled as if each subsidiary
filed a separate return.
VEHICLE SERVICE CONTRACT COUNTERPARTY PAYABLES — Vehicle service contract counterparty
payables represent amounts owed to insurance companies or other counterparties for vehicle service contract payment
plans purchased by us. The vehicle service contract counterparty payable becomes due in accordance with the terms
of the specific contract between Mepco and the counterparty. Typically these terms require payment after Mepco has
received one or two payments from the consumer on the payment plan receivable.
COMMITMENTS TO EXTEND CREDIT AND RELATED FINANCIAL INSTRUMENTS — Financial
instruments may include commitments to extend credit and standby letters of credit. Financial instruments involve
varying degrees of credit and interest-rate risk in excess of amounts reflected in the Consolidated Statements of
Financial Condition. Exposure to credit risk in the event of non-performance by the counterparties to the financial
instruments for loan commitments to extend credit and letters of credit is represented by the contractual amounts of
those instruments. In general, we use a similar methodology to estimate our liability for these off-balance sheet credit
exposures as we do for our allowance for loan losses. For commercial related commitments, we estimate liability
using our loan rating system and for mortgage and installment commitments we estimate liability principally upon
historical loss experience. Our estimated liability for off balance sheet commitments is included in accrued expenses
and other liabilities in our Consolidated Statements of Financial Condition and any charge or recovery is recorded
in non-interest expenses in our Consolidated Statements of Operations.
DERIVATIVE FINANCIAL INSTRUMENTS — We record derivatives on our Consolidated Statements of
Financial Condition as assets and liabilities measured at their fair value. The accounting for increases and decreases
in the value of derivatives depends upon the use of derivatives and whether the derivatives qualify for hedge
accounting.
At the inception of the derivative we designate the derivative as one of three types based on our intention and
belief as to likely effectiveness as a hedge. These three types are (1) a hedge of the fair value of a recognized asset
or liability or of an unrecognized firm commitment (‘‘Fair Value Hedge’’), (2) a hedge of a forecasted transaction or
the variability of cash flows to be received or paid related to a recognized asset or liability (‘‘Cash Flow Hedge’’),
or (3) an instrument with no hedging designation. For a Fair Value Hedge, the gain or loss on the derivative, as well
as the offsetting loss or gain on the hedged item, are recognized in current earnings as fair values change. For a Cash
Flow Hedge, the gain or loss on the derivative is reported in other comprehensive income (loss) and is reclassified
into earnings in the same periods during which the hedged transaction affects earnings. We did not have any Fair
Value Hedges or Cash Flow Hedges at December 31, 2015 or 2014. For both types of hedges, changes in the fair
value of derivatives that are not highly effective in hedging the changes in fair value or expected cash flows of the
hedged item are recognized immediately in current earnings. For instruments with no hedging designation, the gain
or loss on the derivative is reported in earnings. These free standing instruments currently consist of (i) mortgage
banking related derivatives and include rate-lock loan commitments to fund mortgage loans (interest rate locks) to
be sold into the secondary market and mandatory forward commitments for the future delivery of these mortgage
loans, (ii) certain pay-fixed and pay-variable interest rate swap agreements related to commercial loan customers and
(iii) certain purchased and written options related to a time deposit product. Fair values of the mortgage derivatives
are estimated based on mortgage backed security pricing for comparable assets. We enter into mandatory forward
commitments for the future delivery of mortgage loans generally when interest rate locks are entered into in order
46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
to hedge the change in interest rates resulting from our commitments to fund the loans. Changes in the fair values
of these derivatives are included in net gains on mortgage loans. Fair values of the pay-fixed and pay-variable interest
rate swap agreements are based on discounted cash flow analyses and are included in net interest income. Fair values
of the purchased and written options are based on prices of financial instruments with similar characteristics and are
included in net interest income.
Net cash settlements on derivatives that qualify for hedge accounting are recorded in interest expense. Net cash
settlements on derivatives that do not qualify for hedge accounting are reported in non-interest income (mortgage
banking related derivatives) or net interest income (interest rate swap agreements and options). Cash flows on hedges
are classified in the cash flow statement the same as the cash flows of the items being hedged.
We formally document the relationship between derivatives and hedged items, as well as the risk- management
objective and the strategy for undertaking hedge transactions, at the inception of the hedging relationship. This
documentation includes linking Fair Value or Cash Flow Hedges to specific assets and liabilities on the balance sheet
or to specific firm commitments or forecasted transactions. We also assess, both at the hedge’s inception and on an
ongoing basis, whether the derivative instruments that are used are highly effective in offsetting changes in fair values
or cash flows of the hedged items. We discontinue hedge accounting when it is determined that the derivative is no
longer effective in offsetting changes in the fair value or cash flows of the hedged item, the derivative is settled or
terminates, a hedged forecasted transaction is no longer probable, a hedged firm commitment is no longer firm, or
treatment of the derivative as a hedge is no longer appropriate or intended.
When hedge accounting is discontinued, subsequent changes in fair value of the derivative are recorded in
earnings. When a fair value hedge is discontinued, the hedged asset or liability is no longer adjusted for changes in
fair value and the existing basis adjustment is amortized or accreted over the remaining life of the asset or liability.
When a cash flow hedge is discontinued but the hedged cash flows or forecasted transactions are still expected to
occur, gains or losses that were accumulated in other comprehensive loss are amortized into earnings over the same
periods which the hedged transactions will affect earnings.
COMPREHENSIVE INCOME — Comprehensive income consists of net income, unrealized gains and losses on
securities available for sale and derivative instruments classified as cash flow hedges.
INCOME PER COMMON SHARE — Basic income per common share is computed by dividing net income
applicable to common stock by the weighted average number of common shares outstanding during the period and
participating share awards. All outstanding unvested share-based payment awards that contain rights to nonforfeitable
dividends are considered participating securities for this calculation. For diluted income per common share, net
income is divided by the weighted average number of common shares outstanding during the period plus the dilutive
effects of the assumed conversion of convertible preferred stock, assumed exercise of common stock warrants,
assumed exercise of stock options, restricted stock units and stock units for a deferred compensation plan for
non-employee directors.
SHARE BASED COMPENSATION — Cost is recognized for stock options and non-vested share awards issued
to employees based on the fair value of these awards at the date of grant. A Black-Scholes model is utilized to
estimate the fair value of stock options, a simulation analysis which considers potential outcomes for a large number
of independent scenarios is utilized to estimate the fair value of performance share units and the market price of our
common stock at the date of grant is used for other non-vested share awards. Cost is recognized over the required
service period, generally defined as the vesting period. Cost is also recognized for salary stock issued to employees
and stock issued to non-employee directors. These shares vest immediately and cost is recognized during the period
they are issued.
COMMON STOCK — At December 31, 2015, 0.1 million shares of common stock were reserved for issuance
under the dividend reinvestment plan and 0.5 million shares of common stock were reserved for issuance under our
long-term incentive plans.
RECLASSIFICATION — Certain amounts in the 2014 and 2013 consolidated financial statements have been
reclassified to conform to the 2015 presentation.
47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ADOPTION OF NEW ACCOUNTING STANDARDS — In January 2014, the Financial Accounting Standards
Board (‘‘FASB’’) issued Accounting Standards Update (‘‘ASU’’) 2014-04, ‘‘Reclassification of Residential Real
Estate Collateralized Consumer Mortgage Loans upon Foreclosure’’. The amendments in this ASU clarify that an in
substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of
residential real estate property collateralizing a consumer mortgage loan, upon either (1) the creditor obtaining legal
title to the residential real estate property upon completion of a foreclosure or (2) the borrower conveying all interest
in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of
foreclosure or through a similar legal agreement. This amendment is effective for fiscal years, and interim periods
within those years, beginning after December 15, 2014, with early adoption and retrospective or prospective
application permitted. This amended guidance became effective for us on January 1, 2015, and did not have a material
impact on our consolidated operating results or financial condition.
In May 2014, the FASB issued ASU 2014-09, ‘‘Revenue from Contracts with Customers (Topic 606)’’. This
ASU supersedes and replaces nearly all existing revenue recognition guidance, including industry-specific guidance,
establishes a new control-based revenue recognition model, changes the basis for deciding when revenue is
recognized over time or at a point in time, provides new and more detailed guidance on specific topics and expands
and improves disclosures about revenue. In addition, this ASU specifies the accounting for some costs to obtain or
fulfill a contract with a customer. This amended guidance is effective for us on January 1, 2018, and is not expected
to have a material impact on our consolidated operating results or financial condition.
In June 2014, the FASB issued ASU 2014-12, ‘‘Compensation – Stock Compensation (Topic 718) – Accounting
for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved After
the Requisite Service Period’’. This ASU amends existing guidance related to the accounting for share-based
payments when the terms of an award provide that a performance target could be achieved after the requisite service
period. These amendments require that a performance target that affects vesting and that could be achieved after the
requisite service period be treated as a performance condition. The total amount of compensation cost recognized
during and after the requisite service period should reflect the number of awards that are expected to vest and should
be adjusted to reflect those awards that ultimately vest. The requisite service period ends when the employee can
cease rendering service and still be eligible to vest in the award if the performance target is achieved. This amended
guidance is effective for us on January 1, 2016, and is not expected to have a material impact on our consolidated
operating results or financial condition.
In January 2016, the FASB issued ASU 2016-01, ‘‘Financial Instruments – Overall (Subtopic 825-10) –
Recognition and Measurement of Financial Assets and Financial Liabilities’’. This ASU amends existing guidance
related to the accounting for certain financial assets and liabilities. These amendments, among other things, requires
equity investments (except those accounted for under the equity method of accounting, or those that result in
consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income,
requires public business entities to use the exit price notion when measuring the fair value of financial instruments
for disclosure purposes, requires separate presentation of financial assets and financial liabilities by measurement
category and form of financial asset and eliminates the requirement for public business entities to disclose the
method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial
instruments measured at amortized cost. This amended guidance is effective for us on January 1, 2018, and is not
expected to have a material impact on our consolidated operating results or financial condition.
NOTE 2 – RESTRICTIONS ON CASH AND DUE FROM BANKS
Our Bank is required to maintain reserve balances in the form of vault cash and non-interest earning balances
with the FRB. The average reserve balances to be maintained during 2015 and 2014 were $3.2 million and
$15.3 million, respectively. We do not maintain compensating balances with correspondent banks. We are also
required to maintain reserve balances related primarily to our merchant payment processing operations and for certain
investment security transactions. These balances are held at unrelated financial institutions and totaled $2.5 million
and $2.8 million at December 31, 2015 and 2014, respectively.
48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTE 3 – SECURITIES
Securities available for sale consist of the following at December 31:
2015
U.S. agency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
U.S. agency residential mortgage-backed . . . . . . . . . . . . . . . . . . . .
U.S. agency commercial mortgage-backed. . . . . . . . . . . . . . . . . . .
Private label residential mortgage-backed . . . . . . . . . . . . . . . . . . .
Other asset backed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Obligations of states and political subdivisions . . . . . . . . . . . . . . .
Corporate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Trust preferred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2014
U.S. agency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
U.S. agency residential mortgage-backed . . . . . . . . . . . . . . . . . . . .
U.S. agency commercial mortgage-backed. . . . . . . . . . . . . . . . . . .
Private label residential mortgage-backed . . . . . . . . . . . . . . . . . . .
Other asset backed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Obligations of states and political subdivisions . . . . . . . . . . . . . . .
Corporate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Trust preferred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortized
Cost
Unrealized
Gains
Losses
(In thousands)
Fair
Value
$ 47,283
195,055
34,017
5,061
117,431
145,193
38,895
2,916
$585,851
$ 34,936
256,387
33,779
6,216
32,314
143,698
22,690
2,910
$532,930
$ 309
1,584
94
161
54
941
9
—
$3,152
$ 133
1,838
68
187
77
961
53
—
$3,317
$
80
583
83
319
581
1,150
290
433
$3,519
$
63
667
119
390
38
1,244
79
469
$3,069
$ 47,512
196,056
34,028
4,903
116,904
144,984
38,614
2,483
$585,484
$ 35,006
257,558
33,728
6,013
32,353
143,415
22,664
2,441
$533,178
Total OTTI recognized in accumulated other comprehensive loss for securities available for sale was zero at both
December 31, 2015 and 2014, respectively.
Our investments’ gross unrealized losses and fair values aggregated by investment type and length of time that
individual securities have been at a continuous unrealized loss position, at December 31 follows:
2015
U.S. agency . . . . . . . . . . . . . . . . . . .
U.S. agency residential mortgage-
backed. . . . . . . . . . . . . . . . . . . . . .
U.S. agency commercial mortgage-
backed. . . . . . . . . . . . . . . . . . . . . .
Private label residential mortgage-
backed. . . . . . . . . . . . . . . . . . . . . .
Other asset backed . . . . . . . . . . . . . .
Obligations of states and political
subdivisions . . . . . . . . . . . . . . . . .
Corporate . . . . . . . . . . . . . . . . . . . . .
Trust preferred . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . .
Less Than Twelve Months
Unrealized
Losses
Fair Value
Twelve Months or More
Unrealized
Losses
Fair Value
Total
Fair Value
Unrealized
Losses
(In thousands)
$ 12,164
$
47
$ 6,746
$
33
$ 18,910
$
80
23,340
2,247
3,393
5,189
12,240
—
2,483
$55,638
267
23
319
147
553
—
433
$1,775
80,878
18,994
3,393
107,849
64,733
30,550
2,483
$327,790
583
83
319
581
1,150
290
433
$3,519
57,538
16,747
—
102,660
52,493
30,550
—
$272,152
316
60
—
434
597
290
—
$1,744
49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
2014
U.S. agency . . . . . . . . . . . . . . . . . . .
U.S. agency residential mortgage-
backed. . . . . . . . . . . . . . . . . . . . . .
U.S. agency commercial mortgage-
backed. . . . . . . . . . . . . . . . . . . . . .
Private label residential mortgage-
backed. . . . . . . . . . . . . . . . . . . . . .
Other asset backed . . . . . . . . . . . . . .
Obligations of states and political
subdivisions . . . . . . . . . . . . . . . . .
Corporate . . . . . . . . . . . . . . . . . . . . .
Trust preferred . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . .
Less Than Twelve Months
Unrealized
Losses
Fair Value
Twelve Months or More
Unrealized
Losses
Fair Value
Total
Fair Value
Unrealized
Losses
(In thousands)
$ 12,851
$ 58
$
606
$
5
$ 13,457
$
63
89,547
21,325
208
2,960
28,114
8,660
—
$163,665
531
119
1
15
106
79
—
$909
15,793
136
105,340
—
389
23
21,325
4,221
11,689
667
119
390
38
1,138
—
469
$2,160
65,654
8,660
2,441
$232,787
1,244
79
469
$3,069
—
4,013
8,729
37,540
—
2,441
$69,122
Our portfolio of securities available for sale is reviewed quarterly for impairment in value. In performing this
review, management considers (1) the length of time and extent that fair value has been less than cost, (2) the
financial condition and near term prospects of the issuer, (3) the impact of changes in market interest rates on the
market value of the security and (4) an assessment of whether we intend to sell, or it is more likely than not that we
will be required to sell a security in an unrealized loss position before recovery of its amortized cost basis. For
securities that do not meet the aforementioned recovery criteria, the amount of impairment recognized in earnings is
limited to the amount related to credit losses, while impairment related to other factors is recognized in other
comprehensive income (loss).
U.S. agency, U.S. agency residential mortgage-backed securities and U.S. agency commercial mortgage backed
securities — at December 31, 2015, we had 39 U.S. agency, 108 U.S. agency residential mortgage-backed and 18
U.S. agency commercial mortgage-backed securities whose fair market value is less than amortized cost. The
unrealized losses are largely attributed to increases in interest rates since acquisition and widening spreads to
Treasury bonds. As management does not intend to liquidate these securities and it is more likely than not that we
will not be required to sell these securities prior to recovery of these unrealized losses, no declines are deemed to be
other than temporary.
Private label residential mortgage backed securities — at December 31, 2015, we had five of this type of security
whose fair value is less than amortized cost. Two of the five issues are rated by a major rating agency as investment
grade, two are rated below investment grade and one is split rated. Two of these bonds have an impairment in excess
of 10% and all five of these holdings have been impaired for more than 12 months. The unrealized losses are largely
attributable to credit spread widening on these securities since their acquisition.
All of these securities are receiving principal and interest payments. Most of these transactions are pass-through
structures, receiving pro rata principal and interest payments from a dedicated collateral pool. The nonreceipt of
interest cash flows is not expected and thus not presently considered in our discounted cash flow methodology
discussed below.
All private label residential mortgage-backed securities are reviewed for OTTI utilizing a cash flow projection.
The cash flow analysis forecasts cash flow from the underlying loans in each transaction and then applies these cash
flows to the bonds in the securitization. Our cash flow analysis forecasts complete recovery of our cost basis for four
of the five securities whose fair value is less than amortized cost while the fifth security had credit related OTTI
recognized in prior years and is discussed in further detail below.
50
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
As management does not intend to liquidate these securities and it is more likely than not that we will not be
required to sell these securities prior to recovery of these unrealized losses, no other declines discussed above are
deemed to be other than temporary.
Other asset backed — at December 31, 2015, we had 129 other asset backed securities whose fair value is less
than amortized cost. The unrealized losses are primarily due to credit spread widening and increases in interest rates
since acquisition. As management does not intend to liquidate these securities and it is more likely than not that we
will not be required to sell these securities prior to recovery of these unrealized losses, no declines are deemed to be
other than temporary.
Obligations of states and political subdivisions — at December 31, 2015, we had 79 municipal securities whose
fair value is less than amortized cost. The unrealized losses are primarily due to increases in interest rates since
acquisition. As management does not intend to liquidate these securities and it is more likely than not that we will
not be required to sell these securities prior to recovery of these unrealized losses, no declines are deemed to be other
than temporary.
Corporate — at December 31, 2015, we had 27 corporate securities whose fair value is less than amortized cost.
The unrealized losses are primarily due to credit spread widening and increases in interest rates since acquisition. As
management does not intend to liquidate these securities and it is more likely than not that we will not be required
to sell these securities prior to recovery of these unrealized losses, no declines are deemed to be other than temporary.
Trust preferred securities — at December 31, 2015, we had three trust preferred securities whose fair value is
less than amortized cost. All of our trust preferred securities are single issue securities issued by a trust subsidiary
of a bank holding company. The pricing of trust preferred securities has suffered from credit spread widening.
One of the three securities is rated by two major rating agencies as investment grade, while one (a Bank of
America issuance) is rated below investment grade by two major rating agencies and the other one is non-rated. The
non-rated issue is a relatively small bank and was never rated. The issuer of this non-rated trust preferred security,
which had a total amortized cost of $1.0 million and total fair value of $0.8 million as of December 31, 2015,
continues to have satisfactory credit metrics and make interest payments.
The following table breaks out our trust preferred securities in further detail as of December 31:
2015
2014
Fair
Value
Net
Unrealized
Loss
Fair
Value
Net
Unrealized
Loss
(In thousands)
Trust preferred securities
Rated issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unrated issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,690
793
$(226)
(207)
$1,643
798
$(267)
(202)
As management does not intend to liquidate these securities and it is more likely than not that we will not be
required to sell these securities prior to recovery of these unrealized losses, no declines are deemed to be other than
temporary.
During 2015, 2014 and 2013, we recorded in earnings credit related OTTI charges on securities available for sale
of zero, $0.01 million and $0.03 million, respectively.
51
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
At December 31, 2015, three private label residential mortgage-backed securities had credit related OTTI and
are summarized as follows:
Senior
Security
$1,616
1,635
19
—
757
Super
Senior
Security
Senior
Support
Security
(In thousands)
$1,331
1,249
—
82
457
$ 79
—
—
79
380
Total
$3,026
2,884
19
161
1,594
As of December 31, 2015
Fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortized cost. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-credit unrealized loss. . . . . . . . . . . . . . . . . . . . . . . . .
Unrealized gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cumulative credit related OTTI . . . . . . . . . . . . . . . . . . . .
Credit related OTTI recognized in our Consolidated
Statements of Operations
For the years ended December 31,
2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ — $ —
—
—
9
26
$ —
—
—
$ —
9
26
Each of these securities is receiving principal and interest payments similar to principal reductions in the
underlying collateral. Two of these securities have unrealized gains and one has an unrealized loss at December 31,
2015. Prior to the second quarter of 2013, all three of these securities had an unrealized loss. The original amortized
cost for each of these securities has been permanently adjusted downward for previously recorded credit related
OTTI. The unrealized loss (based on original amortized cost) for two of these securities is now less than previously
recorded credit related OTTI amounts. The remaining non-credit related unrealized loss in the senior security is
attributed to other factors and is reflected in other comprehensive income (loss) during those same periods.
A roll forward of credit losses recognized in earnings on securities available for sale for the years ending
December 31 follow:
2015
2014
(In thousands)
2013
Balance at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,844
$1,835
$1,809
Additions to credit losses on securities for which no previous
OTTI was recognized . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Increases to credit losses on securities for which OTTI was
previously recognized . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
—
—
9
—
26
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,844
$1,844
$1,835
52
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The amortized cost and fair value of securities available for sale at December 31, 2015, by contractual maturity,
follow:
Maturing within one year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Maturing after one year but within five years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Maturing after five years but within ten years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Maturing after ten years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
U.S. agency residential mortgage-backed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
U.S. agency commercial mortgage-backed. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Private label residential mortgage-backed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other asset backed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortized
Cost
Fair
Value
(In thousands)
$ 34,565
69,976
46,512
83,234
234,287
195,055
34,017
5,061
117,431
$ 34,591
69,916
46,641
82,445
233,593
196,056
34,028
4,903
116,904
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$585,851
$585,484
The actual maturity may differ from the contractual maturity because issuers may have the right to call or prepay
obligations with or without call or prepayment penalties.
A summary of proceeds from the sale of securities available for sale and gains and losses for the years ended
December 31 follow:
2015. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2014. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2013. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$12,037
14,633
2,940
$ 75
329
15
$—
—
8
Proceeds
Realized
Gains (1)
(In thousands)
Losses (2)
(1) Gains in 2014 exclude $0.3 million of realized gain related to a U.S. Treasury short position.
(2) Losses in 2014 and 2013 exclude $0.01 million and $0.03 million, respectively of credit related OTTI
recognized in earnings.
During 2015, 2014 and 2013, our trading securities consisted of various preferred stocks. During each of those
years, we recognized gains (losses) on trading securities of $(0.06) million, $(0.30) million and $0.39 million,
respectively, that are included in net gains on securities in the Consolidated Statements of Operations. All of these
amounts relate to gains (losses) recognized on trading securities still held at December 31, 2015 and 2014.
Securities with a book value of $1.1 million at both December 31, 2015 and 2014, respectively, were pledged
to secure borrowings, derivatives, public deposits and for other purposes as required by law. There were no
investment obligations of state and political subdivisions that were payable from or secured by the same source of
revenue or taxing authority that exceeded 10% of consolidated shareholders’ equity at December 31, 2015 or 2014.
53
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTE 4 – LOANS AND PAYMENT PLAN RECEIVABLES
Our loan portfolios at December 31 follow:
2015
2014
(In thousands)
Real estate (1)
Residential first mortgages. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Residential home equity and other junior mortgages . . . . . . . . . . . . . . . . . .
Construction and land development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other (2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payment plan receivables. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Agricultural. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 432,215
106,297
62,629
498,706
193,350
180,424
34,599
6,830
$1,515,050
$ 411,423
108,162
54,644
447,837
154,591
186,875
40,001
6,429
$1,409,962
(1)
Includes both residential and non-residential commercial loans secured by real estate.
(2)
Includes loans secured by multi-family residential and non-farm, non-residential property.
Loans include net deferred loan costs of $2.2 million and $1.0 million at December 31, 2015 and 2014,
respectively. Payment plan receivables totaling $36.9 million and $42.6 million at December 31, 2015 and 2014,
respectively, are presented net of unamortized discount of $2.3 million and $2.6 million at December 31, 2015 and
2014, respectively. These payment plan receivables had effective yields of 13% and 14% at December 31, 2015 and
2014, respectively. These receivables have various due dates through January 2018.
In December 2015, we purchased $32.6 million of single-family residential fixed rate jumbo mortgage loans
from another Michigan-based financial institution. These mortgage loans were all on properties located in Michigan,
had a weighted average interest rate (after a 0.25% servicing fee) of 3.94% and a weighted average remaining
contractual maturity of 344 months.
An analysis of the allowance for loan losses by portfolio segment for the years ended December 31 follows:
Commercial Mortgage
Installment
Payment
Plan
Receivables
Subjective
Allocation
Total
(In thousands)
$ 5,445
$13,444
$ 1,814
$ 64
$5,223
$ 25,990
2015
Balance at beginning of period . . . . . .
Additions (deductions)
Provision for loan losses . . . . . . . . .
Recoveries credited to allowance. . .
Loans charged against the
allowance . . . . . . . . . . . . . . . . . . .
Balance at end of period . . . . . . . . . . .
(1,694)
$ 5,670
(2,567)
$10,391
(1,467)
$ 1,181
(737)
2,656
(1,744)
1,258
(274)
1,108
(8)
—
—
$ 56
49
—
(2,714)
5,022
—
$5,272
(5,728)
$ 22,570
2014
Balance at beginning of period . . . . . .
Additions (deductions)
Provision for loan losses . . . . . . . . .
Recoveries credited to allowance. . .
Loans charged against the
$ 6,827
$17,195
$ 2,246
$ 97
$5,960
$ 32,325
(1,683)
4,914
(1,029)
1,397
349
1,104
(36)
5
(2)
$ 64
(737)
—
(3,136)
7,420
—
$5,223
(10,619)
$ 25,990
allowance . . . . . . . . . . . . . . . . . . .
Balance at end of period . . . . . . . . . . .
(4,613)
$ 5,445
(4,119)
$13,444
(1,885)
$ 1,814
54
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Commercial Mortgage
Installment
Payment
Plan
Receivables
Subjective
Allocation
Total
(In thousands)
$11,402
$21,447
$ 3,378
$144
$ 7,904
$ 44,275
2013
Balance at beginning of period . . . . . .
Additions (deductions)
Provision for loan losses . . . . . . . . .
Recoveries credited to allowance. . .
Loans charged against the
allowance . . . . . . . . . . . . . . . . . . .
Balance at end of period . . . . . . . . . . .
(7,358)
$ 6,827
(6,319)
$17,195
(2,520)
$ 2,246
(2,336)
5,119
71
1,996
314
1,074
(93)
81
(35)
$ 97
(1,944)
—
(3,988)
8,270
— (16,232)
$ 32,325
$ 5,960
Allowance for loan losses and recorded investment in loans by portfolio segment follows:
Commercial Mortgage
Installment
Payment
Plan
Receivables
Subjective
Allocation
Total
(In thousands)
2015
Allowance for loan losses:
Individually evaluated for
impairment . . . . . . . . . . . . . . . . . .
$ 2,708
$ 7,818
$
457
$ — $ — $
10,983
Collectively evaluated for
impairment . . . . . . . . . . . . . . . . . .
Total ending allowance balance . . . . . .
2,962
$ 5,670
2,573
$ 10,391
724
$ 1,181
$
56
56
5,272
$5,272
11,587
22,570
$
Loans
Individually evaluated for
impairment . . . . . . . . . . . . . . . . . .
$ 16,868
$ 66,375
$ 5,888
$ —
$
89,131
Collectively evaluated for
impairment . . . . . . . . . . . . . . . . . .
Total loans recorded investment. . . . . .
Accrued interest included in recorded
investment . . . . . . . . . . . . . . . . . . . . .
Total loans. . . . . . . . . . . . . . . . . . . . . . .
2014
Allowance for loan losses:
Individually evaluated for
733,399
750,267
436,349
502,724
226,409
232,297
34,599
34,599
1,869
$748,398
2,270
$500,454
698
$231,599
—
$34,599
1,430,756
1,519,887
4,837
$1,515,050
impairment . . . . . . . . . . . . . . . . . .
$ 3,194
$
9,311
$
728
$ — $ — $
13,233
Collectively evaluated for
impairment . . . . . . . . . . . . . . . . . .
Total ending allowance balance . . . . . .
2,251
$ 5,445
4,133
$ 13,444
1,086
$ 1,814
$
64
64
5,223
$5,223
12,757
25,990
$
Loans
Individually evaluated for
impairment . . . . . . . . . . . . . . . . . .
$ 34,147
$ 72,340
$ 6,679
$ —
$ 113,166
Collectively evaluated for
impairment . . . . . . . . . . . . . . . . . .
Total loans recorded investment. . . . . .
Accrued interest included in recorded
investment . . . . . . . . . . . . . . . . . . . . .
Total loans. . . . . . . . . . . . . . . . . . . . . . .
658,423
692,570
402,458
474,798
200,368
207,047
40,001
40,001
1,615
$690,955
2,170
$472,628
669
$206,378
—
$40,001
1,301,250
1,414,416
4,454
$1,409,962
55
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Non-performing loans include both smaller balance homogeneous loans that are collectively evaluated for
impairment and individually classified impaired loans. If these loans had continued to accrue interest in accordance
with their original terms, approximately $0.6 million, $0.8 million and $1.2 million of interest income would have
been recognized in 2015, 2014 and 2013, respectively. Interest income recorded on these loans was approximately
zero during the years ended 2015 and 2014 and $0.1 million in 2013.
Loans on non-accrual status and past due more than 90 days (‘‘Non-performing Loans’’) at December 31 follow:
90+ and
Still
Accruing
Total Non-
Performing
Loans
Non-
Accrual
(In thousands)
2015
Commercial
Income producing - real estate. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Land, land development and construction - real estate. . . . . . . . . .
Commercial and industrial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ — $ 1,027
401
2,028
49
69
$ 1,027
450
2,097
Mortgage
1-4 family . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Resort lending . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Home equity - 1st lien . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Home equity - 2nd lien . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchased loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Installment
Home equity - 1st lien . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Home equity - 2nd lien . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans not secured by real estate . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payment plan receivables
—
—
—
—
—
—
—
—
—
4,744
1,094
187
147
2
106
443
421
2
4,744
1,094
187
147
2
106
443
421
2
Full refund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Partial refund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total recorded investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued interest included in recorded investment . . . . . . . . . . . . . . .
—
—
—
$118
$ 2
2
2
1
$10,607
2
2
1
$10,725
$ — $
2
2014
Commercial
Income producing - real estate. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Land, land development and construction - real estate. . . . . . . . . .
Commercial and industrial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ — $ 1,233
594
2,746
—
—
$ 1,233
594
2,746
Mortgage
1-4 family . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Resort lending . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Home equity - 1st lien . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Home equity - 2nd lien . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Installment
Home equity - 1st lien . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Home equity - 2nd lien . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans not secured by real estate . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payment plan receivables
7
—
—
—
—
—
—
—
5,945
2,168
331
605
576
517
454
48
5,952
2,168
331
605
576
517
454
48
Full refund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Partial refund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total recorded investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
—
—
$ 7
2
12
—
$15,231
2
12
—
$15,238
Accrued interest included in recorded investment . . . . . . . . . . . . . . .
$ — $ — $ —
56
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
An aging analysis of loans by class at December 31 follows:
2015
Commercial
Income producing - real estate . . . . . . . .
Land, land development and
construction - real estate . . . . . . . . . . .
Commercial and industrial . . . . . . . . . . .
Mortgage
1-4 family . . . . . . . . . . . . . . . . . . . . . . . .
Resort lending . . . . . . . . . . . . . . . . . . . . .
Home equity - 1st lien . . . . . . . . . . . . . .
Home equity - 2nd lien . . . . . . . . . . . . . .
Purchased loans. . . . . . . . . . . . . . . . . . . .
Installment
Home equity - 1st lien . . . . . . . . . . . . . .
Home equity - 2nd lien . . . . . . . . . . . . . .
Loans not secured by real estate . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payment plan receivables
Full refund . . . . . . . . . . . . . . . . . . . . . . .
Partial refund . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans Past Due
30-59 days
60-89 days
90+ days
Total
(In thousands)
Loans not
Past Due
Total
Loans
$ 203
$ 209
$
647
$ 1,059
$ 305,155
$ 306,214
—
785
1,943
307
50
439
9
315
231
567
15
492
415
110
—
16
640
—
—
54
1
107
149
83
3
62
228
3
252
151
4,744
1,094
187
147
2
106
443
421
2
2
2
1
252
952
7,327
1,401
237
640
12
528
823
1,071
20
556
645
114
44,231
398,618
272,298
114,619
22,327
50,618
33,245
16,707
19,727
191,262
2,159
21,294
5,834
6,156
44,483
399,570
279,625
116,020
22,564
51,258
33,257
17,235
20,550
192,333
2,179
21,850
6,479
6,270
Total recorded investment . . . . . . . . . .
$5,881
$1,555
$ 8,201
$15,637
$1,504,250
$1,519,887
Accrued interest included in recorded
investment. . . . . . . . . . . . . . . . . . . . . . . .
$
53
$
17
$
2
$
72
$
4,765
$
4,837
2014
Commercial
Income producing - real estate . . . . . . . .
Land, land development and
construction - real estate . . . . . . . . . . .
Commercial and industrial . . . . . . . . . . .
Mortgage
1-4 family . . . . . . . . . . . . . . . . . . . . . . . .
Resort lending . . . . . . . . . . . . . . . . . . . . .
Home equity - 1st lien . . . . . . . . . . . . . .
Home equity - 2nd lien . . . . . . . . . . . . . .
Installment
Home equity - 1st lien . . . . . . . . . . . . . .
Home equity - 2nd lien . . . . . . . . . . . . . .
Loans not secured by real estate . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payment plan receivables
Full refund . . . . . . . . . . . . . . . . . . . . . . .
Partial refund . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
89
$ — $
214
$
303
$ 252,763
$ 253,066
131
2,391
1,877
226
39
711
466
369
589
15
838
409
96
—
279
1,638
—
50
89
37
81
231
3
214
123
24
223
209
5,952
2,168
331
605
576
517
454
48
2
12
—
354
2,879
9,467
2,394
420
1,405
1,079
967
1,274
66
1,054
544
120
33,984
402,287
269,719
126,342
19,782
45,269
20,995
28,125
152,115
2,426
26,799
6,550
4,934
34,338
405,166
279,186
128,736
20,202
46,674
22,074
29,092
153,389
2,492
27,853
7,094
5,054
Total recorded investment . . . . . . . . . .
$8,246
$2,769
$11,311
$22,326
$1,392,090
$1,414,416
Accrued interest included in recorded
investment. . . . . . . . . . . . . . . . . . . . . . . .
$
55
$
29
$ — $
84
$
4,370
$
4,454
57
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Impaired loans are as follows:
December 31,
2015
2014
(In thousands)
Impaired loans with no allocated allowance
TDR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non - TDR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 2,518
203
$ 9,325
299
Impaired loans with an allocated allowance
TDR - allowance based on collateral . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
TDR - allowance based on present value cash flow . . . . . . . . . . . . . . . . . . . . .
Non - TDR - allowance based on collateral . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non - TDR - allowance based on present value cash flow . . . . . . . . . . . . . . .
4,810
81,002
260
—
5,879
94,970
2,296
—
Total impaired loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$88,793
$112,769
Amount of allowance for loan losses allocated
TDR - allowance based on collateral . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
TDR - allowance based on present value cash flow . . . . . . . . . . . . . . . . . . . . .
Non - TDR - allowance based on collateral . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non - TDR - allowance based on present value cash flow . . . . . . . . . . . . . . .
$ 2,436
8,471
76
—
$ 2,025
10,188
1,020
—
Total amount of allowance for loan losses allocated . . . . . . . . . . . . . . . . . .
$10,983
$ 13,233
58
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Impaired loans by class as of December 31 are as follows (1):
With no related allowance recorded:
Commercial
Income producing - real estate . . . . . . . . . . . .
Land, land development & construction-real
estate . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial and industrial . . . . . . . . . . . . . . .
Mortgage
1-4 family . . . . . . . . . . . . . . . . . . . . . . . . . . .
Resort lending . . . . . . . . . . . . . . . . . . . . . . . .
Home equity - 1st lien . . . . . . . . . . . . . . . . . .
Home equity - 2nd lien . . . . . . . . . . . . . . . . .
Installment
Home equity - 1st lien . . . . . . . . . . . . . . . . . .
Home equity - 2nd lien . . . . . . . . . . . . . . . . .
Loans not secured by real estate. . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
With an allowance recorded:
Commercial
Income producing - real estate . . . . . . . . . . . .
Land, land development & construction-real
estate . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial and industrial . . . . . . . . . . . . . . .
Mortgage
1-4 family . . . . . . . . . . . . . . . . . . . . . . . . . . .
Resort lending . . . . . . . . . . . . . . . . . . . . . . . .
Home equity - 1st lien . . . . . . . . . . . . . . . . . .
Home equity - 2nd lien . . . . . . . . . . . . . . . . .
Installment
Home equity - 1st lien . . . . . . . . . . . . . . . . . .
Home equity - 2nd lien . . . . . . . . . . . . . . . . .
Loans not secured by real estate. . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total
Commercial
Income producing - real estate . . . . . . . . . . . .
Land, land development & construction-real
estate . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial and industrial . . . . . . . . . . . . . . .
Mortgage
1-4 family . . . . . . . . . . . . . . . . . . . . . . . . . . .
Resort lending . . . . . . . . . . . . . . . . . . . . . . . .
Home equity - 1st lien . . . . . . . . . . . . . . . . . .
Home equity - 2nd lien . . . . . . . . . . . . . . . . .
Installment
Home equity - 1st lien . . . . . . . . . . . . . . . . . .
Home equity - 2nd lien . . . . . . . . . . . . . . . . .
Loans not secured by real estate. . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2015
Unpaid
Principal
Balance
Recorded
Investment
Related
Allowance
Recorded
Investment
(In thousands)
2014
Unpaid
Principal
Balance
Related
Allowance
$
641
$
851
$ — $
5,868
$ 6,077
$ —
818
1,245
1,393
1,241
23
—
—
—
—
—
—
—
2,727
8,377
1,690
4,097
47,792
18,148
168
244
2,364
2,929
587
8
86,404
183
—
—
—
76
—
—
—
3,744
9,232
1,778
4,439
49,808
18,319
172
325
2,492
2,951
658
8
90,182
—
—
—
—
—
—
—
—
—
—
—
1,051
2,685
—
48
—
—
—
—
—
—
9,652
1,606
2,667
49
397
—
—
40
—
—
—
10,836
516
12,836
13,797
296
1,896
5,132
2,662
9
15
143
271
42
1
10,983
3,456
8,251
53,206
18,799
162
125
2,744
3,212
711
12
103,514
3,528
8,486
56,063
18,963
177
205
2,930
3,215
835
12
108,211
9,018
10,083
516
18,704
19,874
2,508
5,342
47,815
18,148
168
244
2,364
2,929
587
8
$89,131
3,171
5,680
49,991
18,319
172
325
2,568
2,951
658
8
$93,926
296
1,896
5,132
2,662
9
15
143
271
42
1
$10,983
4,507
10,936
53,206
18,847
162
125
2,744
3,212
711
12
$113,166
$
397
5,134
11,153
56,112
19,360
177
205
2,970
3,215
835
12
$119,047
219
419
89
1
$13,233
—
—
—
—
—
—
—
—
—
—
—
689
499
2,006
6,195
3,075
14
27
219
419
89
1
13,233
689
499
2,006
6,195
3,075
14
27
Accrued interest included in recorded investment . .
$
338
(1) There were no impaired payment plan receivables or purchased mortgage loans at December 31, 2015 or 2014.
59
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Average recorded investment in and interest income earned on impaired loans by class for the years ended
December 31 follows (1):
With no related allowance recorded:
Commercial
Income producing - real estate . . . . . . . . . . . .
Land, land development & construction-real
estate . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial and industrial . . . . . . . . . . . . . . .
Mortgage
1-4 family . . . . . . . . . . . . . . . . . . . . . . . . . . .
Resort lending . . . . . . . . . . . . . . . . . . . . . . . .
Home equity - 1st lien . . . . . . . . . . . . . . . . . .
Home equity - 2nd lien . . . . . . . . . . . . . . . . .
Installment
Home equity - 1st lien . . . . . . . . . . . . . . . . . .
Home equity - 2nd lien . . . . . . . . . . . . . . . . .
Loans not secured by real estate. . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
With an allowance recorded:
Commercial
Income producing - real estate . . . . . . . . . . . .
Land, land development & construction-real
estate . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial and industrial . . . . . . . . . . . . . . .
Mortgage
1-4 family . . . . . . . . . . . . . . . . . . . . . . . . . . .
Resort lending . . . . . . . . . . . . . . . . . . . . . . . .
Home equity - 1st lien . . . . . . . . . . . . . . . . . .
Home equity - 2nd lien . . . . . . . . . . . . . . . . .
Installment
Home equity - 1st lien . . . . . . . . . . . . . . . . . .
Home equity - 2nd lien . . . . . . . . . . . . . . . . .
Loans not secured by real estate. . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total
Commercial
Income producing - real estate . . . . . . . . . . . .
Land, land development & construction-real
estate . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial and industrial . . . . . . . . . . . . . . .
Mortgage
1-4 family . . . . . . . . . . . . . . . . . . . . . . . . . . .
Resort lending . . . . . . . . . . . . . . . . . . . . . . . .
Home equity - 1st lien . . . . . . . . . . . . . . . . . .
Home equity - 2nd lien . . . . . . . . . . . . . . . . .
Installment
2015
2014
2013
Average
Recorded
Investment
Interest
Income
Recognized
Average
Recorded
Investment
Interest
Income
Recognized
Average
Recorded
Investment
Interest
Income
Recognized
(In thousands)
$
4,520
$ 387
$
7,660
$ 250
$
5,765
$ 340
952
2,125
19
12
—
—
—
—
—
—
7,628
12,677
2,219
6,663
50,421
18,448
161
172
2,539
3,055
653
10
97,018
17,197
3,171
8,788
50,440
18,460
161
172
79
257
11
—
—
—
5
—
—
—
739
439
54
104
2,140
670
8
13
176
193
37
1
3,835
826
133
361
2,151
670
8
13
181
193
37
1
$4,574
1,145
3,351
29
40
—
—
—
—
—
—
12,225
12,772
3,939
8,500
55,877
19,458
160
57
2,837
3,359
719
14
107,692
20,432
5,084
11,851
55,906
19,498
160
57
2,837
3,359
719
14
$119,917
64
152
—
1
—
—
2
—
—
—
469
677
149
294
2,286
753
6
2
174
188
35
1
4,565
927
213
446
2,286
754
6
2
176
188
35
1
$5,034
3,092
3,980
5
28
—
—
1,604
1,841
470
15
16,800
18,164
6,186
11,795
60,858
21,708
136
42
1,448
1,546
314
3
122,200
23,929
9,278
15,775
60,863
21,736
136
42
3,052
3,387
784
18
$139,000
240
226
11
—
—
—
83
96
23
1
1,020
587
149
457
2,622
836
4
2
85
86
17
1
4,846
927
389
683
2,633
836
4
2
168
182
40
2
$5,866
Home equity - 1st lien . . . . . . . . . . . . . . . . . .
Home equity - 2nd lien . . . . . . . . . . . . . . . . .
Loans not secured by real estate. . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,539
3,055
653
10
$104,646
(1) There were no impaired payment plan receivables or purchased mortgage loans during the years ending December 31, 2015,
2014 and 2013.
60
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Our average investment in impaired loans was approximately $104.6 million, $119.9 million and $139.0 million
in 2015, 2014 and 2013, respectively. Cash receipts on impaired loans on non-accrual status are generally applied to
the principal balance. Interest income recognized on impaired loans was approximately $4.6 million, $5.0 million and
$5.9 million in 2015, 2014 and 2013, respectively, of which the majority of these amounts were received in cash.
Troubled debt restructurings at December 31 follow:
Performing TDR’s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-performing TDR’s (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Performing TDR’s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-performing TDR’s (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial
2015
Retail
(In thousands)
Total
$13,318
3,041
$16,359
$68,194
3,777(2)
$71,971
$81,512
6,818
$88,330
Commercial
2014
Retail
(In thousands)
Total
$29,475
1,978
$31,453
$73,496
5,225(2)
$102,971
7,203
$78,721
$110,174
(1)
Included in non-performing loans table above.
(2) Also includes loans on non-accrual at the time of modification until six payments are received on a timely basis.
We have allocated $10.9 million and $12.2 million of specific reserves to customers whose loan terms have been
modified in troubled debt restructurings as of December 31, 2015 and 2014, respectively. We have committed to lend
additional amounts totaling up to $0.04 million at both December 31, 2015 and 2014, respectively, to customers with
outstanding loans that are classified as troubled debt restructurings.
The terms of certain loans were modified as troubled debt restructurings and generally included one or a
combination of the following: a reduction of the stated interest rate of the loan; an extension of the maturity date at
a stated rate of interest lower than the current market rate for new debt with similar risk; or a permanent reduction
of the recorded investment in the loan.
Modifications involving a reduction of the stated interest rate of the loan have generally been for periods ranging
from 9 months to 36 months but have extended to as much as 480 months in certain circumstances. Modifications
involving an extension of the maturity date have generally been for periods ranging from 1 month to 60 months but
have extended to as much as 230 months in certain circumstances.
61
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Loans that have been classified as troubled debt restructurings during the years ended December 31 follow:
Number of
Contracts
Pre-modification
Recorded
Balance
Post-modification
Recorded
Balance
(Dollars in thousands)
2015
Commercial
Income producing - real estate . . . . . . . . . . . . . . . . . . . . .
Land, land development & construction-real estate . . . . .
Commercial and industrial . . . . . . . . . . . . . . . . . . . . . . . . .
Mortgage
1-4 family . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Resort lending. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Home equity - 1st lien . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Home equity - 2nd lien . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchased loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Installment
Home equity - 1st lien . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Home equity - 2nd lien . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans not secured by real estate . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2014
Commercial
Income producing - real estate . . . . . . . . . . . . . . . . . . . . .
Land, land development & construction-real estate . . . . .
Commercial and industrial . . . . . . . . . . . . . . . . . . . . . . . . .
Mortgage
1-4 family . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Resort lending. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Home equity - 1st lien . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Home equity - 2nd lien . . . . . . . . . . . . . . . . . . . . . . . . . . .
Installment
Home equity - 1st lien . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Home equity - 2nd lien . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans not secured by real estate . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2013
Commercial
Income producing - real estate . . . . . . . . . . . . . . . . . . . . .
Land, land development & construction-real estate . . . . .
Commercial and industrial . . . . . . . . . . . . . . . . . . . . . . . . .
Mortgage
1-4 family . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Resort lending. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Home equity - 1st lien . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Home equity - 2nd lien . . . . . . . . . . . . . . . . . . . . . . . . . . .
Installment
2
—
17
8
1
1
1
—
6
8
2
—
46
4
2
13
15
6
1
1
13
9
6
—
70
6
1
23
20
5
1
—
Home equity - 1st lien . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Home equity - 2nd lien . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans not secured by real estate . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
25
16
5
—
102
62
$
229
—
3,188
1,345
313
20
27
—
220
228
19
—
$ 5,589
$
426
55
2,236
1,576
1,583
17
85
631
400
114
—
$ 7,123
$ 4,798
16
2,522
1,968
1,240
95
—
659
508
149
—
$11,955
$
227
—
2,960
1,128
307
20
27
—
186
217
25
—
$ 5,097
$
389
44
1,606
1,570
1,572
14
84
523
400
106
—
$ 6,308
$ 3,869
—
1,901
1,995
1,231
97
—
657
508
110
—
$10,368
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The troubled debt restructurings described above increased (decreased) the allowance for loan losses by
$0.4 million, $0.2 million and $(0.3) million during the years ended December 31, 2015, 2014 and 2013, respectively
and resulted in charge offs of $0.16 million, $0.04 million and $0.5 million during the years ended December 31,
2015, 2014 and 2013, respectively.
Loans that have been classified as troubled debt restructured during the past twelve months and that have
subsequently defaulted during the years ended December 31 follows:
Recorded
Number of
Contracts
Balance
(Dollars in thousands)
2015
Commercial
Income producing - real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Land, land development & construction-real estate . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial and industrial
Mortgage
1-4 family . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Resort lending . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Home equity - 1st lien . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Home equity - 2nd lien . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchased loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Installment
Home equity - 1st lien . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Home equity - 2nd lien . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans not secured by real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2014
Commercial
Income producing - real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Land, land development & construction-real estate . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial and industrial
Mortgage
1-4 family . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Resort lending . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Home equity - 1st lien . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Home equity - 2nd lien . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Installment
Home equity - 1st lien . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Home equity - 2nd lien . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans not secured by real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
—
2
2
—
—
—
—
—
—
1
—
5
—
—
2
1
—
—
—
—
—
—
—
3
$ —
—
157
73
—
—
—
—
—
—
4
—
$234
$ —
—
319
125
—
—
—
—
—
—
—
$444
63
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Recorded
Number of
Contracts
Balance
(Dollars in thousands)
2013
Commercial
Income producing - real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Land, land development & construction-real estate . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial and industrial
Mortgage
1-4 family . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Resort lending . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Home equity - 1st lien . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Home equity - 2nd lien . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Installment
Home equity - 1st lien . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Home equity - 2nd lien . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans not secured by real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1
1
2
1
1
—
—
2
1
—
—
9
$ 693
334
143
106
156
—
—
32
22
—
—
$1,486
A loan is generally considered to be in payment default once it is 90 days contractually past due under the
modified terms for commercial loans and installment loans and when four consecutive payments are missed for
mortgage loans.
The troubled debt restructurings that subsequently defaulted described above increased (decreased) the
allowance for loan losses by $(0.03) million, $0.02 million and zero during the years ended December 31, 2015, 2014
and 2013, respectively and resulted in charge offs of zero, zero and $0.2 million during the years ended December 31,
2015, 2014 and 2013, respectively.
The terms of certain other loans were modified during the years ending December 31, 2015, 2014 and 2013 that
did not meet the definition of a troubled debt restructuring. The modification of these loans could have included
modification of the terms of a loan to borrowers who were not experiencing financial difficulties or a delay in a
payment that was considered to be insignificant.
In order to determine whether a borrower is experiencing financial difficulty, we perform an evaluation of the
probability that the borrower will be in payment default on any of its debt in the foreseeable future without the
modification. This evaluation is performed under our internal underwriting policy.
Credit Quality Indicators – As part of our on on-going monitoring of the credit quality of our loan portfolios,
we track certain credit quality indicators including (a) weighted-average risk grade of commercial loans, (b) the level
of classified commercial
loan borrowers, (d) financial
performance of certain counterparties for payment plan receivables and (e) delinquency history and non-performing
loans.
loans, (c) credit scores of mortgage and installment
For commercial loans, we use a loan rating system that is similar to those employed by state and federal banking
regulators. Loans are graded on a scale of 1 to 12. A description of the general characteristics of the ratings follows:
Rating 1 through 6: These loans are generally referred to as our ‘‘non-watch’’ commercial credits that include
very high or exceptional credit fundamentals through acceptable credit fundamentals.
Rating 7 and 8: These loans are generally referred to as our ‘‘watch’’ commercial credits. This rating includes
loans to borrowers that exhibit potential credit weakness or downward trends. If not checked or cured these trends
could weaken our asset or credit position. While potentially weak, no loss of principal or interest is envisioned with
these ratings.
64
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Rating 9: These loans are generally referred to as our ‘‘substandard accruing’’ commercial credits. This rating
includes loans to borrowers that exhibit a well-defined weakness where payment default is probable and loss is
possible if deficiencies are not corrected. Generally, loans with this rating are considered collectible as to both
principal and interest primarily due to collateral coverage.
Rating 10 and 11: These loans are generally referred to as our ‘‘substandard - non-accrual’’ and ‘‘doubtful’’
commercial credits. This rating includes loans to borrowers with weaknesses that make collection of debt in full, on
the basis of current facts, conditions and values at best questionable and at worst improbable. All of these loans are
placed in non-accrual.
Rating 12: These loans are generally referred to as our ‘‘loss’’ commercial credits. This rating includes loans
to borrowers that are deemed incapable of repayment and are charged-off.
The following table summarizes loan ratings by loan class for our commercial loan segment at December 31:
Non-watch
1-6
Watch
7-8
Commercial
Substandard
Accrual
9
(In thousands)
Non-
Accrual
10-11
Total
2015
Income producing - real estate . . . . . . . . . . . . . . . . . . . . $296,898 $ 6,866
2,995
Land, land development and construction - real estate . .
19,502
Commercial and industrial . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $709,099 $29,363
40,844
371,357
Total
Accrued interest included in total
. . . . . . . . . . . . . . . . . . $ 1,729 $
108
2014
Income producing - real estate . . . . . . . . . . . . . . . . . . . . $241,266 $ 8,649
2,485
Land, land development and construction - real estate . .
23,475
Commercial and industrial . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $645,082 $34,609
30,869
372,947
Total
Accrued interest included in total
. . . . . . . . . . . . . . . . . . $ 1,479 $
111
$1,423
243
6,683
$8,349
$
32
$1,918
390
5,998
$8,306
$
25
$1,027 $306,214
44,483
401
2,028
399,570
$3,456 $750,267
$ — $ 1,869
$1,233 $253,066
34,338
594
2,746
405,166
$4,573 $692,570
$ — $ 1,615
For each of our mortgage and installment segment classes we generally monitor credit quality based on the credit
scores of the borrowers. These credit scores are generally updated semi-annually. The following tables summarize
credit scores by loan class for our mortgage and installment loan segments at December 31:
1-4 Family
Resort
Lending
Mortgage (1)
Home
Equity
1st Lien
(In thousands)
Home
Equity
2nd Lien
2015
800 and above . . . . . . . . . . . . . . . . . . . . . . . . . . $ 28,760 $ 13,943 $ 4,374 $ 7,696
17,405
750-799 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
11,022
700-749 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
7,691
650-699 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,684
600-649 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,918
550-599 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,295
500-549 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
265
Under 500 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
282
Unknown . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $279,625 $116,020 $22,564 $51,258
40,888
31,980
17,433
4,991
3,070
1,051
554
2,110
78,802
56,519
51,813
27,966
16,714
10,610
4,708
3,733
7,137
4,341
3,203
1,467
1,027
572
244
199
Total
Purchased
Loans
Total
$ 2,310
23,283
6,940
—
—
—
—
—
724
$33,257
$ 57,083
167,515
110,802
80,140
38,108
22,729
13,528
5,771
7,048
$502,724
Accrued interest included in total . . . . . . . . . . . $ 1,396 $
477 $
87 $
196
$
114
$ 2,270
65
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
1-4 Family
Resort
Lending
Mortgage (1)
Home
Equity
1st Lien
(In thousands)
Home
Equity
2nd Lien
Purchased
Loans
Total
2014
800 and above . . . . . . . . . . . . . . . . . . . . . . . . . . $ 27,918 $ 14,484 $ 3,863 $ 6,225
14,323
750-799 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
9,642
700-749 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
8,194
650-699 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,862
600-649 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,721
550-599 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,401
500-549 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
632
Under 500 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
674
Unknown . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $279,186 $128,736 $20,202 $46,674
45,950
32,660
20,250
6,538
3,639
2,156
875
2,184
72,674
52,843
51,664
27,770
21,361
14,575
6,306
4,075
6,128
3,054
3,257
1,704
994
699
261
242
Total
$— $ 52,490
139,075
—
98,199
—
83,365
—
39,874
—
27,715
—
18,831
—
8,074
—
—
7,175
$— $474,798
Accrued interest included in total . . . . . . . . . . . $
1,311 $
562 $
88 $
209
$— $ 2,170
(1) Credit scores have been updated within the last twelve months.
Home
Equity
1st Lien
Home
Equity
2nd Lien
Installment (1)
Loans not
Secured by
Real Estate
(In thousands)
Other
Total
2015
800 and above . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
750-799 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
700-749 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
650-699 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
600-649 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
550-599 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
500-549 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Under 500 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unknown . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total
$ 1,792
4,117
2,507
3,508
2,173
1,800
1,056
223
59
$17,235
$ 1,782
5,931
3,899
4,182
2,153
1,346
855
370
32
$20,550
$ 44,254
86,800
34,789
16,456
4,979
1,997
1,170
385
1,503
$192,333
$
58
531
694
499
200
109
61
23
4
$2,179
$ 47,886
97,379
41,889
24,645
9,505
5,252
3,142
1,001
1,598
$232,297
Accrued interest included in total
. . . . . . . . . . . . . . . . . .
$
78
$
83
$
520
$
17
$
698
2014
800 and above . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
750-799 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
700-749 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
650-699 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
600-649 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
550-599 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
500-549 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Under 500 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unknown . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total
$ 2,272
5,677
3,111
3,963
3,434
2,019
1,128
393
77
$22,074
$ 2,835
8,557
6,358
5,477
2,408
1,913
1,036
427
81
$29,092
$ 31,507
66,558
28,179
16,152
5,128
1,896
1,672
455
1,842
$153,389
$
60
583
689
615
255
134
84
28
44
$2,492
$ 36,674
81,375
38,337
26,207
11,225
5,962
3,920
1,303
2,044
$207,047
Accrued interest included in total
. . . . . . . . . . . . . . . . . .
$
93
$
112
$
445
$
19
$
669
(1) Credit scores have been updated within the last twelve months.
66
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Mepco is a wholly-owned subsidiary of our Bank that operates a vehicle service contract payment plan business
throughout the United States. See note #11 for more information about Mepco’s business. As of December 31, 2015,
approximately 63.2% of Mepco’s outstanding payment plan receivables relate to programs in which a third party
insurer or risk retention group is obligated to pay Mepco the full refund owing upon cancellation of the related service
contract (including with respect to both the portion funded to the service contract seller and the portion funded to the
administrator). These receivables are shown as ‘‘Full Refund’’ in the table below. Another approximately 18.7% of
Mepco’s outstanding payment plan receivables as of December 31, 2015, relate to programs in which a third party
insurer or risk retention group is obligated to pay Mepco the refund owing upon cancellation only with respect to the
unearned portion previously funded by Mepco to the administrator (but not to the service contract seller). These
receivables are shown as ‘‘Partial Refund’’ in the table below. The balance of Mepco’s outstanding payment plan
receivables relate to programs in which there is no insurer or risk retention group that has any contractual liability
to Mepco for any portion of the refund amount. These receivables are shown as ‘‘Other’’ in the table below. For each
class of our payment plan receivables we monitor financial information on the counterparties as we evaluate the credit
quality of this portfolio.
The following table summarizes credit ratings of insurer or risk retention group counterparties by class of
payment plan receivable at December 31:
Payment Plan Receivables
Full
Refund
Partial
Refund
Other
(In thousands)
Total
2015
AM Best rating
A+ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ — $
A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
A-
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Not rated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,712
3,418
15,720
6 $ — $
6
— 7,915
10,860
15,818
6,265
5
5,203
1,177
93
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $21,850 $6,479 $6,270 $34,599
2014
AM Best rating
A+ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ — $
A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
A-
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Not rated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
10,007
1,989
15,857
43 $ — $
43
— 16,197
7,728
— 16,033
5,054
6,190
685
176
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $27,853 $7,094 $5,054 $40,001
Although Mepco has contractual recourse against various counterparties for refunds owing upon cancellation of
vehicle service contracts, see Note #11 below regarding certain risks and difficulties associated with collecting these
refunds.
Mortgage loans serviced for others are not reported as assets on the Consolidated Statements of Financial
Condition. The principal balances of these loans at December 31 follow:
Mortgage loans serviced for:
Fannie Mae . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Freddie Mac . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ginnie Mae . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 898,443
707,891
37,884
107
$ 913,863
748,833
—
104
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,644,325
$1,662,800
2015
2014
(In thousands)
67
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Custodial deposit accounts maintained in connection with mortgage loans serviced for others totaled
$21.8 million and $20.9 million, at December 31, 2015 and 2014, respectively.
If we do not remain well capitalized for regulatory purposes (see note #20), 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 these investors. 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 regulatory purposes. 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.
An analysis of capitalized mortgage loan servicing rights for the years ended December 31 follows:
2015
2014
(In thousands)
2013
Balance at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . $
Originated servicing rights capitalized . . . . . . . . . . . . . . . . .
Amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in valuation allowance . . . . . . . . . . . . . . . . . . . . . . .
12,106
2,697
(2,868)
501
Balance at end of year
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
12,436
Valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
3,272
$
$
$
13,710
1,823
(2,509)
(918)
12,106
3,773
$
$
$
11,013
3,210
(3,745)
3,232
13,710
2,855
Loans sold and serviced that have had servicing rights
capitalized . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,643,086
$1,661,269
$1,732,476
The fair value of capitalized mortgage loan servicing rights was $12.9 million and $12.6 million at
December 31, 2015 and 2014, respectively. Fair value was determined using an average coupon rate of 4.32%,
average servicing fee of 0.254%, average discount rate of 10.04% and an average Public Securities Association
(‘‘PSA’’) prepayment rate of 203 for December 31, 2015; and an average coupon rate of 4.44%, average servicing
fee of 0.253%, average discount rate of 10.07% and an average PSA prepayment rate of 200 for December 31, 2014.
NOTE 5 – OTHER REAL ESTATE OWNED
A summary of other real estate owned activity for the years ended December 31 follows (1):
2015
2014
(In thousands)
2013
Balance at beginning of year, net of valuation allowance . . .
Loans transferred to other real estate owned . . . . . . . . . . . .
Sales of other real estate owned . . . . . . . . . . . . . . . . . . . . . .
Additions to valuation allowance charged to expense . . . .
$ 6,370
6,694
(5,502)
(492)
$ 18,088
6,143
(17,198)
(663)
$ 25,748
6,932
(11,994)
(2,598)
Balance at end of year, net of valuation allowance . . . . . . . .
$ 7,070
$ 6,370
$ 18,088
(1) Table excludes other repossessed assets totaling $0.08 million at both December 31, 2015 and 2014,
respectively.
68
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
We periodically review our real estate owned properties and establish valuation allowances on these properties
if values have declined since the date of acquisition. An analysis of our valuation allowance for other real estate
owned follows:
Balance at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . .
Additions charged to expense . . . . . . . . . . . . . . . . . . . . . . . .
Direct write-downs upon sale . . . . . . . . . . . . . . . . . . . . . . . .
$ 2,511
492
(1,311)
Balance at end of year
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 1,692
$ 4,047
663
(2,199)
$ 2,511
$ 5,958
2,598
(4,509)
$ 4,047
2015
2014
(In thousands)
2013
At December 31, 2015 and 2014, the balance of other real estate owned includes $2.8 million and $2.9 million
of foreclosed residential real estate properties. Retail mortgage loans secured by residential real estate properties for
which formal foreclosure proceedings are in process according to local requirements totaled $1.1 million and
$2.5 million at December 31, 2015 and 2014, respectively.
Other real estate and repossessed assets totaling $7.2 million and $6.5 million at December 31, 2015 and 2014,
respectively, are presented net of the valuation allowance on the Consolidated Statements of Financial Condition.
NOTE 6 – PROPERTY AND EQUIPMENT
A summary of property and equipment at December 31 follows:
2015
2014
(In thousands)
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equipment
$ 15,152
57,638
79,842
$ 14,904
59,486
79,809
Accumulated depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . .
152,632
(109,529)
154,199
(108,251)
Property and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 43,103
$ 45,948
Depreciation expense was $6.6 million, $6.7 million and $6.7 million in 2015, 2014 and 2013, respectively.
NOTE 7 – INTANGIBLE ASSETS
Intangible assets, net of amortization, at December 31 follows:
2015
2014
Gross
Carrying
Amount
Accumulated
Amortization
Gross
Carrying
Amount
Accumulated
Amortization
(In thousands)
Amortized intangible assets - core deposits . . . . . . . . . . . . $6,118
$3,838
$6,118
$3,491
Intangible amortization expense was $0.3 million, $0.5 million and $0.8 million in 2015, 2014 and 2013,
respectively.
69
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
A summary of estimated core deposit intangible amortization at December 31, 2015, follows:
2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2021 and thereafter
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 347
346
346
346
346
549
$2,280
(In thousands)
NOTE 8 – DEPOSITS
A summary of interest expense on deposits for the years ended December 31 follows:
2015
2014
(In thousands)
2013
Savings and interest bearing checking . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Time deposits under $100,000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Time deposits of $100,000 or more . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,056
1,586
1,367
$1,064
2,467
1,436
$1,131
2,995
1,580
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$4,009
$4,967
$5,706
Aggregate time deposits in denominations of $250,000 or more amounted to $110.4 million and $42.8 million
at December 31, 2015 and 2014, respectively.
A summary of the maturity of time deposits at December 31, 2015, follows:
2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2021 and thereafter
$302,136
66,288
27,367
15,432
11,763
3,234
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$426,220
(In thousands)
Time deposits acquired through broker relationships totaled zero and $11.3 million at December 31, 2015 and
2014, respectively.
Reciprocal deposits totaled $50.2 million and $53.7 million at December 31, 2015 and 2014, respectively. These
deposits represent demand, money market and time deposits from our customers that have been placed through
Promontory Interfinancial Network’s Insured Cash Sweep® service and Certificate of Deposit Account Registry
Service®. These services allow our customers to access multi-million dollar FDIC deposit insurance on deposit
balances greater than the standard FDIC insurance maximum.
A summary of reciprocal deposits at December 31 follows:
Demand . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Money market
Time . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 3,436
8,340
38,431
$ 5,867
7,692
40,109
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$50,207
$53,668
2015
2014
(In thousands)
70
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTE 9 – OTHER BORROWINGS
A summary of other borrowings at December 31 follows:
2015
2014
(In thousands)
Advances from the FHLB . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$11,949
5
$12,464
6
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$11,954
$12,470
Advances from the FHLB are secured by unencumbered qualifying mortgage and home equity loans with a
market value equal to at least 135% to 174%, respectively, of outstanding advances. Advances are also secured by
FHLB stock that we own, which totaled $7.8 million at December 31, 2015. Unused borrowing capacity with the
FHLB (subject to the FHLB’s credit requirements and policies) was $179.6 million at December 31, 2015. Interest
expense on advances amounted to $0.8 million, $0.9 million and $1.1 million for the years ended December 31, 2015,
2014 and 2013, respectively. No FHLB advances were terminated during 2015, 2014 or 2013.
As a member of the FHLB, we must own FHLB stock equal to the greater of 1.0% of the unpaid principal
balance of residential mortgage loans or 5.0% of our outstanding advances. At December 31, 2015, we were in
compliance with the FHLB stock ownership requirements.
The maturity dates and weighted average interest rates of FHLB advances at December 31 follow:
2015
2014
Amount
Rate
Amount
(Dollars in thousands)
Rate
Fixed-rate advances
2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 2,089
1,258
5,437
—
3,165
$11,949
6.55% $ 2,205
1,320
7.04
5,671
5.99
—
3,268
7.49
6.55%
7.04
5.99
7.49
6.59% $12,464
6.59%
A summary of contractually required repayments of FHLB Advances at December 31, 2015, follows:
2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(In thousands)
$ 2,521
1,587
5,042
143
2,656
$11,949
We had no borrowings outstanding with the FRB during the years ended or at December 31, 2015, 2014 or 2013.
We had unused borrowing capacity with the FRB (subject to the FRB’s credit requirements and policies) of
$307.7 million at December 31, 2015. Collateral for FRB borrowings are certain commercial loans.
Assets, consisting of FHLB stock and loans, pledged to secure other borrowings and unused borrowing capacity
totaled $781.8 million at December 31, 2015.
71
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTE 10 – SUBORDINATED DEBENTURES
We have formed various special purpose entities (the ‘‘trusts’’) for the purpose of issuing trust preferred
securities in either public or pooled offerings or in private placements. Independent Bank Corporation owns all of the
common stock of each trust and has issued subordinated debentures to each trust in exchange for all of the proceeds
from the issuance of the common stock and the trust preferred securities. Trust preferred securities totaling
$34.5 million at both December 31, 2015 and 2014, respectively, qualified as Tier 1 regulatory capital.
These trusts are not consolidated with Independent Bank Corporation and accordingly, we report the common
securities of the trusts held by us in accrued income and other assets and the subordinated debentures that we have
issued to the trusts in the liability section of our Consolidated Statements of Financial Condition.
Summary information regarding subordinated debentures as of December 31 follows:
Entity Name
Issue
Date
Subordinated
Debentures
Trust
Preferred
Securities
Issued
2015 and 2014
IBC Capital Finance III . . . . . . . . . . . . . . . . May 2007
IBC Capital Finance IV . . . . . . . . . . . . . . . .
Midwest Guaranty Trust I . . . . . . . . . . . . . .
September 2007
November 2002
(In thousands)
$12,372
15,465
7,732
$35,569
$12,000
15,000
7,500
$34,500
Common
Stock
Issued
$ 372
465
232
$1,069
Other key terms for the subordinated debentures and trust preferred securities that were outstanding at
December 31, 2015 and 2014 follow:
Entity Name
IBC Capital Finance III
IBC Capital Finance IV
Midwest Guaranty Trust I
Maturity
Date
Interest Rate
First Permitted
Redemption Date
July 30, 2037
September 15, 2037
November 7, 2032
3 month LIBOR plus 1.60%
3 month LIBOR plus 2.85%
3 month LIBOR plus 3.45%
July 30, 2012
September 15, 2012
November 7, 2007
The subordinated debentures and trust preferred securities are cumulative and have a feature that permits us to
defer distributions (payment of interest) from time to time for a period not to exceed 20 consecutive quarters. Interest
is payable quarterly on each of the subordinated debentures and trust preferred securities and no distributions were
deferred at December 31, 2015 and 2014.
We have the right to redeem the subordinated debentures and trust preferred securities (at par) in whole or in
part from time to time on or after the first permitted redemption date specified above or upon the occurrence of
specific events defined within the trust indenture agreements. During 2014, we redeemed trust preferred securities
issued by IBC Capital Finance IV with a par value of $5.0 million. These trust preferred securities were redeemed
at a discount of $0.5 million and we recognized a gain on extinguishment of debt in our Consolidated Statements of
Operations for this same amount.
Issuance costs have been capitalized and are being amortized on a straight- line basis over a period not exceeding
30 years and are included in interest expense in the Consolidated Statements of Operations. Distributions (payment
of interest) on the trust preferred securities are also included in interest expense in the Consolidated Statements of
Operations.
72
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTE 11 – COMMITMENTS AND CONTINGENT LIABILITIES
In the normal course of business, we enter into financial instruments with off-balance sheet risk to meet the
financing needs of customers or to reduce exposure to fluctuations in interest rates. These financial instruments may
include commitments to extend credit and standby letters of credit. Financial instruments involve varying degrees of
credit and interest-rate risk in excess of amounts reflected in the Consolidated Statements of Financial Condition.
Exposure to credit risk in the event of non-performance by the counterparties to the financial instruments for loan
commitments to extend credit and standby letters of credit is represented by the contractual amounts of those
instruments. We do not, however, anticipate material losses as a result of these financial instruments.
A summary of financial instruments with off-balance sheet risk at December 31 follows:
2015
2014
(In thousands)
Financial instruments whose risk is represented by contract amounts
Commitments to extend credit
Standby letters of credit
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$243,458
3,582
$204,827
2,757
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any
condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses
and generally require payment of a fee. Since commitments may expire without being drawn upon, the commitment
amounts do not represent future cash requirements. Commitments are issued subject to similar underwriting
standards, including collateral requirements, as are generally involved in the extension of credit facilities.
Standby letters of credit are written conditional commitments issued to guarantee the performance of a customer
to a third party. The credit risk involved in such transactions is essentially the same as that involved in extending loan
facilities and, accordingly, standby letters of credit are issued subject to similar underwriting standards, including
collateral requirements, as are generally involved in the extension of credit facilities. The majority of the standby
letters of credit are to corporations, have variable rates that range from 2.75% to 8.25% and mature through 2018.
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 amounts we have accrued. At this time, we
estimate the maximum amount of additional losses that are reasonably possible is approximately $1.0 million.
However, because of a number of factors, including the fact that certain of these litigation matters are still in their
early stages, this maximum amount may change in the future.
The litigation matters described in the preceding paragraph primarily include claims that have been brought
against us for damages, but do not include litigation matters where 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 we will not collect the full amount owed to us, net of reserves, are disclosed elsewhere in this report.
Our Mepco segment conducts its payment plan business activities across the United States. Mepco acquires the
payment plans from companies (which we refer to as Mepco’s ‘‘counterparties’’) at a discount from the face amount
of the payment plan. Each payment plan (which are classified as payment plan receivables in our Condensed
Consolidated Statements of Financial Condition) permits a consumer to purchase a vehicle 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 thereafter collects the payments from consumers. In acquiring the payment plan, Mepco
generally funds a portion of the cost to the seller of the service contract and a portion of the cost to the administrator
of the service contract. The administrator, in turn, pays the necessary contractual liability insurance policy (‘‘CLIP’’)
premium to the insurer or risk retention group.
73
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Consumers are allowed to voluntarily cancel the service contract at any time and are generally entitled to receive
a refund from the administrator of the unearned portion of the service contract at the time of cancellation. As a result,
while Mepco does not owe any refund to the consumer, it also does not have any recourse against the consumer for
nonpayment of a payment plan and therefore does not evaluate the creditworthiness of the individual consumer. If
a consumer stops making payments on a payment plan or exercises the right to voluntarily cancel the service contract,
the service contract seller and administrator are each obligated to refund to Mepco the amount necessary to make
Mepco whole as a result of its funding of the service contract. In addition, the insurer or risk retention group that
issued the CLIP for the service contract often guarantees all or a portion of the refund to Mepco. See note #4 above
for a breakdown of Mepco’s payment plan receivables by the level of recourse Mepco has against various
counterparties.
Upon the cancellation of a service contract and the completion of the billing process to the counterparties for
amounts due to Mepco, there is a decrease in the amount of ‘‘payment plan receivables’’ and an increase in the
amount of ‘‘vehicle service contract counterparty receivables’’ until such time as the amount due from the
counterparty is collected. These amounts represent funds actually due to Mepco from its counterparties for cancelled
service contracts. At both December 31, 2015 and 2014, 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 $7.2 million. Mepco is currently in the process of working to recover
these receivables, primarily through litigation against counterparties.
In some cases, Mepco requires collateral or guaranties by the principals of the counterparties to secure these
refund obligations; however, this is generally only the case when no insurance company is involved to guarantee the
repayment obligation of the seller and administrator counterparties. 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 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. The sudden
failure of one of Mepco’s major counterparties (an insurance company, administrator, or seller/dealer) could expose
us to significant losses.
When counterparties do not honor their contractual obligations to Mepco to repay funds, we recognize estimated
losses. Mepco pursues collection (including commencing legal action if necessary) of funds due to it under its various
contracts with counterparties. Mepco has had to initiate litigation against certain counterparties, including third party
insurers, to collect amounts owed to Mepco as a result of those parties’ dispute of their contractual obligations to
Mepco. For 2015, 2014 and 2013, non-interest expenses include $0.1 million, $0.2 million and $4.8 million,
respectively, of charges related to estimated losses for vehicle service contract counterparty contingencies. The
significant decrease in this expense in 2014 (from 2013) is due to 2013 including write-downs of vehicle service
contract counterparty receivables related to settlements of certain litigation to collect these receivables. Given the
costs and uncertainty of continued litigation, we determined it was in our best interest to resolve these matters. These
charges are being classified in non-interest expense because they are associated with a default or potential default of
a contractual obligation under our counterparty contracts as opposed to loss on the administration of the payment plan
itself.
Our estimate of probable incurred losses from vehicle service contract counterparty contingencies requires a
significant amount of judgment 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, our evaluation of
collateral that may be available to recover funds due from our counterparties, and our assessment of the amount that
may ultimately be collected from counterparties in connection with their contractual obligations. We apply a rigorous
process, based upon historical payment plan activity and past experience, to estimate probable incurred losses and
quantify the necessary reserves for our vehicle service contract counterparty contingencies, but there can be no
assurance that our modeling process will successfully identify all such losses.
We believe our assumptions regarding the collection of vehicle service contract counterparty receivables are
reasonable, and we based them on our good faith judgments using data currently available. We also believe the
74
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
current amount of reserves we have established and the vehicle service contract counterparty contingencies expense
that we have recorded are appropriate given our estimate of probable incurred losses at the applicable Consolidated
Statement of Financial Condition date. However, because of the uncertainty surrounding the numerous and complex
assumptions made, actual losses could exceed the charges we have taken to date.
An analysis of our vehicle service contract counterparty receivable, net follows:
2015
2014
(In thousands)
2013
Balance at beginning of year, net of reserve . . . . . . . . . . . . . . . . . . .
Transfers in from payment plan receivables . . . . . . . . . . . . . . . . .
Reserves established and charge-offs recorded to expense . . . . . .
Transferred to (from) contingency reserves . . . . . . . . . . . . . . . . . .
Cash received . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 7,237
1,203
(119)
—
(1,092)
$7,716
180
(199)
(75)
(385)
$18,449
792
(4,837)
63
(6,751)
Balance at end of year, net of reserve . . . . . . . . . . . . . . . . . . . . . . . .
$ 7,229
$7,237
$ 7,716
Reserve at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
56
$1,370
$ 1,300
An analysis of our vehicle service contract counterparty reserve follows:
2015
2014
(In thousands)
2013
Balance at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additions charged to expense . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Charge-offs, net
$ 1,370
119
(1,433)
Balance at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reserves recorded in VSC counterparty receivables, net . . . . . . . . .
Reserves recorded in accrued expenses and other liabilities . . . . . .
Total at end of year
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
$
56
56
—
56
$1,375
199
(204)
$ 2,012
4,837
(5,474)
$1,370
$ 1,375
$1,370
—
$1,370
$ 1,300
75
$ 1,375
The provision for loss reimbursement on sold loans represents our estimate of incurred losses related to
mortgage loans that we have sold to investors (primarily Fannie Mae, Freddie Mac and Ginnie Mae). Since we sell
mortgage loans without recourse, loss reimbursements only occur in those instances where we have breached a
representation or warranty or other contractual requirement related to the loan sale. In November 2013, we executed
a Resolution Agreement with Fannie Mae to resolve our existing and future repurchase and make whole obligations
(collectively ‘‘Repurchase Obligations’’) related to mortgage loans originated between January 1, 2000 and
December 31, 2008 and delivered to them by January 31, 2009. Under the terms of the Resolution Agreement, we
paid Fannie Mae approximately $1.5 million in November 2013 with respect to the Repurchase Obligations. We
believe that it was in our best interest to execute the Resolution Agreement in order to bring finality to the loss
reimbursement exposure with Fannie Mae for these years and reduce the resources spent on individual file reviews
and defending loss reimbursement requests. In addition, we were notified by Freddie Mac in January 2014 that they
had completed their review of mortgage loans that we originated between January 1, 2000 and December 31, 2008
and delivered to them. The reserve for loss reimbursements on sold mortgage loans totaled $0.5 million and
$0.7 million at December 31, 2015 and 2014, respectively. This reserve is included in accrued expenses and other
liabilities in our Consolidated Statements of Financial Condition. This reserve is based on an analysis of mortgage
loans that we have sold which are further categorized by delinquency status, loan to value, and year of origination.
The calculation includes factors such as probability of default, probability of loss reimbursement (breach of
representation or warranty) and estimated loss severity. The reserve levels at December 31, 2015 and 2014 also reflect
the resolution of the mortgage loan origination years of 2000 to 2008 with Fannie Mae and Freddie Mac. We believe
that the amounts that we have accrued for incurred losses on sold mortgage loans are appropriate given our analyses.
However, future losses could exceed our current estimate.
75
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTE 12 – SHAREHOLDERS’ EQUITY AND INCOME PER COMMON SHARE
On January 21, 2015, our Board of Directors authorized a share repurchase plan (the ‘‘Repurchase Plan’’) to buy
back up to 5% of our outstanding common stock through December 31, 2015. The repurchases were made through
transactions and totaled 967,199 shares of common stock for an aggregate purchase price of
open market
$13.5 million.
On July 26, 2013, we executed a Securities Purchase Agreement (‘‘SPA’’) with the U.S. Department of the
Treasury (‘‘UST’’). Under the terms of the SPA, we agreed to purchase from the UST for $81.0 million in cash
consideration: (i) 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 Preferred Stock’’), including all accrued and
unpaid dividends; and (ii) the Amended and Restated Warrant to purchase 346,154 shares of our common stock at
an exercise price of $7.234 per share and expiring on December 12, 2018 (the ‘‘Amended Warrant’’). On August 30,
2013, we closed the SPA transaction with the UST and we exited the Troubled Asset Relief Program (‘‘TARP’’). On
that date, the Series B Preferred Stock and Amended Warrant had book balances of $87.2 million (including accrued
dividends) and $1.5 million, respectively. This transaction resulted in a discount of $7.7 million, of which
$7.6 million was allocated to the Series B Preferred Stock and included in net income applicable to common stock
and $0.1 million was allocated to the Amended Warrant and recorded to common stock.
On August 28, 2013, we sold 11.5 million shares of our common stock for gross proceeds of $89.1 million in
a public offering and on September 10, 2013, we sold an additional 1.725 million shares of our common stock for
gross proceeds of $13.4 million pursuant to the underwriters’ overallotment option (collectively, the ‘‘Common Stock
Offering’’). The net proceeds from the Common Stock Offering were approximately $97.1 million.
On November 15, 2011, we entered into a Tax Benefits Preservation Plan (the ‘‘Preservation Plan’’) with our
stock transfer agent, American Stock Transfer & Trust Company. Our Board of Directors adopted the Preservation
Plan in an effort to protect the value to our shareholders of our ability to use deferred tax assets, such as net operating
loss carry forwards, to reduce potential future federal income tax obligations. Under federal tax rules, this value could
be lost in the event we experienced an ‘‘ownership change,’’ as defined in Section 382 of the federal Internal Revenue
Code. The Preservation Plan attempts to protect this value by reducing the likelihood that we will experience such
an ownership change by discouraging any person who is not already a 5% shareholder from becoming a 5%
shareholder (with certain limited exceptions).
On November 15, 2011, our Board of Directors declared a dividend of one preferred share purchase right (a
‘‘Right’’) for each outstanding share of our common stock under the terms of the Preservation Plan. The dividend is
payable to the holders of common stock outstanding as of the close of business on November 15, 2011, or outstanding
at any time thereafter but before the earlier of a ‘‘Distribution Date’’ and the date the Preservation Plan terminates.
Each Right entitles the registered holder to purchase from us 1/1000 of a share of our Series C Junior Participating
Preferred Stock, no par value per share (‘‘Series C Preferred Stock’’). Each 1/1000 of a share of Series C Preferred
Stock has economic and voting terms similar to those of one whole share of common stock. The Rights are not
exercisable and generally do not become exercisable until a person or group has acquired, subject to certain
exceptions and conditions, beneficial ownership of 4.99% or more of the outstanding shares of common stock. At that
time, each Right will generally entitle its holder to purchase securities of the Company at a discount of 50% to the
current market price of the common stock. However, the Rights owned by the person acquiring beneficial ownership
of 4.99% or more of the outstanding shares of common stock would automatically be void. The significant dilution
that would result is expected to deter any person from acquiring beneficial ownership of 4.99% or more and thereby
triggering the Rights.
To date, none of the Rights have been exercised or have become exercisable because no unpermitted 4.99% or
more change in the beneficial ownership of the outstanding common stock has occurred. The Rights will generally
expire on the earlier to occur of the close of business on November 15, 2016 and certain other events described in
the Preservation Plan, including such date as our Board of Directors determines that the Preservation Plan is no longer
necessary for its intended purposes.
76
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
A reconciliation of basic and diluted net income per common share for the years ended December 31 follows:
2015
2014
(In thousands, except per share amounts)
2013
Net income applicable to common stock . . . . . . . . . . . . . . . . . . . . . . . . . .
Convertible preferred stock dividends . . . . . . . . . . . . . . . . . . . . . . . . . . .
Preferred stock discount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$20,017
—
—
$18,021
—
—
$82,062
3,001
(7,554)
Net income applicable to common stock for calculation of diluted
earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$20,017
$18,021
$77,509
Weighted average shares outstanding (1)
. . . . . . . . . . . . . . . . . . . . . . . . . .
Restricted stock units . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Effect of stock options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock units for deferred compensation plan for non-employee
directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Effect of convertible preferred stock . . . . . . . . . . . . . . . . . . . . . . . . . . . .
22,716
233
119
112
—
22,927
306
124
114
—
13,970
363
92
125
7,314
Weighted average shares outstanding for calculation of diluted
earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
23,180
23,471
21,864
Net income per common share
Basic (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 0.88
$ 0.79
$ 5.87
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 0.86
$ 0.77
$ 3.55
(1) Basic net income per common share includes weighted average common shares outstanding during the period
and participating share awards.
Weighted average stock options outstanding that were not considered in computing diluted net income per
common share because they were anti-dilutive totaled 0.03 million, 0.03 million and 0.1 million for 2015, 2014 and
2013, respectively. The Amended Warrant issued to the UST to purchase 346,154 shares of our common stock was
also not considered in computing the diluted net income per common share in 2013 as it was anti-dilutive.
NOTE 13 – INCOME TAX
The composition of income tax expense (benefit) for the years ended December 31 follows:
2015
2014
2013
(In thousands)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Current
Deferred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Disproportionate tax effect
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Valuation allowance - change in estimate . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 200
9,128
—
35
$ (359)
7,672
—
(118)
$
(277)
—
1,444
(56,018)
Income tax expense (benefit) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$9,363
$7,195
$(54,851)
Income tax expense (benefit) was $9.4 million, $7.2 million and $(54.9) million during the years ended
December 31, 2015, 2014 and 2013. Prior to the second quarter of 2013, we had established a deferred tax asset
valuation allowance against all of our net deferred tax assets. The reversal of substantially all of this valuation
allowance on our deferred tax assets during the second quarter of 2013 resulted in our recording an income tax benefit
of $57.6 million. In addition, during the second quarter of 2013, we recorded $1.4 million of income tax expense to
clear from accumulated other comprehensive loss (‘‘AOCL’’) the disproportionate tax effects from cash flow hedges.
These disproportionate tax effects had been charged to other comprehensive income (loss) and credited to income tax
expense (benefit) due to our valuation allowance on deferred tax assets as more fully discussed in note #24. Because
we terminated our last remaining cash flow hedge in the second quarter of 2013, it was appropriate to clear these
disproportionate tax effects from AOCL.
77
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The income tax expense (benefit) in the Consolidated Statements of Operations also includes income taxes in
a variety of other states due primarily to Mepco’s operations. The amounts of such state income taxes were an
expense (benefit) of $(0.1) million, zero and $(0.2) million in 2015, 2014 and 2013, respectively.
The deferred income tax expense of $9.1 million and $7.7 million during 2015 and 2014 can be primarily
attributed to tax effects of temporary differences. The deferred income tax benefit of $56.0 million during 2013 is
attributed to the reversal of our deferred tax valuation allowance on primarily all of our deferred tax assets.
A reconciliation of income tax expense (benefit) to the amount computed by applying the statutory federal
income tax rate of 35% in each year presented to the income before income tax for the years ended December 31
follows:
Statutory rate applied to income before income tax . . . . . . . . . . . . . . .
Bank owned life insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax-exempt income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unrecognized tax benefit
Non-deductible meals, entertainment and memberships . . . . . . . . . . . .
Net change in valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Disproportionate tax effect
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
U.S. Treasury warrant . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Share-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2015
2014
(In thousands)
2013
$10,283
(449)
(434)
(135)
43
35
—
—
—
20
$8,826
(480)
(522)
(595)
53
(118)
—
—
—
31
$ 7,930
(477)
(402)
(186)
55
(63,980)
1,444
359
8
398
Income tax expense (benefit)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 9,363
$7,195
$(54,851)
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and
deferred tax liabilities at December 31 follow:
Deferred tax assets
Loss carryforwards
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Allowance for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Alternative minimum tax credit carry forward . . . . . . . . . . . . . . . . . . . . . . . . .
Property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchase premiums, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Share based payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Valuation allowance on other real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unrealized loss on trading securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other than temporary impairment charge on securities available for sale . . .
Non accrual loan interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reserve for unfunded lending commitments . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss reimbursement on sold loans reserve . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unrealized loss on securities available for sale . . . . . . . . . . . . . . . . . . . . . . . .
Vehicle service contract counterparty contingency reserve . . . . . . . . . . . . . . .
Gross deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total net deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2015
2014
(In thousands)
$25,516
7,901
3,427
3,369
1,755
786
592
578
404
382
232
228
186
128
21
$32,933
9,099
3,037
3,239
2,050
684
879
559
448
436
244
189
242
—
521
45,505
(1,054)
44,451
54,560
(1,019)
53,541
78
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
2015
2014
(In thousands)
Deferred tax liabilities
Capitalized mortgage loan servicing rights
. . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred loan fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal Home Loan Bank stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unrealized gain on securities available for sale . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4,353
256
45
—
162
4,816
4,237
260
196
87
129
4,909
Net deferred tax assets
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$39,635
$48,632
We assess whether a valuation allowance on our deferred tax assets is necessary each quarter. Reversing or
reducing the valuation allowance requires us to conclude that the realization of the deferred tax assets is ‘‘more likely
than not.’’ The ultimate realization of this asset is primarily based on generating future income. As of June 30, 2013,
we concluded that the realization of substantially all of our deferred tax assets was now more likely than not. This
conclusion was primarily based upon the following factors:
•
•
•
Achieving a sixth consecutive quarter of profitability;
A forecast of future profitability that supported that the realization of the deferred tax assets is more likely
than not; and
A forecast that future asset quality continued to be stable to improving and that other factors did not exist
that could cause a significant adverse impact on future profitability.
We have also concluded subsequent to June 30, 2013, that the realization of substantially all of our deferred tax
assets continues to be more likely than not for substantially the same reasons as enumerated above, including 10
additional profitable quarters since June 30, 2013.
The valuation allowance against our deferred tax assets totaled $1.1 million and $1.0 million at December 31,
2015 and 2014, respectively. The valuation allowance against our deferred tax assets at December 31, 2015 primarily
relates to state income taxes from our Mepco segment. In this instance, we determined that the future realization of
these particular deferred tax assets was not more likely than not. This conclusion was primarily based on the
uncertainty of Mepco’s future earnings attributable to particular states (given the various apportionment criteria) and
the significant reduction in the size of Mepco’s business over the past three years.
Because of our net operating loss and tax credit carryforwards, we are still subject to the rules of Section 382
of the Internal Revenue Code of 1986, as amended. An ownership change, as defined by these rules, would negatively
affect our ability to utilize our net operating loss carryforwards and other deferred tax assets in the future. If such an
ownership change were to occur, we may suffer higher-than-anticipated tax expense, and consequently lower net
income and cash flow, in those future years. Although we cannot control our shareholders’ activities in buying and
selling our common stock, we do have in place a Tax Benefits Preservation Plan to dissuade any movement in our
stock that would trigger an ownership change, and we limited the size of our Common Stock Offering to avoid
triggering any Section 382 limitations.
At December 31, 2015, we had federal net operating loss (‘‘NOL’’) carryforwards of approximately
$73.4 million which, if not used against taxable income, will expire as follows:
2030 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2031 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2032 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(In thousands)
$18,496
17,170
37,739
$73,405
79
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
$3.4 million of NOL carryforwards in the table above relate to unrealized excess benefits on share based
compensation for which a benefit will be recorded to additional paid in capital (common stock) when realized. We
also had a minor amount of state NOL carryforwards in certain states where Mepco operates. In addition, we had
$3.4 million of alternative minimum tax credit carryforwards with indefinite lives at December 31, 2015.
Changes in unrecognized tax benefits for the years ended December 31 follow:
2015
2014
(In thousands)
2013
Balance at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additions based on tax positions related to the current year . . . . . . . . .
Reductions due to the statute of limitations . . . . . . . . . . . . . . . . . . . . . .
Reductions due to settlements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,091
20
(135)
—
$1,672
18
(595)
(4)
$1,871
11
(186)
(24)
Balance at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 976
$1,091
$1,672
If recognized, the entire amount of unrecognized tax benefits, net of $0.3 million of federal tax on state benefits,
would affect our effective tax rate. We do not expect the total amount of unrecognized tax benefits to significantly
increase or decrease in the next twelve months. No amounts were expensed for interest and penalties for the years
ended December 31, 2015, 2014 and 2013. No amounts were accrued for interest and penalties at December 31, 2015,
2014 or 2013. At December 31, 2015, U.S. Federal tax years 2012 through the present remain open to examination.
NOTE 14 – SHARE BASED COMPENSATION AND BENEFIT PLANS
We maintain share based payment plans that include a non-employee director stock purchase plan and a
long-term incentive plan that permits the issuance of share based compensation, including stock options and
non-vested share awards. The long-term incentive plan, which is shareholder approved, permits the grant of
additional share based awards for up to 0.3 million shares of common stock as of December 31, 2015. The
non-employee director stock purchase plan permits the grant of additional share based payments for up to 0.2 million
shares of common stock as of December 31, 2015. Share based awards and payments are measured at fair value at
the date of grant and are expensed over the requisite service period. Common shares issued upon exercise of stock
options come from currently authorized but unissued shares.
During 2015 and 2014, pursuant to our long-term incentive plan, we granted in each year 0.07 million, shares
of restricted stock and 0.03 million performance stock units (‘‘PSUs’’) to certain officers. The shares of restricted
stock issued during 2015 cliff vest after a period of three years, the shares of restricted stock issued during 2014 vest
ratably over three years and the PSUs issued in both years cliff vest after a period of three years. The performance
feature of the PSUs is based on a comparison of our total shareholder return over the three year period starting on
the grant date to the total shareholder return over that period for a banking index of our peers.
During 2013, we issued 0.1 million restricted stock units to certain of our executive officers. These restricted
stock units cliff vest after a period of three years. We used the market value of the common stock on the date of grant
to measure compensation cost for these non-vested share awards.
During 2013, pursuant to our performance-based compensation plans, we granted 0.1 million stock options to
certain officers. The stock options have an exercise price equal to the market value on the date of grant, vest ratably
over a three year period and expire 10 years from date of grant. We use the Black Scholes option pricing model to
measure compensation cost for stock options. We also estimate expected forfeitures over the vesting period.
Our directors may elect to receive at least a portion of their quarterly cash retainer fees in the form of common
stock (either on a current basis or on a deferred basis) pursuant to the non-employee director stock purchase plan
referenced above. Shares equal in value to that portion of each director’s fees that he or she has elected to receive
in stock are issued each quarter and vest immediately. We issued 0.01 million shares, 0.01 million shares and
0.06 million shares to directors during 2015, 2014 and 2013, respectively, and expensed their value during those same
periods.
80
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
During 2013, a portion of our president’s annual salary was paid in the form of common stock. The amount paid
in common stock (also referred to as ‘‘salary stock’’) was $0.020 million. These shares were issued each pay period
and vested immediately. No salary stock was paid during 2015 and 2014.
Total compensation expense recognized for grants pursuant to our long-term incentive plan was $1.4 million,
$1.0 million and $0.9 million in 2015, 2014 and 2013, respectively. The corresponding tax benefit relating to this
expense was $0.5 million, $0.4 million and zero in 2015, 2014 and 2013, respectively. Total expense recognized for
non-employee director share based payments was $0.1 million, $0.2 million and $0.3 million in 2015, 2014 and 2013,
respectively. The corresponding tax benefit relating to this expense was $0.03 million, $0.1 million and zero in 2015,
2014 and 2013, respectively.
At December 31, 2015, the total expected compensation cost related to non-vested stock options, restricted
stock, PSUs and restricted stock unit awards not yet recognized was $1.5 million. The weighted-average period over
which this amount will be recognized is 1.6 years.
A summary of outstanding stock option grants and related transactions follows:
Number of
Shares
Average
Exercise
Price
Weighted-
Average
Remaining
Contractual
Term (Years)
Aggregated
Intrinsic
Value
(In thousands)
Outstanding at January 1, 2015 . . . . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
281,820
—
(42,204)
(2,096)
(1,924)
Outstanding at December 31, 2015 . . . . . . . . . . . . . . . . . . . . .
235,596
Vested and expected to vest at December 31, 2015 . . . . . . . .
234,949
Exercisable at December 31, 2015 . . . . . . . . . . . . . . . . . . . . . .
213,154
$4.69
3.25
4.77
6.79
$4.94
$4.93
$4.78
A summary of outstanding non-vested stock and related transactions follows:
6.12
6.11
5.98
$2,443
$2,437
$2,245
Outstanding at January 1, 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Number
of Shares
407,130
108,761
(249,526)
(4,384)
Outstanding at December 31, 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
261,981
Weighted-
Average
Grant Date
Fair Value
$ 6.31
13.07
3.92
12.88
$11.29
A summary of the weighted-average assumptions used in the Black-Scholes option pricing model for grants of
stock options follows (no stock options were granted in 2015 and 2014):
Expected dividend yield . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Risk-free interest rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected life (in years) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected volatility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Per share weighted-average grant date fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2013
0.31%
1.12
6.00
101.30%
$ 4.98
81
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The risk-free interest rate for the expected term of the option is based on the U.S. Treasury yield curve in effect
at the time of the grant. The expected life was obtained using a simplified method that, in general, averaged the
vesting term and original contractual term of the stock option. This method was used as relevant historical data of
actual exercise activity was very limited. The expected volatility was based on historical volatility of our common
stock.
Certain information regarding options exercised during the periods ending December 31 follows:
Intrinsic value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash proceeds received . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax benefit realized . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2015
$444
$137
$155
2014
(In thousands)
$321
$ 96
$112
2013
$117
$ 39
$ —
We maintain 401(k) and employee stock ownership plans covering substantially all of our full-time employees.
During 2015 we matched 50% of employee contributions to the 401(k) plan up to a maximum of 4% of participating
employees’ eligible wages. During 2014 and 2013 we matched 100% of employee contributions up to a maximum
of 2% and 1%, respectively of participating employees’ eligible wages. Contributions to the employee stock
ownership plan are determined annually and require approval of our Board of Directors. The maximum contribution
is 6% of employees’ eligible wages. Contributions to the employee stock ownership plan were 2% for 2015 and 2014
and 3% for 2013. Amounts expensed for these retirement plans were $1.2 million, $1.0 million, and $1.2 million in
2015, 2014 and 2013, respectively.
Our officers participate in various performance-based compensation plans. Amounts expensed for all incentive
plans totaled $5.7 million, $4.2 million and $5.0 million, in 2015, 2014 and 2013, respectively.
We also provide certain health care and life insurance programs to substantially all full-time employees.
Amounts expensed for these programs totaled $3.6 million, $3.9 million and $3.8 million in 2015, 2014 and 2013
respectively. These insurance programs are also available to retired employees at their own expense.
NOTE 15 – OTHER NON-INTEREST INCOME
Other non-interest income for the years ended December 31 follows:
Investment and insurance commissions . . . . . . . . . . . . . . . . . . . . . . . . .
ATM fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Bank owned life insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other real estate rental income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other
Total other non-interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2015
2014
(In thousands)
2013
$1,827
1,551
1,282
128
2,904
$7,692
$1,814
1,599
1,371
1,295
2,852
$8,931
$1,709
1,661
1,363
1,471
2,333
$8,537
82
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTE 16 – DERIVATIVE FINANCIAL INSTRUMENTS
We are required to record derivatives on our Consolidated Statements of Financial Condition as assets and
liabilities measured at their fair value. The accounting for increases and decreases in the value of derivatives depends
upon the use of derivatives and whether the derivatives qualify for hedge accounting.
Our derivative financial instruments according to the type of hedge in which they are designated at December 31
follow:
2015
Average
Maturity
(years)
Fair
Value
Notional
Amount
(Dollars in thousands)
No hedge designation
Rate-lock mortgage loan commitments . . . . . . . . . . . . . . . . . . . . . . .
Mandatory commitments to sell mortgage loans . . . . . . . . . . . . . . . .
Pay-fixed interest rate swap agreements
. . . . . . . . . . . . . . . . . . . . . .
Pay-variable interest rate swap agreements . . . . . . . . . . . . . . . . . . . .
Purchased options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Written options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 20,581
46,320
27,587
27,587
2,098
2,098
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$126,271
0.1
0.1
8.0
8.0
5.7
5.7
3.7
2014
Average
Maturity
(years)
Notional
Amount
$ 550
69
(497)
497
122
(122)
$ 619
Fair
Value
No hedge designation
Rate-lock mortgage loan commitments . . . . . . . . . . . . . . . . . . . . . . .
Mandatory commitments to sell mortgage loans . . . . . . . . . . . . . . . .
Pay-fixed interest rate swap agreements
. . . . . . . . . . . . . . . . . . . . . .
Pay-variable interest rate swap agreements . . . . . . . . . . . . . . . . . . . .
$16,759
38,600
3,300
3,300
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$61,959
0.1
0.1
9.4
9.4
1.1
$ 437
(184)
(182)
182
$ 253
(Dollars in thousands)
We have established management objectives and strategies that include interest-rate risk parameters for
maximum fluctuations in net interest income and market value of portfolio equity. We monitor our interest rate risk
position via simulation modeling reports. The goal of our asset/liability management efforts is to maintain profitable
financial leverage within established risk parameters.
To meet our asset/liability management objectives, we may periodically enter into derivative financial
instruments to mitigate exposure to fluctuations in cash flows resulting from changes in interest rates (‘‘Cash Flow
Hedges’’). Cash Flow Hedges during 2013 included certain pay-fixed interest rate swaps which converted the
variable-rate cash flows on debt obligations to fixed-rates. During the second quarter of 2013 we terminated our last
Cash Flow Hedge pay-fixed interest rate swap and paid a termination fee of $0.6 million. The remaining unrealized
loss on the terminated pay-fixed interest rate swap which was equal to this termination fee was included as a
component of accumulated other comprehensive loss and was amortized into earnings through December 31, 2014,
the original remaining life of the pay-fixed interest rate swap.
Certain derivative financial instruments have not been designated as hedges. The fair value of these derivative
financial instruments has been recorded on our Consolidated Statements of Financial Condition and is adjusted on
an ongoing basis to reflect their then current fair value. The changes in fair value of derivative financial instruments
not designated as hedges are recognized in earnings.
In the ordinary course of business, we enter into rate-lock mortgage loan commitments with customers
(‘‘Rate-Lock Commitments’’). These commitments expose us to interest rate risk. We also enter into mandatory
83
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
commitments to sell mortgage loans (‘‘Mandatory Commitments’’) to reduce the impact of price fluctuations of
mortgage loans held for sale and Rate-Lock Commitments. Mandatory Commitments help protect our loan sale profit
margin from fluctuations in interest rates. The changes in the fair value of Rate Lock Commitments and Mandatory
Commitments are recognized currently as part of net gains on mortgage loans. We obtain market prices on Mandatory
Commitments and Rate-Lock Commitments. Net gains on mortgage loans, as well as net income, may be more
volatile as a result of these derivative instruments, which are not designated as hedges.
During 2015, we began offering to our deposit customers an equity linked time deposit product (‘‘Altitude
CD’’). The Altitude CD is a time deposit that provides the customer a guaranteed return of principal at maturity plus
a potential equity return (a written option), while we receive a like stream of funds based on the equity return
(a purchased option). The written and purchased options will generally move in opposite directions resulting in little
or no net impact on our Consolidated Statements of Operations. All of the written and purchased options in the table
above relate to this Altitude CD product.
During 2014, we began a program that allows commercial loan customers to lock in a fixed rate for a longer
period of time than we would normally offer for interest rate risk reasons. We will enter into a variable rate
commercial loan and an interest rate swap agreement with a customer and then enter into an offsetting interest rate
swap agreement with an unrelated party. The interest rate swap agreement fair values will generally move in opposite
directions resulting in little or no net impact on our Consolidated Statements of Operations. All of the interest rate
swap agreements in the table above relate to this program.
During the second quarter of 2014, we completed a securities trade in which we shorted a $13 million UST
security. This UST short was terminated during the fourth quarter of 2014 and the change in the fair value of the short
position from the inception date to the termination date has been recorded in net gains on securities in our
Consolidated Statements of Operations.
During 2010, we entered into an amended and restated warrant with the UST that would allow them to purchase
our common stock at a fixed price (see Note #12). Because of certain anti-dilution features included in the Amended
Warrant, it was not considered to have been indexed to our common stock and was therefore accounted for as a
derivative instrument and recorded as a liability. Any change in value of the Amended Warrant while it was accounted
for as a derivative was recorded in non-interest income in our Consolidated Statements of Operations. However, the
anti-dilution features in the Amended Warrant which caused it to be accounted for as a derivative and included in
accrued expenses and other liabilities on our Consolidated Statements of Financial Condition expired on April 16,
2013. As a result, the Amended Warrant was reclassified into shareholders’ equity on that date at its then fair value
which totaled $1.5 million. During the third quarter of 2013, we repurchased the Amended Warrant from the UST
(see Note #12).
84
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following tables illustrate the impact that the derivative financial instruments discussed above have on
individual line items in the Consolidated Statements of Financial Condition for the periods presented:
Fair Values of Derivative Instruments
Asset Derivatives
December 31,
Liability Derivatives
December 31,
2015
2014
2015
Balance
Sheet
Location
Fair
Value
Balance
Sheet
Location
Fair
Value
Balance
Sheet
Location
Fair
Value
2014
Balance
Sheet
Location
Fair
Value
(In thousands)
Derivatives not designated as hedging instruments
Rate-lock mortgage loan commitments
. . . . . . . . Other
assets
$ 550
Mandatory commitments to sell mortgage loans . . Other
assets
Pay-fixed interest rate swap agreements . . . . . . . . Other
assets
Pay-variable interest rate swap agreements . . . . . . Other
assets
Purchased options . . . . . . . . . . . . . . . . . . . . . . . Other
assets
Written options . . . . . . . . . . . . . . . . . . . . . . . . . Other
assets
Total derivatives . . . . . . . . . . . . . . . . . . . . . .
69
—
497
122
—
$1,238
Other
assets
Other
assets
Other
assets
Other
assets
Other
assets
Other
assets
$437
—
—
182
—
—
$619
Other
liabilities
Other
liabilities
Other
liabilities
Other
liabilities
Other
liabilities
Other
liabilities
$ —
—
497
—
—
122
$619
Other
liabilities
Other
liabilities
Other
liabilities
Other
liabilities
Other
liabilities
Other
liabilities
$ —
184
182
—
—
—
$366
The effect of derivative financial instruments on the Consolidated Statements of Operations follows:
Year Ended December 31,
Location
of Loss
Reclassified
from
Accumulated
Other
Comprehensive
Loss into
Income
(Effective
Portion)
Loss Recognized
in Other
Comprehensive
Income (Loss)
(Effective Portion)
2013
2014
2015
Loss Reclassified from
Accumulated Other
Comprehensive
Loss into Income
(Effective Portion)
2014
(In thousands)
2013
2015
Location of
Gain (Loss)
Recognized
in Income (1)
Gain (Loss)
Recognized
in Income (1)
2014
2013
2015
$— $— $(37)
$— $— $(37)
Interest
expense
$— $(380) $(397)
$— $(380) $(397)
Interest
expense
$ — $ — $ —
$ — $ — $ —
Net gains on
mortgage
loans
Net gains
on mortgage
loans
Interest
income
Interest
income
Interest
expense
Interest
expense
Gain on
securities
Increase in
fair value of
U.S. Treasury
warrant
$ 113 $ 71 $(1,002)
253
(312)
250
(315)
(182)
315
122
182
—
(122) —
— 295
—
—
—
—
—
—
— (1,025)
$ 366 $ 54 $(1,777)
Cash Flow Hedges
Pay-fixed interest rate
swap agreements . . . . .
. . . . . . . . . . . . .
Total
No hedge designation
Rate-lock mortgage loan
commitments . . . . . . . .
Mandatory commitments to
sell mortgage loans . . .
Pay-fixed interest rate
swap agreements . . . . .
Pay-variable interest rate
swap agreements . . . . .
Purchased options . . . . . .
Written options. . . . . . . . .
UST short position . . . . . .
Amended Warrant . . . . . . .
. . . . . . . . . . . . . . .
Total
(1) For cash flow hedges, this location and amount refers to the ineffective portion.
85
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTE 17 – RELATED PARTY TRANSACTIONS
Certain of our directors and executive officers, including companies in which they are officers or have
significant ownership, were loan and deposit customers during 2015 and 2014.
A summary of loans to our directors and executive officers whose borrowing relationship (which includes loans
to entities in which the individual owns a 10% or more voting interest) exceeds $60,000 for the years ended
December 31 follows:
Balance at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
New loans and advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repayments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$216
—
(26)
$ 351
—
(135)
Balance at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$190
$ 216
Deposits held by us for directors and executive officers totaled $1.3 million and $1.0 million at December 31,
2014
2015
(In thousands)
2015 and 2014, respectively.
NOTE 18 – LEASES
We have non-cancelable operating leases for certain office facilities, some of which include renewal options and
escalation clauses.
A summary of future minimum lease payments under non-cancelable operating leases at December 31, 2015,
follows:
2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2021 and thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,054
862
809
720
666
253
$4,364
(In thousands)
Rental expense on operating leases totaled $1.2 million, $1.3 million and $1.2 million in 2015, 2014 and 2013,
respectively.
NOTE 19 – CONCENTRATIONS OF CREDIT RISK
Credit risk is the risk to earnings and capital arising from an obligor’s failure to meet the terms of any contract
with our organization or otherwise fail to perform as agreed. Credit risk can occur outside of our traditional lending
activities and can exist in any activity where success depends on counterparty, issuer or borrower performance.
Concentrations of credit risk (whether on- or off-balance sheet) arising from financial instruments can exist in relation
to individual borrowers or groups of borrowers, certain types of collateral, certain types of industries or certain
geographic regions. Credit risk associated with these concentrations could arise when a significant amount of loans
or other financial instruments, related by similar characteristics, are simultaneously impacted by changes in economic
or other conditions that cause their probability of repayment or other type of settlement to be adversely affected. Our
major concentrations of credit risk arise by collateral type and by industry. The significant concentrations by
collateral type at December 31, 2015, include $538.5 million of loans secured by residential real estate and
$62.6 million of construction and development loans. In addition, we have a concentration of credit within the vehicle
service contract industry. At December 31, 2015, we had $34.6 million of payment plan receivables. Our recourse
for nonpayment of these payment plan receivables is against our counterparties operating within the vehicle service
contract industry.
86
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Additionally, within our commercial real estate and commercial loan portfolio, we had significant standard
industry classification concentrations in the following categories as of December 31, 2015: Lessors of Nonresidential
Real Estate ($259.1 million); Lessors of Residential Real Estate ($82.1 million); Health Care and Social Assistance
($67.8 million) and Construction General Contractors and Land Development ($54.4 million). A geographic
concentration arises because we primarily conduct our lending activities in the State of Michigan.
Our concentration of credit within the vehicle service contract industry relates to the business operated by our
subsidiary, Mepco. This business and certain risks associated with this business are described in note #11 above. In
addition, see note #4 above for a breakdown of Mepco’s payment plan receivables by the level of recourse Mepco
has against various counterparties. Mepco monitors counterparty concentrations in order to attempt to manage our
exposure for contractual obligations from its counterparties. In addition, even where an insurance company or risk
retention group does not have a guarantee obligation to Mepco, the failure of the insurance company or risk retention
group could result in a mass cancellation of the vehicle service contracts (and the related payment plans) insured by
such entity. Such a mass cancellation would trigger and accelerate the contractual obligations of the counterparties
that did have such obligations to Mepco. The counterparty concentration levels are managed based on the AM Best
rating and statutory surplus level for an insurance company and on other factors including financial evaluation,
collateral,
funding holdbacks, guarantees, and distribution of concentrations for vehicle service contract
administrators and vehicle service contract sellers/dealers.
The five largest concentrations by insurance company, risk retention group or other party backing the service
contract represents approximately 42.4%, 24.0%, 15.0%, 7.8% and 3.7%, respectively, of Mepco’s payment plan
receivables at December 31, 2015. These companies have provided the insurance coverage for the vehicle service
contracts underlying the payment plan receivables; however, these companies are not all obligated to Mepco for the
repayment of the payment plan receivables upon cancellation of the underlying vehicle service contracts and payment
plans. Mepco has varying levels of recourse against such companies. Still, the failure of any insurer backing service
contracts related to Mepco’s payment plan receivables could have an adverse effect on Mepco’s collection of those
receivables.
The top five vehicle service contract sellers from which Mepco purchases payment plans represent
approximately 62.2%, 11.7%, 9.4%, 5.4% and 3.8%, respectively of Mepco’s payment plan receivables at
December 31, 2015. See note #11 for additional information on Mepco counterparties.
NOTE 20 – REGULATORY MATTERS
Capital guidelines adopted by federal and state regulatory agencies and restrictions imposed by law limit the
amount of cash dividends our Bank can pay to us. Under these guidelines, the amount of dividends that may be paid
in any calendar year is limited to the Bank’s current year’s net profits, combined with the retained net profits of the
preceding two years. Further, the Bank cannot pay a dividend at any time that it has negative undivided profits. As
of December 31, 2015, the Bank had negative undivided profits of $10.1 million. We can request regulatory approval
for a return of capital from the Bank to the parent company. During the first quarter of 2014, we requested regulatory
approval for a $15.0 million return of capital from the Bank to the parent company. This return of capital request was
approved by our banking regulators on March 28, 2014 and the Bank returned $15.0 million of capital to the parent
company on April 9, 2014. During January of 2015, we requested regulatory approval for an additional $18.5 million
return of capital from the Bank to the parent company. This return of capital request was approved by our banking
regulators on February 13, 2015, and the Bank returned $18.5 million of capital to the parent company on
February 17, 2015. It is not our intent to have dividends paid in amounts that would reduce the capital of our Bank
to levels below those which we consider prudent and in accordance with guidelines of regulatory authorities.
We are also subject to various regulatory capital requirements. The prompt corrective action regulations
establish quantitative measures to ensure capital adequacy and require minimum amounts and ratios of total, Tier 1,
and common equity Tier 1 (as of January 1, 2015) capital to risk-weighted assets and Tier 1 capital to average assets.
Failure to meet minimum capital requirements can result in certain mandatory, and possibly discretionary, actions by
regulators that could have a material effect on our consolidated financial statements. Under capital adequacy
guidelines, we must meet specific capital requirements that involve quantitative measures as well as qualitative
judgments by the regulators. The most recent regulatory filings as of December 31, 2015 and 2014, categorized our
Bank as well capitalized. Management is not aware of any conditions or events that would have changed the most
recent Federal Deposit Insurance Corporation (‘‘FDIC’’) categorization.
87
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
On July 2, 2013, the Federal Reserve approved a final rule that establishes an integrated regulatory capital
framework (the ‘‘New Capital Rules’’). The rule implements in the United States the Basel III regulatory capital
reforms from the Basel Committee on Banking Supervision and certain changes required by the Dodd-Frank Act. In
general, under the New Capital Rules, minimum requirements have increased for both the quantity and quality of
capital held by banking organizations. Consistent with the international Basel framework, the New Capital Rules
include a new minimum ratio of common equity Tier 1 capital to risk-weighted assets of 4.5% and a common equity
Tier 1 capital conservation buffer of 2.5% of risk-weighted assets that applies to all supervised financial institutions.
The rule also raises the minimum ratio of Tier 1 capital to risk-weighted assets from 4% to 6% and includes a
minimum leverage ratio of 4% for all banking organizations. As to the quality of capital, the New Capital Rules
emphasize common equity Tier 1 capital, the most loss-absorbing form of capital, and implement strict eligibility
criteria for regulatory capital instruments. The New Capital Rules also change the methodology for calculating
risk-weighted assets to enhance risk sensitivity. The New Capital Rules became effective for us on January 1, 2015.
Our actual capital amounts and ratios at December 31 follow:
Actual
Amount
Ratio
Minimum for
Adequately Capitalized
Institutions
Amount
Ratio
(Dollars in thousands)
Minimum for
Well-Capitalized
Institutions
Amount
Ratio
2015
Total capital to risk-weighted assets
Consolidated . . . . . . . . . . . . . . . . . . . . . . . . . .
Independent Bank . . . . . . . . . . . . . . . . . . . . . .
$278,170
261,894
16.65% $133,668
133,514
15.69
8.00%
8.00
NA
$166,893
NA
10.00%
Tier 1 capital to risk-weighted assets
Consolidated . . . . . . . . . . . . . . . . . . . . . . . . . .
Independent Bank . . . . . . . . . . . . . . . . . . . . . .
$257,050
240,867
15.38% $100,251
100,136
14.43
6.00%
6.00
NA
$133,514
NA
8.00%
Common equity tier 1 capital to risk-weighted
assets
Consolidated . . . . . . . . . . . . . . . . . . . . . . . . . .
Independent Bank . . . . . . . . . . . . . . . . . . . . . .
Tier 1 capital to average assets
$239,271
240,867
14.32% $ 75,188
75,102
14.43
4.50%
4.50
NA
$108,480
NA
6.50%
Consolidated . . . . . . . . . . . . . . . . . . . . . . . . . .
Independent Bank . . . . . . . . . . . . . . . . . . . . . .
$257,050
240,867
10.91% $ 94,217
94,145
10.23
4.00%
4.00
NA
$117,682
NA
5.00%
2014
Total capital to risk-weighted assets
Consolidated . . . . . . . . . . . . . . . . . . . . . . . . . .
Independent Bank . . . . . . . . . . . . . . . . . . . . . .
$265,163
247,883
18.06% $117,427
117,374
16.90
8.00%
8.00
NA
$146,718
NA
10.00%
Tier 1 capital to risk-weighted assets
Consolidated . . . . . . . . . . . . . . . . . . . . . . . . . .
Independent Bank . . . . . . . . . . . . . . . . . . . . . .
$246,628
229,361
16.80% $ 58,714
58,687
15.63
4.00%
4.00
NA
$ 88,031
NA
6.00%
Tier 1 capital to average assets
Consolidated . . . . . . . . . . . . . . . . . . . . . . . . . .
Independent Bank . . . . . . . . . . . . . . . . . . . . . .
$246,628
229,361
11.18% $ 88,206
87,687
10.46
4.00%
4.00
NA
$109,609
NA
5.00%
NA — Not applicable
88
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The components of our regulatory capital are as follows:
Consolidated
December 31,
2015
2014
Independent Bank
December 31,
2015
2014
(In thousands)
Total shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$251,092
$250,371
$259,947
$257,832
Add (deduct)
Accumulated other comprehensive loss for regulatory
purposes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Disallowed deferred tax assets. . . . . . . . . . . . . . . . . . . . . .
Disallowed capitalized mortgage loan servicing rights . .
Common equity tier 1 capital . . . . . . . . . . . . . . . . . . . .
Qualifying trust preferred securities . . . . . . . . . . . . . . . . .
Disallowed deferred tax assets. . . . . . . . . . . . . . . . . . . . . .
Tier 1 capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Allowance for loan losses and allowance for unfunded
lending commitments limited to 1.25% of total risk-
weighted assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total risk-based capital . . . . . . . . . . . . . . . . . . . . . . . . .
NOTE 21 – FAIR VALUE DISCLOSURES
238
(912)
(11,147)
—
239,271
34,500
(16,721)
257,050
5,636
(2,627)
(40,500)
(752)
212,128
34,500
—
246,628
238
(912)
(18,406)
—
240,867
—
—
240,867
5,636
(2,627)
(30,728)
(752)
229,361
—
—
229,361
21,120
$278,170
18,535
$265,163
21,027
$261,894
18,522
$247,883
FASB ASC topic 820 defines fair value as the exchange price that would be received for an asset or paid to
transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly
transaction between market participants on the measurement date. FASB ASC topic 820 also establishes a fair value
hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable
inputs when measuring fair value.
The standard describes three levels of inputs that may be used to measure fair value:
Level 1: Valuation is based upon quoted prices for identical instruments traded in active markets. Level 1
instruments include securities traded on active exchange markets, such as the New York Stock Exchange,
as well as U.S. Treasury securities that are traded by dealers or brokers in active over-the-counter markets.
Level 2: Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for
identical or similar instruments in markets that are not active, and model-based valuation techniques for
which all significant assumptions are observable in the market. Level 2 instruments include securities
traded in less active dealer or broker markets.
Level 3: Valuation is generated from model-based techniques that use at least one significant assumption
not observable in the market. These unobservable assumptions reflect estimates of assumptions that market
participants would use in pricing the asset or liability. Valuation techniques include use of option pricing
models, discounted cash flow models and similar techniques.
We used the following methods and significant assumptions to estimate fair value:
Securities: Where quoted market prices are available in an active market, securities (trading or available for sale)
are classified as Level 1 of the valuation hierarchy. Level 1 securities include certain preferred stocks included in our
trading portfolio for which there are quoted prices in active markets. If quoted market prices are not available for the
specific security, then fair values are estimated by (1) using quoted market prices of securities with similar
characteristics, (2) matrix pricing, which is a mathematical technique used widely in the industry to value debt
securities without relying exclusively on quoted prices for specific securities but rather by relying on the securities’
relationship to other benchmark quoted prices, or (3) a discounted cash flow analysis whose significant fair value
inputs can generally be verified and do not typically involve judgment by management. These securities are classified
as Level 2 of the valuation hierarchy and include agency securities, private label residential mortgage-backed
securities, other asset backed securities, municipal securities, trust preferred securities and corporate securities.
89
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Loans held for sale: The fair value of mortgage loans held for sale is based on mortgage backed security pricing
for comparable assets (recurring Level 2).
Impaired loans with specific loss allocations based on collateral value: From time to time, certain loans are
considered impaired and an allowance for loan losses is established. Loans for which it is probable that payment of
interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered
impaired. We measure our investment in an impaired loan based on one of three methods: the loan’s observable
market price, the fair value of the collateral or the present value of expected future cash flows discounted at the loan’s
effective interest rate. Those impaired loans not requiring an allowance represent loans for which the fair value of
the expected repayments or collateral exceed the recorded investments in such loans. At December 31, 2015 and
2014, all of our total impaired loans were evaluated based on either the fair value of the collateral or the present value
of expected future cash flows discounted at the loan’s effective interest rate. When the fair value of the collateral is
based on an appraised value or when an appraised value is not available we record the impaired loan as nonrecurring
Level 3. These appraisals may utilize a single valuation approach or a combination of approaches including
comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the
independent appraisers to adjust for differences between the comparable sales and income data available. Such
adjustments can be significant and thus will typically result in a Level 3 classification of the inputs for determining
fair value.
Other real estate: At the time of acquisition, other real estate is recorded at fair value, less estimated costs to
sell, which becomes the property’s new basis. Subsequent write-downs to reflect declines in value since the time of
acquisition may occur from time to time and are recorded in net (gains) losses on other real estate and repossessed
assets in the Consolidated Statements of Operations. The fair value of the property used at and subsequent to the time
of acquisition is typically determined by a third party appraisal of the property. These appraisals may utilize a single
valuation approach or a combination of approaches including comparable sales and the income approach.
Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences
between the comparable sales and income data available. Such adjustments can be significant and typically result in
a Level 3 classification of the inputs for determining fair value.
Appraisals for both collateral-dependent impaired loans and other real estate owned are performed by certified
general appraisers (for commercial properties) or certified residential appraisers (for residential properties) whose
qualifications and licenses have been reviewed and verified by us. Once received, an independent third party (for
commercial properties over $0.25 million) or a member of our Collateral Evaluation Department (for commercial
properties under $0.25 million) or a member of our Special Assets Group (for retail properties) reviews the
assumptions and approaches utilized in the appraisal as well as the overall resulting fair value in comparison with
independent data sources such as recent market data or industry-wide statistics. We compare the actual selling price
of collateral that has been sold to the most recent appraised value of our properties to determine what additional
adjustment, if any, should be made to the appraisal value to arrive at fair value. For commercial and retail properties
we typically discount an appraisal to account for various factors that the appraisal excludes in its assumptions. These
additional discounts generally do not result in material adjustments to the appraised value.
Capitalized mortgage loan servicing rights: The fair value of capitalized mortgage loan servicing rights is based
on a valuation model used by an independent third party that calculates the present value of estimated net servicing
income. The valuation model incorporates assumptions that market participants would use in estimating future net
servicing income. Certain model assumptions are generally unobservable and are based upon the best information
available including data relating to our own servicing portfolio, reviews of mortgage servicing assumption and
valuation surveys and input from various mortgage servicers and, therefore, are recorded as nonrecurring Level 3.
Management evaluates the third party valuation for reasonableness each quarter as part of our financial reporting
control processes.
Derivatives: The fair value of rate-lock mortgage loan commitments and mandatory commitments to sell
mortgage loans is based on mortgage backed security pricing for comparable assets (recurring Level 2). The fair value
of interest rate swap agreements is based on a discounted cash flow analysis whose significant fair value inputs can
generally be observed in the market place and do not typically involve judgment by management (recurring Level 2).
The fair value of purchased and written options is based on prices of financial instruments with similar characteristics
and do not typically involve judgment by management (recurring Level 2).
90
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Assets and liabilities measured at fair value, including financial assets for which we have elected the fair value
option, were as follows:
Fair Value Measurements Using
Quoted
Prices
in Active
Markets
for
Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
(In thousands)
Fair Value
Measurements
$
148
$148
$
—
$ —
December 31, 2015:
Measured at Fair Value on a Recurring Basis:
Assets
Trading securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Securities available for sale
U.S. agency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
U.S. agency residential mortgage-backed . . . . . . . . . . . . . . . . .
U.S. agency commercial mortgage-backed . . . . . . . . . . . . . . . .
Private label residential mortgage-backed . . . . . . . . . . . . . . . .
Other asset backed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Obligations of states and political subdivisions . . . . . . . . . . . .
Corporate. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Trust preferred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans held for sale. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Derivatives (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
47,512
196,056
34,028
4,903
116,904
144,984
38,614
2,483
27,866
1,238
Liabilities
Derivatives (2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
619
Measured at Fair Value on a Non-recurring basis:
Assets
Capitalized mortgage loan servicing rights (3) . . . . . . . . . . . . . . .
Impaired loans (4)
Commercial
Income producing - real estate . . . . . . . . . . . . . . . . . . . . . .
Land, land development & construction-real estate. . . . . . . .
Commercial and industrial . . . . . . . . . . . . . . . . . . . . . . . . .
Mortgage
1-4 Family . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Resort lending . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other real estate (5)
Commercial
Land, land development & construction-real estate. . . . . . . .
Commercial and industrial . . . . . . . . . . . . . . . . . . . . . . . . .
Mortgage
1-4 Family . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Resort lending . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Home equity - 1st lien . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Installment
Home equity - 1st lien . . . . . . . . . . . . . . . . . . . . . . . . . . . .
8,481
711
40
1,257
421
129
639
165
26
107
14
36
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
47,512
196,056
34,028
4,903
116,904
144,984
38,614
2,483
27,866
1,238
619
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
8,481
711
40
1,257
421
129
639
165
26
107
14
36
Included in accrued income and other assets
Included in accrued expenses and other liabilities
(1)
(2)
(3) Only includes servicing rights that are carried at fair value due to recognition of a valuation allowance.
(4) Only includes impaired loans with specific loss allocations based on collateral value.
(5) Only includes other real estate with subsequent write downs to fair value.
91
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Fair Value Measurements Using
Quoted
Prices
in Active
Markets
for
Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
(In thousands)
Fair Value
Measurements
$
203
$203
$
— $ —
December 31, 2014:
Measured at Fair Value on a Recurring Basis:
Assets
Trading securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Securities available for sale
U.S. agency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
U.S. agency residential mortgage-backed . . . . . . . . . . . . .
U.S. agency commercial mortgage-backed . . . . . . . . . . . .
Private label residential mortgage-backed . . . . . . . . . . . . .
Other asset backed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Obligations of states and political subdivisions. . . . . . . . .
Corporate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Trust preferred. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Derivatives (1). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
35,006
257,558
33,728
6,013
32,353
143,415
22,664
2,441
23,662
619
Liabilities
Derivatives (2). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
366
Measured at Fair Value on a Non-recurring basis:
Assets
Capitalized mortgage loan servicing rights (3) . . . . . . . . . . .
Impaired loans (4)
Commercial
Income producing - real estate . . . . . . . . . . . . . . . . . . . .
Land, land development & construction-real estate . . .
Commercial and industrial . . . . . . . . . . . . . . . . . . . . . . .
Mortgage
1-4 Family . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other real estate (5)
Commercial
Income producing - real estate . . . . . . . . . . . . . . . . . . . .
Land, land development & construction-real estate . . .
Mortgage
1-4 Family . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Resort lending . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Installment
Home equity - 1st lien . . . . . . . . . . . . . . . . . . . . . . . . . .
(1)
(2)
Included in accrued income and other assets
Included in accrued expenses and other liabilities
9,197
869
354
2,601
1,306
479
737
102
575
13
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
35,006
257,558
33,728
6,013
32,353
143,415
22,664
2,441
23,662
619
366
—
—
—
—
—
—
—
—
—
—
—
—
9,197
—
—
—
—
—
—
—
—
—
869
354
2,601
1,306
479
737
102
575
13
(3) Only includes servicing rights that are carried at fair value due to recognition of a valuation allowance.
(4) Only includes impaired loans with specific loss allocations based on collateral value.
(5) Only includes other real estate with subsequent write downs to fair value.
92
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
There were no transfers between Level 1 and Level 2 during the years ended December 31, 2015 and 2014.
Changes in fair values of financial assets for which we have elected the fair value option for the years ended
December 31 were as follows:
Total
Change
in Fair
Values
Included
in Current
Period
Earnings
Net Gains (Losses)
on Assets
Securities
Loans
(In thousands)
2015
Trading securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ (55)
—
$ — $
90
(55)
90
2014
Trading securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$(295)
—
$ — $ (295)
258
258
2013
Trading securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 388
—
$ — $
(1,477)
388
(1,477)
For those items measured at fair value pursuant to our election of the fair value option, interest income is
recorded within the Consolidated Statements of Operations based on the contractual amount of interest income earned
on these financial assets and dividend income is recorded based on cash dividends.
The following represent impairment charges recognized during the years ended December 31, 2015, 2014 and
2013 relating to assets measured at fair value on a non-recurring basis:
•
•
•
Capitalized mortgage loan servicing rights, whose individual strata are measured at fair value, had a
carrying amount of $8.5 million, which is net of a valuation allowance of $3.3 million, at December 31,
2015, and had a carrying amount of $9.2 million, which is net of a valuation allowance of $3.8 million, at
December 31, 2014. A recovery (charge) of $0.5 million, $(0.9) million and $3.2 million was included in
our results of operations for the years ending December 31, 2015, 2014 and 2013, respectively.
Loans which are measured for impairment using the fair value of collateral for collateral dependent loans
had a carrying amount of $5.1 million, with a valuation allowance of $2.5 million at December 31, 2015,
and had a carrying amount of $8.2 million, with a valuation allowance of $3.1 million at December 31,
2014. An additional provision for loan losses relating to impaired loans of $1.1 million, $2.1 million and
$1.5 million was included in our results of operations for the years ending December 31, 2015, 2014 and
2013, respectively.
Other real estate, which is measured using the fair value of the property, had a carrying amount of
$1.0 million which is net of a valuation allowance of $1.7 million at December 31, 2015, and a carrying
amount of $1.9 million, which is net of a valuation allowance of $2.5 million, at December 31, 2014. An
additional charge relating to other real estate measured at fair value of $0.3 million, $0.3 million and
$1.6 million was included in our results of operations during the years ended December 31, 2015, 2014 and
2013, respectively.
We had no assets or liabilities measured at fair value on a recurring basis that used significant unobservable
inputs (Level 3) during the years ended December 31, 2015 and 2014.
93
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Quantitative information about Level 3 fair value measurements measured on a non-recurring basis follows:
Asset
Fair
Value
(In thousands)
Valuation
Technique
Unobservable
Inputs
Weighted
Average
2015
Capitalized mortgage
loan servicing rights . . . . . . .
$8,481
Present value of net Discount rate
servicing revenue Cost to service
Ancillary income
Float rate
$
10.04%
80
24
1.73%
Impaired loans
Commercial (1) . . . . . . . . . . .
1,605
Sales comparison
Adjustment for differences
Mortgage . . . . . . . . . . . . . . . .
550
approach
Income approach
Sales comparison
approach
between comparable sales
Capitalization rate
Adjustment for differences
(2.1)%
9.3
between comparable sales
0.7
Other real estate
Commercial . . . . . . . . . . . . . .
Mortgage and installment . . .
2014
Capitalized mortgage loan
804
183
Sales comparison
Adjustment for differences
approach
between comparable sales
(3.9)
Sales comparison
Adjustment for differences
approach
between comparable sales
75.6
servicing rights . . . . . . . . . . .
$9,197
Present value of net Discount rate
servicing revenue Cost to service
Ancillary income
Float rate
$
10.07%
82
25
1.77%
Impaired loans
Commercial (1) . . . . . . . . . . .
2,751
Sales comparison
Adjustment for differences
Mortgage . . . . . . . . . . . . . . . .
1,306
Other real estate
approach
Income approach
Sales comparison
approach
between comparable sales
Capitalization rate
Adjustment for differences
(3.8)%
9.3
between comparable sales
8.6
Commercial . . . . . . . . . . . . . .
1,216
Sales comparison
Adjustment for differences
Mortgage and installment . . .
690
Sales comparison
Adjustment for differences
approach
between comparable sales
(9.0)
approach
between comparable sales
34.3
(1)
In addition to the valuation techniques and unobservable inputs discussed above, at December 31, 2015 and
2014, we had an impaired collateral dependent commercial relationship that
totaled $0.4 million and
$1.1 million, respectively that was primarily secured by collateral other than real estate. Collateral securing this
relationship primarily included machinery and equipment and inventory at December 31, 2015 and 2014 and
also included accounts receivable at December 31, 2014. Valuation techniques at December 31, 2015, included
appraisals and discounting restructuring firm valuations based on estimates of value recovery of each particular
asset type. Discount rates used ranged from 0% to 100% of stated values. Valuation techniques at December 31,
2014, included discounting cost and financial statement value approaches based on estimates of value recovery
of each particular asset type. Discount rates used ranged from 35% to 100% of stated values.
94
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following table reflects the difference between the aggregate fair value and the aggregate remaining
contractual principal balance outstanding for loans held for sale for which the fair value option has been elected at
December 31.
Aggregate
Fair Value Difference
Contractual
Principal
(In thousands)
Loans held for sale
2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$27,866
23,662
20,390
$714
624
366
$27,152
23,038
20,024
NOTE 22 – FAIR VALUES OF FINANCIAL INSTRUMENTS
Most of our assets and liabilities are considered financial instruments. Many of these financial instruments lack
an available trading market and it is our general practice and intent to hold the majority of our financial instruments
to maturity. Significant estimates and assumptions were used to determine the fair value of financial instruments.
These estimates are subjective in nature, involving uncertainties and matters of judgment, and therefore, fair values
cannot be determined with precision. Changes in assumptions could significantly affect the estimates.
Estimated fair values have been determined using available data and methodologies that are considered suitable
for each category of financial instrument. For instruments with adjustable-interest rates which reprice frequently and
without significant credit risk, it is presumed that estimated fair values approximate the recorded book balances.
Cash and due from banks and interest bearing deposits: The recorded book balance of cash and due from banks
and interest bearing deposits approximate fair value and are classified as Level 1.
Interest bearing deposits - time: Interest bearing deposits - time have been valued based on a model using a
benchmark yield curve plus a base spread and are classified as Level 2.
Securities: Financial instrument assets actively traded in a secondary market have been valued using quoted
market prices. Trading securities are classified as Level 1 while securities available for sale are classified as Level 2
as described in note #21.
Federal Home Loan Bank and Federal Reserve Bank Stock: It is not practicable to determine the fair value of
FHLB and FRB Stock due to restrictions placed on transferability.
Net loans and loans held for sale: The fair value of loans is calculated by discounting estimated future cash
flows using estimated market discount rates that reflect credit and interest-rate risk inherent in the loans resulting in
a Level 3 classification. Impaired loans are valued at the lower of cost or fair value as described in Note #21. Loans
held for sale are classified as Level 2 as described in Note #21.
Accrued interest receivable and payable: The recorded book balance of accrued interest receivable and payable
approximate fair value and are classified at the same Level as the asset and liability they are associated with.
Derivative financial instruments: The fair value of rate-lock mortgage loan commitments and mandatory
commitments to sell mortgage loans is based on mortgage backed security pricing for comparable assets, the fair
value of interest rate swap agreements is based on a discounted cash flow analysis whose significant fair value inputs
can generally be observed in the market place and do not typically involve judgment by management and the fair
value of purchased and written options is based on prices of financial instruments with similar characteristics and do
not typically involve judgment by management. Each of these instruments has been classified as Level 2 as described
in note #21.
Deposits: Deposits without a stated maturity, including demand deposits, savings, NOW and money market
accounts, have a fair value equal to the amount payable on demand. Each of these instruments is classified as Level 1.
Deposits with a stated maturity, such as certificates of deposit, have generally been valued based on the discounted
value of contractual cash flows using a discount rate approximating current market rates for liabilities with a similar
maturity resulting in a Level 2 classification.
Other borrowings: Other borrowings have been valued based on the discounted value of contractual cash flows
using a discount rate approximating current market rates for liabilities with a similar maturity resulting in a Level 2
classification.
95
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Subordinated debentures: Subordinated debentures have generally been valued based on a quoted market price
of similar instruments resulting in a Level 2 classification.
The estimated recorded book balances and fair values at December 31 follow:
Fair Value Using
Quoted
Prices
in Active
Markets
for
Identical
Assets
(Level 1)
(In thousands)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Recorded
Book
Balance
Fair Value
2015
Assets
Cash and due from banks . . . . . . . . . . . . . . . . . . . $
Interest bearing deposits . . . . . . . . . . . . . . . . . . . .
Interest bearing deposits - time. . . . . . . . . . . . . . .
Trading securities . . . . . . . . . . . . . . . . . . . . . . . . .
Securities available for sale . . . . . . . . . . . . . . . . .
Federal Home Loan Bank and Federal
54,260 $
31,523
11,866
148
585,484
54,260 $
31,523
11,858
148
585,484
54,260 $
31,523
— $
—
— 11,858
—
148
— 585,484
—
—
—
—
—
Reserve Bank Stock . . . . . . . . . . . . . . . . . . . . .
Net loans and loans held for sale . . . . . . . . . . . . .
Accrued interest receivable. . . . . . . . . . . . . . . . . .
Derivative financial instruments . . . . . . . . . . . . . .
15,471
1,520,346
6,565
1,238
NA
1,472,613
6,565
1,238
NA
NA
— 27,866
1,969
5
1,238
—
NA
1,444,747
4,591
—
Liabilities
Deposits with no stated maturity (1) . . . . . . . . . . $1,659,743 $1,659,743 $1,659,743 $
Deposits with stated maturity (1) . . . . . . . . . . . . .
Other borrowings . . . . . . . . . . . . . . . . . . . . . . . . .
Subordinated debentures . . . . . . . . . . . . . . . . . . . .
Accrued interest payable. . . . . . . . . . . . . . . . . . . .
Derivative financial instruments . . . . . . . . . . . . . .
426,220
11,954
35,569
466
619
423,776
13,448
23,069
466
619
— 423,776
— 13,448
— 23,069
445
21
619
—
— $
2014
Assets
Cash and due from banks . . . . . . . . . . . . . . . . . . . $
Interest bearing deposits . . . . . . . . . . . . . . . . . . . .
Interest bearing deposits - time. . . . . . . . . . . . . . .
Trading securities . . . . . . . . . . . . . . . . . . . . . . . . .
Securities available for sale . . . . . . . . . . . . . . . . .
Federal Home Loan Bank and Federal
48,326 $
25,690
13,561
203
533,178
48,326 $
25,690
13,585
203
533,178
48,326 $
25,690
— $
—
— 13,585
203
—
— 533,178
—
—
—
—
—
—
—
—
—
—
—
Reserve Bank Stock . . . . . . . . . . . . . . . . . . . . .
Net loans and loans held for sale . . . . . . . . . . . . .
Accrued interest receivable. . . . . . . . . . . . . . . . . .
Derivative financial instruments . . . . . . . . . . . . . .
19,919
1,407,634
5,995
619
NA
1,394,424
5,995
619
NA
NA
— 23,662
1,599
2
619
—
NA
1,370,762
4,394
—
Liabilities
Deposits with no stated maturity (1) . . . . . . . . . . $1,534,175 $1,534,175 $1,534,175 $
Deposits with stated maturity (1) . . . . . . . . . . . . .
Other borrowings . . . . . . . . . . . . . . . . . . . . . . . . .
Subordinated debentures . . . . . . . . . . . . . . . . . . . .
Accrued interest payable. . . . . . . . . . . . . . . . . . . .
Derivative financial instruments . . . . . . . . . . . . . .
390,127
12,470
35,569
380
366
389,139
14,560
23,328
380
366
— 389,139
— 14,560
— 23,328
359
21
366
—
— $
—
—
—
—
—
—
(1) Deposits with no stated maturity include reciprocal deposits with a recorded book balance of $11.8 million and
$13.6 million at December 31, 2015 and 2014, respectively. Deposits with a stated maturity include reciprocal
deposits with a recorded book balance of $38.4 million and $40.1 million at December 31, 2015 and 2014,
respectively.
96
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The fair values for commitments to extend credit and standby letters of credit are estimated to approximate their
aggregate book balance, which is nominal, and therefore are not disclosed.
Fair value estimates are made at a specific point in time, based on relevant market information and information
about the financial instrument. These estimates do not reflect any premium or discount that could result from offering
for sale the entire holdings of a particular financial instrument.
Fair value estimates are based on existing on- and off-balance sheet financial instruments without attempting to
estimate the value of anticipated future business, the value of future earnings attributable to off-balance sheet
activities and the value of assets and liabilities that are not considered financial instruments.
Fair value estimates for deposit accounts do not include the value of the core deposit intangible asset resulting
from the low-cost funding provided by the deposit liabilities compared to the cost of borrowing funds in the market.
NOTE 23 – OPERATING SEGMENTS
Our reportable segments are based upon legal entities. We currently have two reportable segments: Independent
Bank (‘‘IB’’ or ‘‘Bank’’) and Mepco. These business segments are also differentiated based on the products and
services provided. We evaluate performance based principally on net income (loss) of the respective reportable
segments.
In the normal course of business, our IB segment provides funding to our Mepco segment through an
intercompany line of credit priced at the prime rate of interest as published in the Wall Street Journal. Our IB segment
also provides certain administrative services to our Mepco segment which are reimbursed at an agreed upon rate.
These intercompany transactions are eliminated upon consolidation. The only other material intersegment balances
and transactions are investments in subsidiaries at the parent entities and cash balances on deposit at our IB segment.
A summary of selected financial information for our reportable segments follows:
IB
Mepco
Other (1)(2) Elimination (3)
Total
(In thousands)
2015
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for loan losses . . . . . . . . . . . . . . . . . . . . . . .
Income (loss) before income tax . . . . . . . . . . . . . . . . .
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$2,340,566
75,552
71,448
(2,705)
32,136
21,727
$57,208
5,290
4,487
(9)
(1,183)
(712)
$286,936
72
(949)
—
(1,478)
(936)
$(275,644)
(72)
—
—
(95)
(62)
$2,409,066
80,842
74,986
(2,714)
29,380
20,017
2014
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for loan losses . . . . . . . . . . . . . . . . . . . . . . .
Income (loss) before income tax . . . . . . . . . . . . . . . . .
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$2,174,536
73,551
68,948
(3,098)
25,845
18,550
$63,378
7,004
5,706
(38)
561
366
$286,158
64
(1,398)
—
(1,095)
(712)
$(275,342)
(64)
—
—
(95)
(183)
$2,248,730
80,555
73,256
(3,136)
25,216
18,021
2013
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for loan losses . . . . . . . . . . . . . . . . . . . . . . .
Income (loss) before income tax . . . . . . . . . . . . . . . . .
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$2,104,550
76,018
71,496
(3,891)
29,605
74,313
$94,648
11,103
8,780
(97)
(2,891)
(1,801)
$272,348
—
(2,317)
—
(3,961)
5,092
$(261,603)
—
—
—
(95)
(95)
$2,209,943
87,121
77,959
(3,988)
22,658
77,509
(1) During 2013 IB and Other (parent company) include $47.1 million and $9.0 million, respectively of income tax benefit
related to the reversal of the valuation allowance on our net deferred tax assets (see note #13).
Includes amounts relating to our parent company and certain insignificant operations.
Includes parent company’s investment in subsidiaries and cash balances maintained at subsidiary.
(2)
(3)
97
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTE 24 – ACCUMULATED OTHER COMPREHENSIVE LOSS
A summary of changes in accumulated other comprehensive loss (‘‘AOCL’’), net of tax during the years ended
December 31 follows:
Unrealized
Losses on
Available
for Sale
Securities
Disproportionate
Tax Effects
from
Securities
Available
for Sale
Unrealized
Losses on
Cash Flow
Hedges
Unrealized
Losses on
Settled
Derivatives
(In thousands)
Disproportionate
Tax Effects
from Cash
Flow
Hedges
Total
2015
Balances at beginning of period . . . . . . . . .
$
162
$(5,798)
$ —
$ —
$ —
$(5,636)
Other comprehensive loss before
reclassifications . . . . . . . . . . . . . . . . .
Amounts reclassified from AOCL . . . . . .
Net current period other
comprehensive loss . . . . . . . . . . . .
(351)
(49)
(400)
—
—
—
—
—
—
—
—
—
—
—
—
(351)
(49)
(400)
Balances at end of period . . . . . . . . . . . . . .
$ (238)
$(5,798)
$ —
$ —
$ —
$(6,036)
2014
Balances at beginning of period . . . . . . . . .
$(3,200)
$(5,798)
$ —
$(247)
$ —
$(9,245)
Other comprehensive income before
reclassifications . . . . . . . . . . . . . . . . .
Amounts reclassified from AOCL . . . . . .
Net current period other
comprehensive income . . . . . . . . . .
3,570
(208)
3,362
—
—
—
—
—
—
Balances at end of period . . . . . . . . . . . . . .
$
162
$(5,798)
$ —
2013
Balances at beginning of period . . . . . . . . .
Income tax . . . . . . . . . . . . . . . . . . . . . .
$ (516)
181
Balances at beginning of period, net of tax . .
Terminated cash flow hedge . . . . . . . . . .
Other comprehensive loss before
reclassifications . . . . . . . . . . . . . . . . .
Amounts reclassified from AOCL . . . . . .
Net current period other
comprehensive income (loss) . . . . .
(335)
—
(2,877)
12
(2,865)
$(5,617)
(181)
(5,798)
—
—
—
—
Balances at end of period . . . . . . . . . . . . . .
$(3,200)
$(5,798)
$(739)
258
(481)
370
(24)
135
111
$ —
—
247
247
$ —
$ —
—
—
(370)
—
123
123
—
—
—
3,570
39
3,609
$ —
$(5,636)
$(1,186)
(258)
(1,444)
—
—
1,444
$(8,058)
—
(8,058)
—
(2,901)
1,714
1,444
(1,187)
$(247)
$ —
$(9,245)
The disproportionate tax effects from securities available for sale and cash flow hedges arose due to tax effects
of other comprehensive income (‘‘OCI’’) in the presence of a valuation allowance against our deferred tax assets and
a pretax loss from operations. Generally, the amount of income tax expense or benefit allocated to operations is
determined without regard to the tax effects of other categories of income or loss, such as OCI. However, an
exception to the general rule is provided when, in the presence of a valuation allowance against deferred tax assets,
there is a pretax loss from operations and pretax income from other categories in the current period. In such instances,
income from other categories must offset the current loss from operations, the tax benefit of such offset being
reflected in operations. During the second quarter of 2013, we terminated our last remaining cash flow hedge and
cleared the disproportionate tax effects relating to cash flow hedges from accumulated other comprehensive loss (see
note #13).
98
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
A summary of reclassifications out of each component of AOCL for the years ended December 31 follows:
AOCL Component
2015
Unrealized losses on securities available for
sale
2014
Unrealized losses on securities available for
sale
Unrealized losses on settled derivatives
2013
Unrealized losses on securities available for
sale
Unrealized losses on cash flow hedges
Unrealized losses on settled derivatives
Disproportionate tax effects from cash flow
hedges
Reclassified
From
AOCL
(In thousands)
Affected Line Item in
Consolidated Statements of Operations
$
$
$
$
75
—
75
26
49
329
(9)
320
112
208
$ (380)
(133)
$ (247)
$
(39)
$
$
7
(26)
(19)
(7)
(12)
$ (208)
(73)
$ (135)
$ (189)
(66)
$ (123)
Net gains on securities
Net impairment loss recognized in earnings
Total reclassifications before tax
Income tax expense (benefit)
Reclassifications, net of tax
Net gains on securities
Net impairment loss recognized in earnings
Total reclassifications before tax
Income tax expense (benefit)
Reclassifications, net of tax
Interest expense
Income tax expense (benefit)
Reclassification, net of tax
Total reclassifications for the period, net of tax
Net gains on securities
Net impairment loss recognized in earnings
Total reclassifications before tax
Income tax expense (benefit)
Reclassifications, net of tax
Interest expense
Income tax expense (benefit)
Reclassification, net of tax
Interest expense
Income tax expense (benefit)
Reclassification, net of tax
$ 1,444
Income tax expense (benefit)
$(1,714)
Total reclassifications for the period, net of tax
99
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTE 25 – INDEPENDENT BANK CORPORATION (PARENT COMPANY ONLY) FINANCIAL
INFORMATION
Presented below are condensed financial statements for our parent company.
CONDENSED STATEMENTS OF FINANCIAL CONDITION
December 31,
2015
2014
(In thousands)
ASSETS
Cash and due from banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest bearing deposits - time. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment in subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 10,800
5,000
261,016
10,120
$ 5,174
12,500
258,901
9,583
Total Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$286,936
$286,158
LIABILITIES AND SHAREHOLDERS’ EQUITY
Subordinated debentures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 35,569
378
250,989
$ 35,569
382
250,207
Total Liabilities and Shareholders’ Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$286,936
$286,158
CONDENSED STATEMENTS OF OPERATIONS
2015
Year Ended December 31,
2014
(In thousands)
2013
OPERATING INCOME (LOSS)
Interest income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain on extinguishment of debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain on securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Increase in fair value of U.S. Treasury warrant . . . . . . . . . . . . . . . . . . . . .
Other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Operating Income (Loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
72
—
—
—
31
103
$
64
500
295
—
35
894
$ —
—
—
(1,025)
63
(962)
OPERATING EXPENSES
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Administrative and other expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Operating Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss Before Income Tax and Equity in Undistributed Net Income of
1,021
560
1,581
1,462
527
1,989
2,317
682
2,999
Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(1,478)
(542)
(1,095)
(383)
(3,961)
(9,053)
Income (Loss) Before Equity in Undistributed Net Income of
Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity in undistributed net income of subsidiaries . . . . . . . . . . . . . . . . . .
(936)
20,953
(712)
18,733
5,092
72,417
Net Income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$20,017
$18,021
$77,509
100
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
CONDENSED STATEMENTS OF CASH FLOWS
Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 20,017
$ 18,021
$ 77,509
2015
Year Ended December 31,
2014
(In thousands)
2013
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH
USED IN OPERATING ACTIVITIES
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Share based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain on extinguishment of debt. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain on securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Decrease in other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Increase (decrease) in other liabilities . . . . . . . . . . . . . . . . . . . . . . . . .
Equity in undistributed net income of subsidiaries operations . . . . . .
Total Adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net Cash Used in Operating Activities . . . . . . . . . . . . . . . . . . . . . .
CASH FLOW FROM INVESTING ACTIVITIES
Purchases of interest bearing deposits - time . . . . . . . . . . . . . . . . . . .
Maturity of interest bearing deposits - time . . . . . . . . . . . . . . . . . . . .
Return of capital from subsidiary . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net Cash From Investing Activities. . . . . . . . . . . . . . . . . . . . . . . . .
CASH FLOW FROM (USED IN) FINANCING ACTIVITIES
Repurchase of common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from issuance of common stock. . . . . . . . . . . . . . . . . . . . . .
Share based compensation withholding obligation . . . . . . . . . . . . . . .
Redemption of subordinated debt . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Redemption of convertible preferred stock and common stock
(542)
21
—
—
5
(6)
(20,953)
(21,475)
(1,458)
(5,000)
12,500
18,500
26,000
(13,498)
(5,896)
1,569
(1,091)
—
(383)
46
(500)
(295)
118
287
(18,733)
(19,460)
(1,439)
(17,500)
5,000
15,000
2,500
—
(4,129)
1,242
—
(4,654)
(8,955)
84
—
—
738
(5,858)
(72,417)
(86,408)
(8,899)
—
—
7,500
7,500
—
—
100,230
(513)
(9,452)
warrant . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
—
(81,000)
Net Cash From (Used in) Financing Activities . . . . . . . . . . . . . . . .
(18,916)
Net Increase (Decrease) in Cash and Cash Equivalents . . . . . . . . .
Cash and Cash Equivalents at Beginning of Year. . . . . . . . . . . . . . . . . .
5,626
5,174
(7,541)
(6,480)
11,654
9,265
7,866
3,788
Cash and Cash Equivalents at End of Year. . . . . . . . . . . . . . . . .
$ 10,800
$ 5,174
$ 11,654
NOTE 26 – BRANCH SALE
On April 29, 2015 we entered into a Purchase and Assumption Agreement (‘‘PAA’’) with Isabella Bank (based
in Mt. Pleasant, Michigan). Pursuant to the PAA, on August 28, 2015, we sold the fixed assets, real property and
certain other assets of our bank branch located in Midland, Michigan (the ‘‘Midland Branch’’) to Isabella Bank. The
deposit liabilities of the Midland Branch were assumed by Isabella Bank which totaled $8.7 million on the date of
sale. Under the terms of the PAA, Isabella Bank paid a premium of $0.6 million (which was equal to 6.0% of the
average deposit liabilities of $9.7 million based on the 20-day average ending two business days prior to the closing
date of August 28, 2015) and $0.85 million for the real property and fixed assets (including the ATM). The real
property and the fixed assets had a net book value of approximately $0.2 million as of August 28, 2015. We recorded
a net gain of $1.2 million in the third quarter of 2015 on the sale of the Midland Branch.
101
QUARTERLY FINANCIAL DATA (UNAUDITED)
A summary of selected quarterly results of operations for the years ended December 31 follows:
Three Months Ended
March 31,
June 30,
September 30, December 31,
(In thousands, except per share amounts)
2015
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for loan losses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income before income tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$19,552
18,091
(659)
5,561
3,781
$20,131
18,701
(134)
8,243
5,619
$20,293
18,841
(244)
7,325
5,047
$20,866
19,353
(1,677)
8,251
5,570
Income per common share
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
0.16
0.16
0.25
0.24
0.22
0.22
0.25
0.25
2014
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for loan losses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income before income tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$20,283
18,478
428
4,605
3,138
$20,357
18,538
(1,845)
7,899
6,052
$20,068
18,183
(632)
7,274
4,929
$19,847
18,057
(1,087)
5,438
3,902
Income per common share
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
0.14
0.13
0.26
0.26
0.21
0.21
0.17
0.17
During the fourth quarter of 2015, we recognized a recovery of impairment on our capitalized mortgage loan
servicing rights of $0.8 million (see note #4). During the fourth quarter of 2014, we recognized an additional
impairment on our capitalized mortgage loan servicing rights of $1.0 million (see note #4) and a gain on the
extinguishment of debt of $0.5 million (see note #10).
QUARTERLY SUMMARY (UNAUDITED)
First quarter . . . . . . . . . . . . . .
Second quarter . . . . . . . . . . . .
Third quarter . . . . . . . . . . . . .
Fourth quarter . . . . . . . . . . . .
High
$13.20
13.93
15.27
15.88
Reported Sales Prices of Common Shares
2014
2015
Low
Low
Close
High
$12.07
12.62
13.20
13.71
$12.83
13.56
14.76
15.23
$14.25
13.88
13.47
13.20
$11.78
12.45
11.77
11.47
Cash Dividends
Declared
Close
$12.98
12.87
11.92
13.05
2015
$0.06
0.06
0.06
0.08
2014
$ —
0.06
0.06
0.06
We have approximately 1,600 holders of record of our common stock. Our common stock trades on the Nasdaq
Global Select Market System under the symbol ‘‘IBCP.’’ The prices shown above are supplied by Nasdaq and reflect
the inter-dealer prices and may not include retail markups, markdowns or commissions. There may have been
transactions or quotations at higher or lower prices of which we are not aware.
In addition to limitations imposed by the provisions of the Michigan Business Corporation Act (which, among
other things, limits us from paying dividends to the extent we are insolvent), our ability to pay dividends is limited
by our ability to obtain funds from our Bank and by regulatory capital guidelines applicable to us (see note #20).
102
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[THIS PAGE INTENTIONALLY LEFT BLANK]
INDEPENDENT BANK CORPORATION
SENIOR OFFICERS
BOARD OF DIRECTORS*
William B. Kessel
Robert N. Shuster
James J. Twarozynski
Michael M. Magee Jr., Chairman
William J. Boer
Joan A. Budden
Stephen L. Gulis Jr.
Terry L. Haske
William B. Kessel
James E. McCarty, Lead Director
Matthew J. Missad
Charles C. Van Loan
INDEPENDENT BANK
SENIOR OFFICERS
William B. Kessel
Robert N. Shuster
Mark L. Collins
Stefanie M. Kimball
Dennis J. Mack
David C. Reglin
Cheryl A. Bartholic
Martha A. Blandford
Richard E. Butler
Larry R. Daniel
Gary C. Dawley
Sandra A. Dine
Peter R. Graves
Beth J. Jungel
Keith J. Lightbody
Cheryl L. McKellar
Dean M. Morse
Laurinda M. Neve
Steven M. Potter
Raymond P. Stecko
Michael J. Stodolak
James J. Twarozynski
Denise E. Wheaton
*Individuals listed also serve on the Board of Directors for Independent Bank.
STOCK Independent Bank Corporation’s common stock trades on the
NASDAQ Global Select Market System under the symbol IBCP.
TRANSFER AGENT AND REGISTRAR American Stock Transfer & Trust
Company, LLC, 6201 15th Avenue, Brooklyn, New York 11219, info@amstock.
com, (telephone 800.937.5449), serves as transfer agent and registrar of our
common stock. Inquiries related to shareholder records and change of name,
address or ownership of stock should be directed to our transfer agent and
registrar.
INVESTOR RELATIONS ON THE INTERNET Go to our website at
IndependentBank.com to find the latest investor relations information
about Independent Bank Corporation, including stock quotes, news
releases and financial data.
DIVIDEND REINVESTMENT AND DIRECT STOCK PURCHASES OR SALES
Investors Choice is our Dividend Reinvestment & Direct Stock Purchase and
Sale Plan sponsored and administered by American Stock Transfer & Trust
Company, LLC, the transfer agent for Independent Bank Corporation. A plan
booklet is available by writing to our Chief Financial Officer. The plan materials
are also available at the American Stock Transfer & Trust Company website
(amstock.com).
FORM 10-K Shareholders may obtain, without charge, a copy of Form 10-K,
the 2015 Annual Report to the Securities and Exchange Commission, through
our website at IndependentBank.com or by writing to the Chief Financial Officer,
Independent Bank Corporation, 4200 East Beltline, Grand Rapids, Michigan
49525 or by email at info@ibcp.com.