LETTER FROM THE PRESIDENT AND CEO
Dear Shareholders:
POSITIVE OPERATING MOMENTUM FOR 2017
It is my honor and pleasure to provide you with an update on Independent Bank Corporation. In 2017, we continued our
positive operating momentum. This momentum includes double digit growth in pretax earnings, double digit growth in
net interest income, and double digit growth in loans, including 15 consecutive quarters of loan growth. Furthermore, we
improved on already strong asset quality metrics and recorded loan net recoveries for all of 2017. We made investments
for the future, including recruiting new team members and opening seven new loan production offices in attractive growth
markets. Further, in December 2017, we announced an agreement to acquire Traverse City State Bank. TCSB is a
well-run franchise with experienced, high-performing people, and an attractive balance sheet.
STRONG FINANCIAL RESULTS
For the year ended December 31, 2017, the Company reported net income of $20.5 million, or $0.95 per diluted share.
This compares to net income of $22.8 million, or $1.05 per diluted share for the prior year. Excluding a $6.0 million one-time
income tax expense related to the re-measurement of our net deferred tax assets as a result of the Tax Cuts and Jobs Act
signed into law on December 22, 2017, our adjusted net income was $26.4 million or $1.22 per diluted share. On an adjusted
basis we achieved 16.1% growth in net income and 16.2% increase in earnings per share. This growth is directly attributable
to our initiatives to migrate earning assets out of investments into higher yielding loans. For all of 2017 net interest income
increased by $9.5 million, or 12%. In prior communications I shared our performance targets of earning one percent on
assets and ten percent on equity. I am pleased to report that in 2017 we reached our return on assets and return on
equity goals of one percent or better and ten percent or better, respectively, when excluding the above
mentioned one-time income tax expense.
In regards to our balance sheet, we continue to position ourselves to be successful in view of ever-changing market
conditions. This includes maintaining disciplined lending standards, ample liquidity, strong capital levels, a diversified
earning asset mix, and continuous emphasis on growing our core deposit base. In 2017 we generated strong organic loan
growth of $410.6 million or 25.5%. We experienced growth in all three loan categories, with mortgage loans leading the way
followed by commercial and consumer loans. On the funding side, total deposits increased by $32.9 million, or 1.5% since
December 31, 2016. This excludes broker deposit growth of $142.0 million. At year-end 2017, our loan to deposit ratio was
a healthy 84%, up from 72% at the prior year end, but still with capacity for additional growth. We continue to position our
balance sheet to be slightly asset sensitive, thereby benefiting from rising interest rates, albeit, we did extend the duration
of our loan portfolio in 2017 in an effort to grow net interest income.
On the credit quality front, we produced further improvement in asset quality with declines in non-performing loans and
assets. Non-performing loans at December 31, 2017 declined by $5.2 million, or 38.8% from December 31, 2016.
Non-performing assets to total assets were 35 basis points at year-end 2017 compared to 72 basis points at the end of
2016. In addition, we recorded loan net recoveries of $1.2 million (0.06% of average loans) in 2017 as compared to loan
net charge-offs of $1.0 million (0.06% of average loans) in 2016.
Also significant for us in 2017 was our divestiture of our payment processing business. While it did not have a material impact
on our 2017 results, I believe the divestiture of this business did improve the risk profile of our balance sheet, particularly as
we move to different stages of the business cycle.
Capital levels continue to be strong and support our growth initiatives and provide us flexibility. Tangible common equity
to tangible assets was 9.45% as of the end of 2017 compared to 9.70% at the end of 2016. We increased our dividend in
November 2017 from $0.10 per share to $0.12 per share. Then in January 2018 we announced an increase from $0.12 per
share to $0.15 per share in conjunction with the drop in the corporate federal income tax rate from 35% to 21%. While we
did not repurchase any of our shares in 2017, your Board of Directors reauthorized the share repurchase program in
January 2018.
2
GROWTH INITIATIVES
Over the last 18 to 24 months we have made significant investments in people and markets as we look to grow our
revenues and increase our operating leverage. The first initiative involved the expansion of our mortgage banking business.
In recent years, we generated consistent growth in our commercial and consumer loan portfolios, and we were originating
solid volumes of saleable mortgage loans. However, we produced very little growth in portfolio mortgage loans, including
jumbo mortgage loans. That said, we believed as a community bank there existed a need for us to be active in the mortgage
banking business, despite all the challenges that go along with this type of lending. In late 2016 and early 2017 we were
successful in recruiting additional talented mortgage sales and support staff. In conjunction with the recruiting of this staff,
we opened loan production offices in adjacent or new markets in which we believe we can successfully compete and capture
market share. These new loan production offices include Ann Arbor, Brighton, Dearborn, Grosse Pointe Woods, and Traverse
City, Michigan as well as Columbus and Akron, Ohio. As a result of this expansion we originated $871 million of mortgage
loans in 2017 as compared to $428 million in 2016. In addition, portfolio mortgage loans increased to $850 million at the
end of 2017 from $539 million at the prior year end.
A second initiative involves the acquisition of Traverse City State Bank. TCSB is an excellent strategic fit for us as it is a
natural geographic extension of our community bank footprint and has a similar community bank business model. With
$338 million in total assets, TCSB has strong commercial and industrial and commercial real estate business relationships,
an attractive core deposit base, and an asset sensitive balance sheet profile. Most importantly we like their leadership,
employee base, and growth prospects. Pending TCSB shareholder approval, this merger is on target to close on
April 1, 2018, followed by a data processing systems conversion in late second quarter 2018.
ADDITIONAL HIGHLIGHTS
In 2017, Michael Cok joined the IBC Board. Mike is the President of Foremost of Farmers Insurance Group. Foremost
(Farmers Specialty) provides a variety of specialty and personal insurance products across the United States. Mike is also
a Certified Public Accountant and an active community leader in West Michigan. We are very pleased to have
Mike join our Board and serve on the IBC Audit Committee.
We were also pleased to announce the promotion of two associates to the IBC executive team in November 2017. The first is
Russ Daniel, who was named EVP, Operations and Digital Banking. Russ joined the company in 1998 and has held numerous
leadership positions. Russ is now responsible for a significant portion of our operational areas as well as further developing
and executing our digital banking strategies. Patrick Ervin, who joined us in August 2016, was promoted to EVP, Mortgage
Banking. Pat is responsible for leading our mortgage banking business and title insurance agency business.
Also in 2017, we held our second annual bank-wide community service day. Branded as “Making a Difference Day,” on
Columbus Day of this past year, we closed our offices and our employees selected and participated in important service
projects from a variety of organizations and non-profits, located in our markets. The volunteer activities ranged from the
demolition of a house in Grand Rapids, Michigan for Habitat for Humanity to decorating the Saginaw Children’s Zoo for
Halloween, as well as various clean-up projects in several markets. Our teams throughout Michigan and Ohio definitely
made a positive difference in their communities.
FAVORABLE MARKET CONDITIONS BUT HIGHLY COMPETITIVE
Often in responding to customers and shareholders, I am asked to comment on the current conditions in our State and local
markets. Overall, I would say the market conditions continue to be favorable in each of our markets, with our West Michigan
and Southeast Michigan markets being the strongest. Michigan’s gross domestic product grew at a 3.1% rate in 2017
compared to 2.3% for the national economy. The State unemployment rate at 4.5% now closely approximates the national
unemployment rate at 4.4%. While not necessarily robust, Michigan’s net job growth rate was 1.5% for all of 2017. Housing
starts in Michigan were solid, with a 4% increase versus the prior year, while home prices were up a strong 7.9% for all of 2017.
Consumer confidence remains at historically high levels according to The Conference Board’s Consumer Confidence Survey.
Small business owners’ optimism is now just shy of the record high in the 15 year trend of +114 registered in December 2006
according to the January 2018 Gallup Small Business Index. When speaking with our customers, often we hear the desire to
hire, yet candidates are not always readily available.
3
On the interest rate front, during 2017, the Federal Open Market Committee made three 25 basis point increases in the federal
funds rate and began unwinding the Federal Reserve Bank’s balance sheet. The federal funds market futures are forecasting
three additional 25 basis point hikes in 2018, and we have seen a 90 basis point increase in the two-year treasury yield and a
40 basis point increase in the ten-year treasury yield from one year ago. Consequently, while we now have higher overall
interest rates, we also have the challenge of a flatter yield curve.
Competition for loans and deposits in our markets continues to be robust. There still exists a steady demand for commercial
loans. Competition for loans to households is also intense, particularly in the mortgage category, with select lenders standing
out from the pack. It was recently reported that non-banks now account for more than fifty percent of the country’s mortgage
financing. The country’s largest mortgage lender, a non-bank, is headquartered in our market. What has changed in the last
year is the competition for deposits. In 2017 and continuing in to the start of 2018, we are seeing rate increases by large
national and regional banks, in addition to credit unions.
While the tone at the top has called for an easing of regulatory burden, to date there still exists a high hurdle for regulatory
compliance. In 2018, we anticipate significant work for our organization to implement two new regulatory requirements. The
first is the numerous additional Home Mortgage Disclosure Act data fields to be gathered from our customers to report to the
government. The second is the additional due diligence procedures to identify and verify the beneficial owners of a customer’s
legal entity under the new FinCEN Beneficial Ownership rules. Perhaps because of these burdens, the steady consolidation of
our industry continued in 2017 and will likely continue into 2018 and beyond.
OUTLOOK FOR 2018 AND BEYOND
As we look to 2018 and beyond, despite the on-going challenges of a high cost regulatory framework, a very competitive
landscape, and the flattening yield curve, we remain optimistic about our future. This optimism stems from a combination
of our belief in: our people; the Independent Bank brand; our focus on community banking; and our operating plan.
Our people are truly what set us apart from our competition. We have a highly skilled, fully engaged team of professionals,
some who have come from other organizations, and others who have worked their entire career at Independent Bank.
We believe it is not only important to invest in our people but also to empower them. The combination of our people and
leveraging technology will enable us to continue to improve productivity and to continue to optimize the customer experience.
The Independent Bank brand continues to be viewed favorably and gain recognition as we grow in our existing markets
and expand into new markets. The IB Brand is comprised of six components:
1. Exceptional Service: We aim to impress every customer, every day, every time.
2. Community Focus: We are active members of and serve our communities through lending, investing,
and giving of our time and talent.
3. Trust: Character, “do the right thing.” Competence, “get the right things done.”
4. High Performance: We strive to be the best in everything we do, with high expectations and high results.
5. Business Ease: Being real people, approachable, with honest answers, helpful advice, and a friendly smile.
6. Value Creation: We are not the highest priced, nor the lowest priced, but always offering real value.
Our focus is on community banking, delivered through three lines of business. Today we lead with our commercial
banking team serving small and middle market clients with annual sales from one million to one hundred million. We target
a mix for the commercial loan portfolio of 60% commercial and industrial loans and 40% commercial real estate loans. We
provide a full suite of financing products as well as cash management products and services customized through our friendly,
knowledgeable sales professionals. We like the risk profile of this business line, and our intent is to generally have it be our
largest earning asset category. We also like the mortgage banking business. This business has undergone significant change
post-recession, and many new regulatory rules do make it more complex. However, we believe there is a need for local,
knowledgeable, sales staff to support the home financing needs of our markets. Our mortgage banking team is well positioned
for the 2018 home purchase season. The third leg of our community banking model is the consumer banking business. This
includes our seasoned team of professionals in our branch footprint, our centralized call center, our indirect lending team, and
our full suite of digital products. Today, all three lines of business work well together; our teams continue to review and assess
potential investments that promote increased referrals and sales among them.
4
Finally, our operating plan is straightforward. The key to our success is our ability to continue to execute on it.
Having reached our targeted performance metrics in 2017, as well as in consideration of a reduced corporate federal income
tax rate, led us to establish higher return expectations for 2018. Our new performance targets are a 1.20% or better return on
assets and a 12.5% or better return on equity.
The first objective of our operating plan is organic growth and a continuation of migrating earning assets to higher yielding loans.
Our second objective is continuing to generate operating efficiencies through controlling costs while growing revenue. Important
to this objective will be the successful integration of TCSB and achieving the assumed cost saves. Our third objective is an
on-going strong enterprise-wide risk management framework for credit risk, market risk (economic, capital, interest rate and
liquidity), operating risk (including cyber), and legal or regulatory risk. Our fourth objective is to be good stewards of our capital.
We continue to target a tangible common equity to tangible assets ratio of 8.5% to 9.5%. Our capital priorities include: organic
growth; a consistent dividend, paying out one-third to one-half of our earnings; share repurchases when it makes financial
sense; followed by acquired growth, provided it meets our internal business objectives and financial metrics.
CLOSING
I encourage you to attend the 2018 Annual Meeting of Shareholders of Independent Bank Corporation at 3:00 p.m. Eastern
Time, on Tuesday, April 24, 2018. As a convenience to all of our shareholders, we will be conducting our Annual Meeting
of Shareholders, virtually, by means of remote communication via the Internet.
In closing, I would like thank you, our shareholders for investing in IBCP, and 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
5
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
PER COMMON SHARE DATA
Net income per common share
Basic
Diluted
Cash dividends declared
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
2017
2016
CHANGE
AMOUNT
CHANGE
PERCENT
$ 98,309
$ 86,523
$ 11,786
13.62 %
9,123
89,186
1,199
260
42,273
92,082
38,438
17,963
6,882
79,641
(1,309)
563
41,735
90,347
32,901
10,135
2,241
9,545
2,508
(303)
538
1,735
5,537
7,828
32.56
11.99
191.60
(53.82)
1.29
1.92
16.83
77.24
$ 20,475
$ 22,766
$ (2,291) (10.06) %
$ 0.96
0.95
0.42
$ 1.06
$ (0.10)
1.05
0.34
(0.10)
0.08
(9.43) %
(9.52)
23.53
$ 2,789,355
$ 2,548,950
$ 240,405
9.43 %
2,018,817
2,400,534
2,617,659
264,933
12.42
1,608,248
2,225,719
2,355,744
248,980
11.71
410,569
174,815
261,915
15,953
0.71
25.53
7.85
11.12
6.41
6.06
7.82%
0.77
9.21%
0.92
(1.39) %
(15.09) %
(0.15)
(16.30)
As a percent of average interest-earning assets
Interest income
Interest expense
Net interest income
4.02%
0.37
3.65
3.82%
0.20 %
5.24 %
0.30
3.52
0.07
0.13
23.33
3.69
6
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
8
9
10
33
34
36
41
101
7
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, 2012 and the reinvestment of all dividends during the periods
presented. The performance shown on the graph is not necessarily indicative of future performance.
Independent Bank Corporation
Independent B ank Corporat ion
NAS DAQ Compos it e
NAS DAQ B ank
$700
$600
$500
$400
$300
$200
l
e
u
a
V
x
e
d
n
I
$100
12/31/12
12/31/13
12/31/14
12/31/15
12/31/16
12/31/17
Index
Independent Bank Corporation
etisopmoC QADSAN
knaB QADSAN
Period Ending
12/31/12
12/31/13
12/31/14
12/31/15
12/31/16
12/31/17
$
100.00
00.001
00.001
$
342.86
140.12
136.62
$
378.40
160.78
152.77
$
449.82
171.97
156.15
$
654.62
187.22
197.60
$
687.52
242.71
233.94
8
SELECTED CONSOLIDATED FINANCIAL DATA (1)
2017
Year Ended December 31,
2015
(Dollars in thousands, except per share amounts)
2016
2014
SUMMARY OF OPERATIONS
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Interest expense. . . . . . . . . . . . . . . . . . . . . . . . . . .
Net interest income . . . . . . . . . . . . . . . . . . . . . .
Provision for loan losses. . . . . . . . . . . . . . . . . . . .
Net gains on securities . . . . . . . . . . . . . . . . . . . . .
Net gain on branch sale . . . . . . . . . . . . . . . . . . . .
Gain on extinguishment of debt . . . . . . . . . . . . . .
Other non-interest income . . . . . . . . . . . . . . . . . .
Non-interest expenses . . . . . . . . . . . . . . . . . . . . . .
Income before income tax . . . . . . . . . . . . . . . .
Income tax expense (benefit) . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . $
Preferred stock dividends . . . . . . . . . . . . . . . . . . . . .
Preferred stock discount . . . . . . . . . . . . . . . . . . . . . .
Net income applicable to common stock . . . $
98,309 $
9,123
89,186
1,199
260
—
—
42,273
92,082
38,438
17,963
20,475 $
—
—
20,475 $
86,523 $
6,882
79,641
(1,309)
563
—
—
41,735
90,347
32,901
10,135
22,766 $
—
—
22,766 $
80,842 $
5,856
74,986
(2,714)
20
1,193
—
38,917
88,450
29,380
9,363
20,017 $
—
—
20,017 $
80,555 $
7,299
73,256
(3,136)
320
—
500
37,955
89,951
25,216
7,195
18,021 $
—
—
18,021 $
2013
87,121
9,162
77,959
(3,988)
369
—
—
44,460
104,118
22,658
(54,851)
77,509
(3,001)
7,554
82,062
PER COMMON SHARE DATA
Net income per common share
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash dividends declared and paid . . . . . . . . . . . .
Book value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
0.96 $
0.95
0.42
12.42
1.06 $
1.05
0.34
11.71
0.88 $
0.86
0.26
11.28
0.79 $
0.77
0.18
10.91
5.87
3.55
0.00
10.15
SELECTED BALANCES
Assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,789,355 $2,548,950 $2,409,066 $2,248,730 $2,209,943
1,374,570
2,018,817
Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Allowance for loan losses. . . . . . . . . . . . . . . . . . .
32,325
22,587
1,884,806
2,400,534
Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
231,581
264,933
Shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . .
17,188
54,600
Other borrowings . . . . . . . . . . . . . . . . . . . . . . . . .
40,723
35,569
Subordinated debentures . . . . . . . . . . . . . . . . . . . .
1,515,050
22,570
2,085,963
251,092
11,954
35,569
1,608,248
20,234
2,225,719
248,980
9,433
35,569
1,409,962
25,990
1,924,302
250,371
12,470
35,569
SELECTED RATIOS
Net interest income to average interest earning
assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income 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 . . . . . .
3.65%
3.52%
3.58%
3.67%
4.11%
7.82
0.77
9.88
10.57
0.41
9.21
0.92
9.98
10.50
0.83
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
(1) The significant variations in the results of operations for the five years presented above is a result of a number
of factors, including changes in asset quality metrics, our exit from the Troubled Asset Relief Program in 2013
and significant income tax expense/benefits realized in 2017 and 2013.
(2) These amounts are calculated using net income applicable to common stock.
9
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;
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, 2017, 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 (‘‘IBCP’’), 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.
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. Economic conditions in Michigan began to show signs of
improvement during 2010. Generally, these improvements have continued into 2017, 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
10
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, lower levels of new loan defaults, and reduced levels of loan net charge-offs.
Recent Developments. On December 22, 2017, President Donald Trump signed into law ‘‘H.R. 1’’, also known
as the ‘‘Tax Cuts and Jobs Act’’, which among other things, reduced the federal corporate income tax rate to
21% effective January 1, 2018. As a result, we concluded that our deferred tax assets, net (‘‘DTA’’) had to be
remeasured. Our DTA represents expected corporate tax benefits anticipated to be realized in the future. The
reduction in the federal corporate income tax rate reduces these anticipated future benefits. The remeasurement of our
DTA at December 31, 2017 resulted in a reduction of these net assets and a corresponding increase in income tax
expense of $6.0 million that was recorded in the fourth quarter of 2017.
On December 4, 2017, we entered into an Agreement and Plan of Merger with TCSB Bancorp, Inc. (‘‘TCSB’’)
(the ‘‘Merger Agreement’’) providing for a business combination of IBCP and TCSB. The Merger Agreement
provides that, upon the terms and subject to the conditions set forth in the Merger Agreement, TCSB will be merged
with and into IBCP, with IBCP as the surviving corporation (the ‘‘Merger’’). In addition, IBCP intends to consolidate
Traverse City State Bank, TCSB’s wholly-owned subsidiary bank, with and into Independent Bank (with Independent
Bank as the surviving institution).
Subject to the terms and conditions of the Merger Agreement, we will pay aggregate Merger consideration of
approximately $63.2 million in IBCP common stock or stock options for all of the shares of TCSB common stock
and TCSB stock options issued and outstanding immediately before the effective time of the Merger. The Merger
consideration is subject to adjustment in certain limited circumstances, as set forth in the Merger Agreement.
Completion of the Merger is subject to certain closing conditions. These include, among others, (i) in the case
of both parties, receipt of the requisite approval of TCSB’s shareholders, receipt of required regulatory approvals, the
absence of any law or order prohibiting completion of the Merger and the absence of a material adverse effect (as
defined in the Merger Agreement), and (ii) in the case of IBCP, the consolidated shareholders’ equity of TCSB must
be at least $33 million (subject to adjustment as provided in the Merger Agreement) as of the final statement date (as
defined in the Merger Agreement). The Merger Agreement provides certain termination rights for both IBCP and
TCSB and further provides that, upon termination of the Merger Agreement under certain circumstances, TCSB will
be obligated to pay IBCP a termination fee of approximately $2.5 million. Currently, we anticipate that the Merger
will be effective on or about April 1, 2018. Our 2017 non-interest expenses include $0.3 million of costs incurred
through December 31, 2017 related to the Merger.
Effective on January 1, 2017, we adopted the fair value accounting method for capitalized mortgage loan
servicing rights. The adoption of this accounting method resulted in the following changes to the January 1, 2017
beginning balances: an increase in capitalized mortgage loan servicing rights of $0.54 million; a decrease in deferred
income taxes of $0.19 million and a decrease in our accumulated deficit of $0.35 million. See note #1 to the
Consolidated Financial Statements.
On December 30, 2016, the Bank and its wholly-owned subsidiary, Mepco Finance Corporation (‘‘Mepco’’),
entered into an Asset Purchase Agreement (‘‘APA’’) with Seabury Asset Management LLC (‘‘Seabury’’). Pursuant to
the terms of the APA, we sold our payment plan processing business, payment plan receivables, and certain other
assets to Seabury, who also assumed certain liabilities of Mepco. These assets and liabilities were categorized as
‘‘held for sale’’ in the December 31, 2016 Consolidated Statement of Financial Condition. We also recorded a
$0.32 million loss related to the sale of these assets in the fourth quarter of 2016. This transaction closed on May 18,
2017, with an effective date of May 1, 2017. As a result of the closing, Mepco sold $33.1 million of net payment plan
receivables, $0.5 million of commercial loans, $0.2 million of furniture and equipment and $1.6 million of other
assets to Seabury, who also assumed $2.0 million of specified liabilities. Mepco was renamed IB Holding Company
in May 2017 and was liquidated on June 30, 2017, with the remaining assets and liabilities transferred to the Bank.
We do not believe that the sale of the Mepco business and assets will have a significant impact on our future overall
financial condition or results of operations.
In the fourth quarter of 2016, we reached a tentative settlement regarding litigation initiated against the Bank
in Wayne County, Michigan Circuit Court. The Court issued a preliminary approval of this settlement in the first
quarter of 2017 and a final approval of this settlement in January 2018. This litigation concerned the Bank’s checking
account transaction sequencing during a period from February 2009 to June 2011. Under the terms of the settlement,
we agreed to pay $2.2 million and we are also responsible for class notification costs and certain other expenses
11
which are estimated to total approximately $0.1 million. The $2.2 million was paid in January 2018. We recorded a
$2.3 million expense in the fourth quarter of 2016 for this settlement. Although, we deny any liability associated with
this matter and believe we have meritorious defenses to the allegations in the complaint, given the costs and
uncertainty of litigation, we determined that this settlement was in the best interests of the organization.
Regulation. On July 2, 2013, the Federal Reserve Board 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 ratably over a four-year period that began in 2016. In 2017,
1.25% is being added to the minimum ratio for adequately capitalized institutions. To avoid limits on capital
distributions and certain discretionary bonus payments we must meet the minimum ratio for adequately capitalized
institutions plus the phased in buffer (now 5.75% in 2017). 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. As of December 31,
2017 and 2016 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 2017 as compared
to earlier periods.
12
RESULTS OF OPERATIONS
Summary. We recorded net income of $20.5 million, or $0.95 per diluted share, in 2017, net income of
$22.8 million, or $1.05 per diluted share, in 2016, and net income of $20.0 million, or $0.86 per diluted share, in
2015. 2017 results include an additional $6.0 million of income tax expense related to the remeasurement of our DTA
as described earlier under ‘‘Recent Developments.’’
KEY PERFORMANCE RATIOS
Year Ended December 31,
2016
2015
2017
Net income to
Average common equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Average assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
7.82%
0.77
9.21%
0.92
7.89%
0.86
Net income per common share
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$0.96
0.95
$1.06
1.05
$0.88
0.86
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 $89.2 million during 2017, compared to $79.6 million and $75.0 million during 2016
The increase in net interest income in 2017 compared to 2016 primarily reflects a
and 2015, respectively.
$191.2 million increase in average interest-earning assets and a 13 basis point increase in our tax equivalent net
interest income as a percent of average interest-earning assets (the ‘‘net interest margin’’).
The increase in average interest-earning assets primarily reflects loan growth utilizing funds from increases in
deposits and borrowed funds. The increase in the net interest margin reflects a change in the mix of average-interest
earning assets (higher percentage of loans) as well as increases in short-term market interest rates.
The increase in net interest income in 2016 compared to 2015 primarily reflects a $173.7 million increase in
average interest-earning assets that was partially offset by a six basis point decrease in our net interest margin.
Our net interest income is also impacted by our level of non-accrual loans. Average non-accrual loans totaled
$9.5 million, $10.9 million and $13.8 million in 2017, 2016 and 2015, respectively.
13
AVERAGE BALANCES AND RATES
2017
2016
2015
Average
Balance
Interest
Rate
Average
Balance
Interest
Rate
Average
Balance
Interest
Rate
(Dollars in thousands)
ASSETS
Taxable loans . . . . . . . . . .
Tax-exempt loans (1) . . . . .
Taxable securities . . . . . . .
Tax-exempt securities (1) . .
Interest bearing cash . . . . .
Other investments . . . . . . .
$1,845,661
3,199
485,343
86,902
37,119
15,543
$84,169
172
10,928
3,063
264
836
4.56% $1,596,136
3,763
5.38
534,233
2.25
54,390
3.52
78,606
0.71
15,474
5.38
$74,014
220
9,921
1,917
403
792
4.64% $1,457,508
5.85
3,972
529,571
1.86
34,039
3.52
66,595
0.51
17,171
5.12
$70,770
246
7,805
1,388
275
925
4.86%
6.19
1.47
4.08
0.41
5.39
Interest earning assets . .
2,473,767
99,432
4.02
2,282,602
87,267
3.82
2,108,856
81,409
3.86
Cash and due from banks . .
Other assets, net . . . . . . . .
31,980
144,442
Total assets . . . . . . . . . .
$2,650,189
36,831
155,778
$2,475,211
44,842
166,363
$2,320,061
LIABILITIES
Savings and interest-
bearing checking . . . . . .
Time deposits . . . . . . . . . .
Other borrowings . . . . . . .
Interest bearing
liabilities . . . . . . . . .
Non-interest bearing
deposits . . . . . . . . . . . .
Other liabilities . . . . . . . . .
Shareholders’ equity. . . . . .
$1,052,215
502,284
74,876
1,530
5,245
2,348
0.15
1.04
3.14
$1,018,685
447,243
47,058
1,115
3,826
1,941
0.11
0.86
4.12
$ 988,504
386,035
47,842
1,056
2,953
1,847
0.11
0.76
3.86
1,629,375
9,123
0.56
1,512,986
6,882
0.45
1,422,381
5,856
0.41
728,208
30,838
261,768
688,697
26,439
247,089
619,206
24,840
253,634
Total liabilities and
shareholders’ equity . .
$2,650,189
$2,475,211
$2,320,061
Net interest income . . . .
$90,309
$80,385
$75,553
Net interest income as a
percent of average
interest earning
assets . . . . . . . . . . . .
3.65%
3.52%
3.58%
(1)
Interest on tax-exempt loans and securities is presented on a fully tax equivalent basis assuming a marginal tax
rate of 35%.
RECONCILIATION OF NET INTEREST MARGIN, FULLY TAXABLE EQUIVALENT (‘‘FTE’’)
2017
Year Ended December 31,
2016
(Dollars in thousands)
2015
Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Add: taxable equivalent adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$89,186
1,123
$79,641
744
$74,986
567
Net interest income - taxable equivalent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$90,309
$80,385
$75,553
Net interest margin (GAAP) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3.61%
3.49%
3.56%
Net interest margin (FTE) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3.65%
3.52%
3.58%
14
CHANGE IN NET INTEREST INCOME
2017 compared to 2016
Rate
Volume
2016 compared to 2015
Rate
Net
Net
(In thousands)
Volume
Increase (decrease) in interest income (1)
Taxable loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax-exempt loans (2) . . . . . . . . . . . . . . . . . . . . . . . .
Taxable securities. . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax-exempt securities (2) . . . . . . . . . . . . . . . . . . . .
Interest bearing cash . . . . . . . . . . . . . . . . . . . . . . . .
Other investments . . . . . . . . . . . . . . . . . . . . . . . . . .
$11,398
(31)
(966)
1,146
(260)
4
$(1,243) $10,155
(48)
1,007
1,146
(139)
44
(17)
1,973
—
121
40
$6,526
(13)
69
738
55
(88)
$(3,282) $3,244
(26)
2,116
529
128
(133)
(13)
2,047
(209)
73
(45)
Total interest income . . . . . . . . . . . . . . . . . . . . . .
11,291
874
12,165
7,287
(1,429)
5,858
Increase (decrease) in interest expense (1)
Savings and interest bearing checking . . . . . . . . . .
Time deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . .
38
508
952
Total interest expense . . . . . . . . . . . . . . . . . . . . .
1,498
Net interest income . . . . . . . . . . . . . . . . . . . . .
$ 9,793
$
377
911
(545)
743
131
415
1,419
407
2,241
33
500
(31)
502
26
373
125
524
59
873
94
1,026
$ 9,924
$6,785
$(1,953) $4,832
(1) The change in interest due to changes in both balance and rate has been allocated to change due to balance and
change due to rate in proportion to the relationship of the absolute dollar amounts of change in each.
(2)
Interest on tax-exempt 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,
2016
2015
2017
As a percent of average interest earning assets
Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other interest earning assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
74.7%
25.3
70.1%
29.9
69.3%
30.7
Average interest earning assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
100.0% 100.0% 100.0%
Savings and NOW . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Time deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Brokered CDs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Average interest bearing liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Earning asset ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Free-funds ratio (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
42.5%
18.2
2.2
3.0
65.9%
93.3%
34.1
44.6%
19.6
—
2.1
66.3%
92.2%
33.7
46.9%
18.2
0.1
2.2
67.4%
90.9%
32.6
(1) Average interest earning assets less average interest bearing liabilities.
Provision for loan losses. The provision for loan losses was an expense of $1.2 million in 2017 and was a credit
of $1.3 million and $2.7 million during 2016 and 2015, 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 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.
15
Non-interest income. Non-interest income is a significant element in assessing our results of operations.
Non-interest income totaled $42.5 million during 2017 compared to $42.3 million and $40.1 million during 2016 and
2015, respectively. In May 2014, the Financial Accounting Standards Board (‘‘FASB’’) issued Accounting Standards
Update (‘‘ASU’’) No. 2014-09 ‘‘Revenue from Contracts with Customers (Topic 606)’’ (‘‘ASU 2014-09’’). ASU
2014-09 is effective for us on January 1, 2018. Our interest income is excluded from the scope of ASU 2014-09 and
for the reasons described in note #1 to our Consolidated Financial Statements, we do not believe that there will be
any material impact on our non-interest income. The components of non-interest income are as follows:
NON-INTEREST INCOME
2017
Year Ended December 31,
2016
(In thousands)
2015
Service charges on deposit accounts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interchange income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net gains on assets
Mortgage loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mortgage loan servicing, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment and insurance commissions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Bank owned life insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net gain on branch sale. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$12,673
8,023
$12,406
7,938
$12,389
8,481
11,762
260
1,647
1,968
1,061
—
5,139
10,566
563
2,222
1,647
1,124
—
5,832
7,448
20
1,751
1,827
1,282
1,193
5,739
Total non-interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$42,533
$42,298
$40,130
Service charges on deposit accounts totaled $12.7 million in 2017 as compared to $12.4 million during both
2016 and 2015. The 2017 increase was principally due to higher service charges on commercial accounts and a
modest increase in non-sufficient funds occurrences.
Interchange income totaled $8.0 million in 2017 compared to $7.9 million in 2016 and $8.5 million in 2015. The
increase in interchange income in 2017 as compared to 2016 is primarily due to increased transaction volume. The
decrease in interchange income in 2016 as compared to 2015 was primarily due to lower incentives under our Debit
Brand Agreement with MasterCard. In addition, although transaction volume increased 1.5% in 2016 as compared
to 2015, interchange revenue per transaction declined by 3.1%, primarily due to a higher mix of debit (PIN-based)
versus credit (signature-based) transactions.
We realized net gains of $11.8 million on mortgage loans during 2017, compared to $10.6 million and
$7.4 million during 2016 and 2015 respectively. Mortgage loan activity is summarized as follows:
MORTGAGE LOAN ACTIVITY
2017
Year Ended December 31,
2016
(Dollars in thousands)
2015
Mortgage loans originated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mortgage loans sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net gains on mortgage loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net gains as a percent of mortgage loans sold (‘‘Loan Sales Margin’’) . . . . .
Fair value adjustments included in the Loan Sales Margin . . . . . . . . . . . . . . .
$871,222
423,327
11,762
$428,249
313,985
10,566
$336,618
281,494
7,448
2.78%
(0.07)
3.37%
0.12
2.65%
0.16
The increase in mortgage loan originations, sales and net gains in 2017 and 2016 as compared to 2015 is due
primarily to the expansion of our mortgage-banking operations. In addition, an improving housing market has
resulted in an increase in purchase money mortgage origination volume.
During the last quarter of 2016 and the first half of 2017, we significantly expanded our mortgage-banking
operations by adding new employees and opening new loan production offices (Ann Arbor, Brighton, Dearborn,
Grosse Pointe, Traverse City and Troy, Michigan and Columbus and Fairlawn, Ohio). Overall, we have increased
16
average full-time equivalent employees in mortgage lending sales and operations by 58.4% in 2017 as compared to
2016. This business expansion has increased net gains on mortgage loans and has accelerated the growth of portfolio
mortgage loans and mortgage loans serviced for others, leading to increased mortgage loan interest income and
mortgage loan servicing revenue. However, this expansion has also increased non-interest expenses, particularly
compensation and employee benefits and occupancy. In addition, due to higher interest rates, mortgage loan refinance
volume has declined in 2017 on an industry-wide basis. It is important to our future results of operations that we
effectively and successfully manage this business expansion.
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 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.
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. Net 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 2.85% in 2017, 3.25% in 2016 and 2.49% in 2015. The higher Loan Sales Margin in 2016 as
compared to 2017 and 2015, was principally due to more favorable competitive conditions including wider
primary-to-secondary market pricing spreads for much of that year. In 2017, our Loan Sales Margin contracted due
to competitive factors. 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 net gains on securities of $0.3 million, $0.6 million and $0.02 million in 2017, 2016 and 2015,
respectively. The 2017 net gain was due primarily to a $0.045 million increase in the fair value of trading securities
and $17.3 million of securities sales that produced net gains of $0.215 million. The 2016 net gain was due primarily
to a $0.3 million increase in the fair value of trading securities and $64.1 million of securities sales that produced
net gains of $0.3 million. The 2015 net 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.
We recorded no net impairment losses in 2017, 2016 or 2015 for other than temporary impairment of securities
available for sale.
GAINS AND LOSSES ON SECURITIES
2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$17,308
64,103
12,037
$263
616
75
$ 3
53
55
$260
563
20
Year Ended December 31,
Proceeds
Gains (1)
Losses (2)
Net
(In thousands)
(1) Gains in 2017 and 2016 include $0.045 million and $0.262 million, respectively related to an increase in the fair
value of trading securities.
(2) Losses in 2015 include $0.055 million related to a decrease in the fair value of trading securities.
17
Mortgage loan servicing generated net earnings of $1.6 million, $2.2 million and $1.8 million in 2017, 2016 and
2015, respectively. This activity is summarized in the following table:
MORTGAGE LOAN SERVICING ACTIVITY
2017
2016
(In thousands)
2015
Mortgage loan servicing:
Revenue, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fair value change due to price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fair value change due to pay-downs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Impairment (charge) recovery. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 4,391
(718)
(2,026)
—
—
$ 4,106
—
—
(2,850)
966
$ 4,118
—
—
(2,868)
501
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 1,647
$ 2,222
$ 1,751
Effective on January 1, 2017, we adopted the fair value accounting method for capitalized mortgage loan
servicing rights. Activity related to capitalized mortgage loan servicing rights is as follows:
CAPITALIZED MORTGAGE LOAN SERVICING RIGHTS
2017
2016
(In thousands)
2015
Balance at January 1, . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in accounting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$13,671
542
$12,436
—
$12,106
—
Balance at January 1, as adjusted. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Originated servicing rights capitalized . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in valuation allowance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
14,213
4,230
—
—
(2,744)
12,436
3,119
(2,850)
966
—
12,106
2,697
(2,868)
501
—
Balance at December 31, . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$15,699
$13,671
$12,436
Valuation allowance at December 31, . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ — $ 2,306
$ 3,272
At December 31, 2017, we were servicing approximately $1.82 billion in mortgage loans for others on which
servicing rights have been capitalized. This servicing portfolio had a weighted average coupon rate of 4.17% and a
weighted average service fee of approximately 25.8 basis points. Remaining capitalized mortgage loan servicing
rights at December 31, 2017 totaled $15.7 million, representing approximately 86 basis points on the related amount
of mortgage loans serviced for others.
Investment and insurance commissions totaled $2.0 million in 2017, as compared to $1.6 million and
$1.8 million in 2016 and 2015, respectively. The increase in 2017 as compared to 2016 was due primarily to growth
in sales and assets under management. The decline in 2016 as compared to 2015 was due primarily to open sales
positions during part of that year.
We earned $1.1 million, $1.1 million and $1.3 million in 2017, 2016 and 2015, 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 $54.6 million and $54.0 million at December 31, 2017 and 2016, respectively.
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
18
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.
Other non-interest income totaled $5.1 million, $5.8 million and $5.7 million in 2017, 2016 and 2015,
respectively. The decrease in 2017 as compared to 2016 and 2015 is primarily due to a reduction in title insurance
fees and lower rental income on other real estate.
Non-interest expense. Non-interest expense is an important component of our results of operations. We strive to
efficiently manage our cost structure.
Non-interest expense totaled $92.1 million in 2017, $90.3 million in 2016, and $88.5 million in 2015. The
components of non-interest expense are as follows:
NON-INTEREST EXPENSE
2017
Year ended December 31,
2016
(In thousands)
2015
Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Performance-based compensation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payroll taxes and employee benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$35,397
9,874
9,818
$33,080
7,866
8,633
$32,677
7,401
8,108
Compensation and employee benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Occupancy, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Data processing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Furniture, fixtures and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Communications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loan and collection. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Advertising . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Legal and professional . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interchange expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
FDIC deposit insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Supplies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Credit card and bank service fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Costs (recoveries) related to unfunded lending commitments . . . . . . . . . . . . . . .
Amortization of intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Merger related expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision (credit) for loss reimbursement on sold loans. . . . . . . . . . . . . . . . . . . .
Net (gains) losses on other real estate and repossessed assets . . . . . . . . . . . . . . .
Litigation settlement expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss on sale of payment plan business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
55,089
8,102
7,657
3,870
2,684
2,230
1,905
1,892
1,156
894
666
529
475
346
284
171
(606)
—
—
4,738
49,579
8,023
7,952
3,912
3,142
2,512
1,856
1,742
1,111
1,049
728
791
(2)
347
—
30
250
2,300
320
4,705
48,186
8,369
7,944
3,892
2,957
3,609
2,121
2,013
1,125
1,366
809
797
113
347
—
(59)
(180)
—
—
5,041
Total non-interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$92,082
$90,347
$88,450
Compensation expense, which is primarily salaries, totaled $35.4 million, $33.1 million and $32.7 million in
2017, 2016 and 2015, respectively. The increase in 2017 as compared to 2016 is primarily due to annual merit based
salary increases and a 6.8% rise in average total full-time equivalent employees due principally to the aforementioned
expansion of our mortgage banking operations. The increase in 2016 as compared to 2015 is primarily due to annual
merit based salary increases. 2016 average total full-time equivalent employee levels were unchanged compared to
2015.
Performance-based compensation expense totaled $9.9 million, $7.9 million and $7.4 million in 2017, 2016 and
2015, respectively. The increases in 2017 as compared to 2016, and in 2016 as compared to 2015, are both primarily
related to higher compensation under our Management Incentive Compensation Plan (‘‘MICP’’) based on our
performance relative to plan targets and increased mortgage loan officer retention bonuses. In computing MICP
results in 2017, our Board of Directors determined that it was appropriate to exclude the impact of the $6.0 million
19
of additional income tax expense related to the remeasurement of our DTA as described earlier under ‘‘Recent
Developments’’, consistent with the prior practice of excluding unique, one-time, adjustments to our reported
financial results.
We maintain performance-based compensation plans. In addition to commissions and cash incentive awards,
such plans include an employee stock ownership plan (ESOP) and a long-term equity based incentive plan. The
amount of expense recognized in 2017, 2016 and 2015 for share-based awards under our long-term equity based
incentive plan was $1.6 million, $1.5 million and $1.4 million, respectively. In 2017, 2016 and 2015, the Board and
Compensation Committee of the Board authorized the grant of restricted stock and performance share awards under
the plan.
Payroll taxes and employee benefits expense totaled $9.8 million, $8.6 million and $8.1 million in 2017, 2016
and 2015, respectively. The increase in 2017 as compared to 2016 is primarily due to a $0.6 million increase in
payroll taxes, a $0.4 million increase in health care insurance and a $0.2 million increase in recruiting costs. The
increase in 2016 as compared to 2015 is primarily due to a $0.2 million increase in our 401(k) plan match and a
$0.2 million increase in employee training costs (primarily sales training). In 2015, we added auto-enrollment to our
401(k) plan. In 2016, we increased our 401(k) plan match from 2% to 3% of eligible compensation.
Occupancy expenses, net, totaled $8.1 million, $8.0 million and $8.4 million in 2017, 2016 and 2015,
respectively. The increase in 2017 as compared to 2016 is primarily due to increased lease costs for new loan
production offices related to the aforementioned expansion of our mortgage banking operations. The decrease in
2016 as compared to 2015 is primarily due to a decline in utilities and real estate property taxes due to branch closings
or sales that took place during 2015 as well as a decline in leasehold improvement depreciation expense at Mepco
related to its former Chicago location.
Data processing expenses totaled $7.7 million, $8.0 million, and $7.9 million in 2017, 2016 and 2015,
respectively. The decrease in 2017 as compared to 2016 is primarily due to a $0.8 million decline related to the sale
of our payment processing business in May 2017 that was partially offset by a $0.5 million increase related to higher
mobile banking activity and software costs for new or expanded lending systems. Although data processing expenses
were relatively unchanged in 2016 as compared to 2015 on a consolidated basis, such expenses declined by
$0.6 million at Mepco (due primarily to a decrease in software amortization); however, this decline was offset by a
comparable increase in such expenses at the Bank (various new or expanded electronic banking services and network
security costs).
Furniture, fixtures and equipment expense was relatively unchanged during 2017, 2016 and 2015.
Communications expense decreased by $0.5 million in 2017 as compared to 2016 and increased by $0.2 million
in 2016 as compared to 2015. The decrease in 2017 as compared to 2016 is primarily due to the sale of our payment
plan processing business in May 2017, reduced checking account related direct mail and a change in our
telecommunications provider as well as 2016 including a debit card mailing. The increase in 2016 as compared to
2015 was due primarily to an increase in postage costs principally as a result of mailing new chip-enabled debit cards
to our entire debit card customer base.
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 as well as recoveries of
previously incurred collection costs.
Advertising expense totaled $1.9 million, $1.9 million, and $2.1 million in 2017, 2016 and 2015, respectively.
The decrease in 2017 and 2016 as compared to 2015 was primarily due to declines in outdoor (billboard) advertising,
television and radio advertising and market research that were partially offset by an increase in checking account
acquisition costs (principally direct mail).
Legal and professional fees totaled $1.9 million, $1.7 million, and $2.0 million in 2017, 2016 and 2015,
respectively. The increase in 2017 as compared to 2016 is primarily due to higher co-sourced internal audit costs and
higher consulting costs for certain deposit account programs. The decrease in 2016 as compared to 2015 was due
primarily to a $0.4 million decline in such costs at Mepco resulting from the resolution of certain litigation matters
and a related reduction in legal fees.
20
Interchange expense primarily represents fees paid to our core information systems processor and debit card
licensor related to debit card and ATM transactions. This expense was relatively unchanged during 2017, 2016 and
2015.
FDIC deposit insurance expense totaled $0.9 million, $1.0 million, and $1.4 million in 2017, 2016 and 2015,
respectively. The declines in 2017 and 2016 as compared to 2015 principally results from the FDIC Deposit Insurance
Fund reserve ratio reaching a 1.15% reserve ratio at June 30, 2016, which triggered a new assessment method and
generally lower deposit insurance premiums for banks with less than $10 billion in assets.
Supplies expense has declined over the past two years consistent with our cost reduction efforts including
‘‘go-green’’ initiatives to reduce paper usage and printing.
Credit card and bank service fees primarily relate to card processing fees incurred by Mepco in its payment plan
processing business. This business was sold in May 2017. (See ‘‘Recent Developments.’’)
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 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 $1.6 million and $1.9 million at December 31, 2017 and
2016 respectively. See note #7 to the Consolidated Financial Statements for a schedule of future amortization of
intangible assets.
Merger related expenses in 2017 primarily represent legal and investment banking fees incurred with respect to
our pending acquisition of TCSB. (See ‘‘Recent Developments.’’)
The provision for loss reimbursement on sold loans was an expense of $0.17 million and $0.03 million in
2017 and 2016, respectively, compared to a credit of $0.06 million in 2015. This provision represents our estimate
of incurred losses related to mortgage loans that we have sold to investors (primarily Fannie Mae, Freddie Mac,
Ginnie Mae and the Federal Home Loan Bank of Indianapolis). 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. The reserve for loss reimbursements on sold mortgage loans totaled
$0.67 million and $0.56 million at December 31, 2017 and 2016, respectively. This reserve is included in accrued
expenses and other liabilities in our Consolidated Statements of Financial Condition. We believe that the amounts that
we have accrued for incurred losses on sold mortgage loans are appropriate based upon our prior experience and other
assumptions. However, future losses could exceed our current estimate.
Net (gains) losses on other real estate 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 gain of $0.6 million in 2017 was
primarily due to the sale of a commercial property in the fourth quarter of that year. The net loss of $0.25 million
in 2016 was primarily due to $0.46 million of write-downs on a group of commercial income-producing properties
that were subsequently sold in 2017. The net gain of $0.2 million in 2015 primarily reflected stable to improving real
estate prices.
We incurred a $2.3 million expense in 2016 for the settlement of a litigation matter as described earlier under
‘‘Recent Developments.’’
We incurred a $0.3 million loss in 2016 on the expected sale of Mepco’s payment plan business as described
earlier under ‘‘Recent Developments.’’
Other non-interest expenses totaled $4.7 million, $4.7 million, and $5.0 million in 2017, 2016 and 2015,
respectively. The $0.3 million decrease in 2017 and 2016 as compared to 2015 is primarily due to declines in
corporate insurance costs, vehicle service contract counterparty contingency expense and fraud costs related to
deposit account and debit card activities.
21
Income tax expense. We recorded an income tax expense of $18.0 million, $10.1 million and $9.4 million in
2017, 2016 and 2015, respectively. 2017 includes an additional $6.0 million of income tax expense related to the
remeasurement of our DTA as described earlier under ‘‘Recent Developments.’’
Our actual federal income tax expense is different than the amount computed by applying our statutory federal
income tax rate to our pre-tax income primarily due to tax-exempt interest income and tax-exempt income from the
increase in the cash surrender value on life insurance (and for 2017, the remeasurement of our DTA as well). As a
result of the reduced federal corporate income tax rate effective January 1, 2018, we expect our actual federal income
tax to be approximately 19% to 20% of our income before income tax.
In addition, 2016 included a $0.3 million income tax benefit resulting from the adoption of FASB ASU 2016-09
‘‘Compensation – Stock Compensation (718) Improvements to Employee Share-Based Payment Accounting.’’
We assess whether a valuation allowance should be established against our DTA based on the consideration of
all available evidence using a ‘‘more likely than not’’ standard. The ultimate realization of this asset is primarily based
on generating future income. We concluded at December 31, 2017 and 2016 that the realization of substantially all
of our DTA continues to be more likely than not.
We had maintained a valuation allowance against our DTA of approximately $1.1 million at December 31, 2016.
This valuation allowance on our DTA related to state income taxes at Mepco. In this instance, we determined that
the future realization of this particular DTA was not more likely than not. That conclusion was based on the pending
sale of Mepco’s payment plan business. After accounting for the May 2017 sale of our payment plan business, all
that remained of this DTA was loss carryforwards that we wrote off against the related valuation allowance as of
June 30, 2017 as we will no longer be doing business in those states.
22
FINANCIAL CONDITION
Summary. Our total assets increased to $2.79 billion at December 31, 2017, compared to $2.55 billion at
December 31, 2016, primarily due to an increase loans. Loans, excluding loans held for sale (‘‘Portfolio Loans’’),
totaled $2.02 billion at December 31, 2017, an increase of 25.5% from $1.61 billion at December 31, 2016. (See
‘‘Portfolio Loans and asset quality’’). The increase in Portfolio Loans during the last few years is part of our overall
strategy to grow revenues, earnings and improve our operating leverage by increasing our loans to deposits ratio. The
expansion of our mortgage banking operations, as described earlier, is part of this strategy along with continuing to
increase our commercial and consumer installment lending.
Deposits totaled $2.40 billion at December 31, 2017, compared to $2.23 billion at December 31, 2016. The
$174.8 million increase in total deposits during the period reflects growth in all categories, except time deposits,
which declined by $79.0 million. The decline in time deposits primarily reflects maturities with one municipal
customer, where we elected to allow the deposits to run-off rather than rebidding for these funds.
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, trust preferred securities and foreign government
securities (that are denominated in U.S. dollars). 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 declined by $87.7 million during 2017 as these funds were utilized to support net Portfolio Loan
growth.
We adopted FASB ASU 2017-08, ‘‘Receivables-Nonrefundable Fees and Other Costs (Subtopic 310-20)
Premium Amortization on Purchased Callable Debt Securities’’ during the first quarter of 2017 using a modified
retrospective approach. As a result, the amortized cost of securities as of January 1, 2017 was adjusted lower by
$0.46 million (see note #1 to the Consolidated Financial Statements).
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. We recorded no net impairment losses related to other than temporary impairment on securities available for
sale in 2017, 2016 or 2015.
SECURITIES
Securities available for sale
Amortized
Cost
Unrealized
Gains
(In thousands)
Losses
Fair
Value
December 31, 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $523,520 $3,197 $3,792 $522,925
610,616
December 31, 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
615,709
7,641
2,548
Portfolio Loans and asset quality. In addition to the communities served by our Bank branch and loan
production office network, our principal lending markets also include nearby communities and metropolitan areas.
Subject 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.
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.
23
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 conventional and fixed rate jumbo mortgage loans as
Portfolio Loans, while 15- and 30-year fixed-rate non-jumbo mortgage loans are generally sold to mitigate exposure
to changes in interest rates. (See ‘‘Non-interest income.’’) Due primarily to the expansion of our mortgage-banking
activities and a change in mix in our mortgage loan originations, we are now originating and putting into Portfolio
Loans more fixed rate mortgage loans compared to past periods. These fixed rate mortgage loans generally have
terms from 15 to 30 years, do not have prepayment penalties and expose us to more interest rate risk. To date, our
interest rate risk profile has not changed significantly. However, we are carefully monitoring this change in the
composition of our Portfolio Loans and the impact of potential future changes in interest rates on our changes in
market value of portfolio equity and changes in net interest income. (See ‘‘Asset/liability management.’’). As a result,
we have added and may continue to add some longer-term borrowings, may utilize derivatives (interest rate swaps
and interest rate caps) to manage interest rate risk and may begin to attempt to sell fixed rate jumbo mortgage loans
in the future.
LOAN PORTFOLIO COMPOSITION
December 31,
2017
2016
(In thousands)
Real estate (1)
Residential first mortgages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 672,592 $ 453,348
105,550
Residential home equity and other junior mortgages . . . . . . . . . . . . . . . . . . . . . . . . . . .
77,287
Construction and land development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
525,748
Other (2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
234,632
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
206,607
Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5,076
Agricultural . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,018,817 $1,608,248
136,560
143,188
538,880
291,091
231,786
4,720
(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.
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total non-performing assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2017
2015
December 31,
2016
(Dollars in thousands)
$13,364
—
13,364
5,004
$18,368
$10,607
116
10,723
7,150
$17,873
$ 8,184
—
8,184
1,643
$ 9,827
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 . . . . . . . . . . . . . . .
0.41%
1.12
0.35
275.99
0.83%
1.26
0.72
151.41
0.71%
1.49
0.74
210.48
(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 (2). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Performing TDR’s. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-performing TDR’s (2). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31, 2017
Commercial
Retail (1)
Total
(In thousands)
$7,748
323
$8,071
$52,367
4,506(3)
$60,115
4,829
$56,873
$64,944
December 31, 2016
Commercial
Retail (1)
Total
(In thousands)
$10,560
3,565
$14,125
$59,726
4,071(3)
$70,286
7,636
$63,797
$77,922
(1) Retail loans include mortgage and installment loan segments.
(2)
Included in non-performing loans table above.
(3) Also includes loans on non-accrual at the time of modification until six payments are received on a timely basis.
Non-performing loans totaled $8.2 million, $13.4 million and $10.7 million at December 31, 2017, 2016 and
2015, respectively. The decline in 2017 as compared to 2016 primarily reflects the pay-off or liquidation of
non-performing commercial loans. The increase in 2016 as compared to 2015 is primarily due to the default of one
commercial loan relationship and one mortgage loan relationship in the fourth quarter of 2016. In general, stable
economic conditions in our market areas, as well as our collection and resolution efforts, have resulted in relatively
low levels non-performing loans the last few years. 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 $60.1 million, or 3.0% of total Portfolio Loans, and $70.3 million, or 4.4% of total Portfolio
Loans, at December 31, 2017 and 2016, respectively. The decrease in the amount of performing TDRs during 2017
reflects declines in both commercial loan and mortgage loan TDRs due primarily to payoffs and amortization.
ORE and repossessed assets totaled $1.6 million at December 31, 2017, compared to $5.0 million at
December 31, 2016. The decrease in ORE during 2017 primarily reflects the sale of properties during the year being
in excess of the inward migration of new properties.
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 . . . . . . . . . . . . . . . . . . . . . . . .
2017
$ 6,839
1,228
7,125
7,395
December 31,
2016
(In thousands)
$ 9,152
491
4,929
5,662
2015
$10,983
1,053
5,262
5,272
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$22,587
$20,234
$22,570
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 AFLL 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.
loss allocations) is determined by assigning allocations to higher rated
The third AFLL element (historical
(‘‘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 AFLL 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 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 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.
The AFLL increased $2.4 million to $22.6 million at December 31, 2017 from $20.2 million at December 31,
2016 and was equal to 1.12% of total Portfolio Loans at December 31, 2017 compared to 1.26% at December 31,
2016.
Three of the four components of the allowance for loan losses outlined above increased during 2017. The
allowance for loan losses related to specific loans decreased $2.3 million in 2017 due primarily to a $14.3 million,
or 17.9%, decline in the balance of individually impaired loans as well as charge-offs. In particular, we received a
full payoff in March 2017 on a commercial loan that had a specific reserve of $1.2 million at December 31, 2016.
The allowance for loan losses related to other adversely rated commercial loans increased $0.7 million in 2017
primarily due to an increase in the balance of such loans included in this component to $27.2 million at December 31,
2017 from $11.8 million at December 31, 2016. The allowance for loan losses related to historical losses increased
$2.2 million during 2017 due principally to slight upward adjustments in our probability of default and expected loss
rates for commercial loans, an additional component of approximately $0.6 million added for loans secured by
commercial real estate due primarily to emerging risks in this sector (such as retail store closings and potential
overdevelopment in certain markets) and Portfolio Loan growth. We also extended our historical lookback period to
be more representative of the probability of default and account for infrequent migration events and extremely low
levels of watch credits. The allowance for loan losses related to subjective factors increased $1.7 million during 2017
primarily due to Portfolio Loan growth.
By comparison, three of the four components of the allowance for loan losses outlined above declined during
2016. The allowance for loan losses related to specific loans decreased $1.8 million in 2016 due primarily to a
$9.3 million, or 10.4%, decline in the balance of individually impaired loans as well as charge-offs. The allowance
26
for loan losses related to other adversely rated commercial loans decreased $0.6 million in 2016 as the total balance
of such loans included in this component decreased to $11.8 million at December 31, 2016, from $27.8 million at
December 31, 2015. The allowance for loan losses related to historical losses decreased $0.3 million during 2016 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 over the relevant measurement
period). The allowance for loan losses related to subjective factors increased $0.4 million due primarily to Portfolio
Loan growth.
ALLOWANCE FOR LOSSES ON LOANS AND UNFUNDED COMMITMENTS
2017
2016
2015
Loan
Losses
Unfunded
Commitments
Unfunded
Commitments
Loan
Losses
(Dollars in thousands)
Loan
Losses
Unfunded
Commitments
$ 650
$22,570
$652
$25,990
$539
Balance at beginning of year . . . . . . . . . . . . $20,234
Additions (deductions)
Provision for loan losses . . . . . . . . . . . . . .
Recoveries credited to allowance . . . . . . .
Loans charged against the allowance . . . .
Reclassification to loans held for sale . . .
1,199
4,205
(3,051)
—
Additions (deductions) included in non-
—
—
—
—
(1,309)
4,619
(5,587)
(59)
—
—
—
(2,714)
5,022
(5,728)
—
—
—
—
—
113
$652
interest expense . . . . . . . . . . . . . . . . . . . . .
—
475
—
(2)
—
Balance at end of year . . . . . . . . . . . . . . . . . $22,587
$1,125
$20,234
$650
$22,570
Net loans charged against the allowance to
average Portfolio Loans . . . . . . . . . . . . . .
(0.06)%
0.06%
0.05%
In 2017, we recorded a net recovery of 0.06% to average loans (or $1.2 million). This compares to loan net
charge-offs to average loans of 0.06% in 2016 (or $1.0 million) and 0.05% in 2015 (or $0.7 million). The net
recoveries in 2017 occurred in the commercial loan and mortgage loan categories and primarily reflect reduced levels
of non-performing loans, improvement in collateral liquidation values and on-going collection efforts on previously
charged-off loans. The slight increase in loan net charge-offs in 2016 as compared to 2015 were in mortgage loans
and deposit overdrafts.
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 $2.40 billion and $2.23 billion at December 31, 2017 and 2016, respectively. The
$174.8 million increase in deposits in 2017 is due to growth in checking, savings, reciprocal and brokered deposit
account balances. Reciprocal deposits totaled $51.0 million and $38.7 million at December 31, 2017 and 2016,
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 also added $142.0 million of
brokered time deposits during 2017. This increase, replaced in part, the run-off of time deposits with one municipal
customer as described earlier under ‘‘Financial Condition - Summary.’’
27
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, 2017, we had an estimated $530.5 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 primarily of federal funds purchased and advances from the Federal Home Loan
Bank (the ‘‘FHLB’’), totaled $54.6 million and $9.4 million at December 31, 2017 and 2016, respectively.
As described above, we utilize wholesale funding, including federal funds purchased, FHLB borrowings and
Brokered CDs to augment our core deposits and fund a portion of our assets. At December 31, 2017, our use of such
wholesale funding sources (including reciprocal deposits) amounted to approximately $247.5 million, or 10.1% 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. We began to again utilize interest-rate
swaps in 2014, primarily relating to our commercial lending activities. During 2017, 2016 and 2015, we entered into
$39.1 million, $24.1 million and $24.3 million (original 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 $0.413 million, $0.380 million and $0.412 million of fee income related to these
transactions during 2017, 2016 and 2015, respectively. Also in 2017, we entered into $15.0 million (notional amount)
of pay fixed interest rate swaps and $45.0 million (notional amount) of interest rate caps. These swaps and caps are
hedging short-term wholesale funding.
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
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, federal funds
purchased borrowing facilities with other commercial banks, and access to the capital markets (for Brokered CDs).
At December 31, 2017, we had $446.8 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, $1.85 billion of our deposits
at December 31, 2017, 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 highly
28
liquid or short-term assets) to total assets, short-term liability dependence and basic surplus (defined as quick assets
less volatile liabilities to total assets). Policy limits have been established for our various liquidity measurements and
are monitored on a quarterly 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 $21.5 million as of December 31, 2017 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, 2017.
CONTRACTUAL COMMITMENTS (1)
1 Year or Less
1-3 Years
3-5 Years
(In thousands)
After
5 Years
Total
Time deposit maturities . . . . . . . . . . . . . . . . . . . . . . . . . .
FHLB advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Subordinated debentures. . . . . . . . . . . . . . . . . . . . . . . . . .
Operating lease obligations . . . . . . . . . . . . . . . . . . . . . . .
Purchase obligations (2) . . . . . . . . . . . . . . . . . . . . . . . . . .
$446,835
30,042
—
1,310
2,226
17,799
—
1,823
4,452
542 $554,818
— 47,841
35,569
4,092
7,235
—
— 35,569
387
—
572
557
$ 81,405 $26,036 $
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$480,413
$105,479 $27,165 $36,498 $649,555
(1) Excludes approximately $0.5 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.
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
December 31,
2017
2016
(In thousands)
Subordinated debentures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amount not qualifying as regulatory capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 35,569
(1,069)
$ 35,569
(1,069)
Amount qualifying as regulatory capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
34,500
34,500
Shareholders’ equity
Common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total shareholders’ equity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
324,986
(54,090)
(5,963)
264,933
323,745
(65,657)
(9,108)
248,980
Total capitalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$299,433
$283,480
We have three special purpose entities with $34.5 million of outstanding cumulative trust preferred securities.
These special purpose entities issued common securities and provided cash to our parent company that in turn issued
29
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.
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 both December 31, 2017
and 2016. 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.
Common shareholders’ equity increased to $264.9 million at December 31, 2017 from $249.0 million at
December 31, 2016 due primarily to our net income in 2017 and a decline in our accumulated other comprehensive
loss that were partially offset by dividends. Our tangible common equity (‘‘TCE’’) totaled $263.3 million and
$247.0 million, respectively, at those same dates. Our ratio of TCE to tangible assets was 9.45% and 9.70% at
December 31, 2017 and 2016, respectively. TCE and the ratio of TCE to tangible assets are non-GAAP measures.
TCE represents total common equity less intangible assets.
In January 2016 and 2017, our Board of Directors authorized share repurchase plans. Under the terms of these
share repurchase plans, we were authorized to buy back up to 5% of our outstanding common stock (plus an
additional $5.0 million for the 2016 plan). These repurchase plans expired on December 31, 2017 and 2016,
respectively. During 2017, we did not repurchase any shares of our common stock. During 2016, we repurchased
1,153,136 shares of our comment stock at an average price of $14.62 per share.
In January 2018, our Board of Directors authorized another share repurchase plan. Under the terms of the 2018
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, 2018.
We pay a quarterly cash dividend on our common stock. These dividends totaled $0.42 per share and $0.34 per
share in 2017 and 2016, respectively. In January 2018, our Board of Directors increased the quarterly cash dividend
on our common stock by 25% (to $0.15 per share from $0.12 per share) effective with the February 15, 2018
dividend. This increase, in part, reflects the expected benefit to net income from a lower corporate federal income
tax rate under H.R. 1. We generally favor a dividend payout ratio between 30% and 50% of net income.
As of December 31, 2017 and 2016, 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 Consolidated Statements 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
30
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.
CHANGES IN MARKET VALUE OF PORTFOLIO EQUITY AND NET INTEREST INCOME
Change in Interest Rates
Market
Value of
Portfolio
Equity (1)
Percent
Change
(Dollars in thousands)
Net Interest
Income (2)
Percent
Change
December 31, 2017
200 basis point rise . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
100 basis point rise . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Base-rate scenario . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
100 basis point decline . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$409,200
417,100
414,300
386,400
(1.23)% $99,100
98,600
0.68
96,900
—
91,600
(6.73)
December 31, 2016
200 basis point rise . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
100 basis point rise . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Base-rate scenario . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
100 basis point decline . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$427,400
417,800
399,800
366,000
6.90%
4.50
—
(8.45)
$84,800
82,500
79,300
73,500
2.27%
1.75
—
(5.47)
6.94%
4.04
—
(7.31)
(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 Consolidated 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
FASB Accounting Standards Codification (‘‘ASC’’) topic 820 - ‘‘Fair Value Measurements and Disclosures’’
(‘‘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. 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, capitalized mortgage loan servicing rights, 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 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.
As described in ‘‘Recent Developments’’ we settled a litigation matter in December 2016 and recorded a
$2.3 million expense in the fourth quarter of 2016. We are also involved in various other 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
LITIGATION MATTERS
31
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 other 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 insignificant. 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). 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 the allowance for loan losses, capitalized mortgage loan servicing rights, 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.
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. In June 2016, the FASB issued ASU No. 2016-13 ‘‘Financial Instruments – Credit
Losses (Topic 326), Measurement of Credit Losses on Financial Instruments’’ (‘‘ASU 2016-13’’). See note #1 to the
Consolidated Financial Statements for a description of our implementation efforts related to ASU 2016-13.
At December 31, 2017 and 2016, we had approximately $15.7 million and $13.7 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. As of January 1, 2017, we elected the fair value measurement method for our mortgage loan
servicing rights (in lieu of the amortization method).
Our accounting for income taxes involves the valuation of our DTA 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, 2017 we had gross deferred tax assets of $19.8 million, gross deferred tax liabilities
of $4.7 million and no valuation allowance. This compares to gross deferred tax assets of $39.2 million, gross
deferred tax liabilities of $5.3 million and a valuation allowance of $1.1 million at December 31, 2016. We assess
whether a valuation allowance should be established against our DTA based on the consideration of all available
evidence using a ‘‘more likely than not’’ standard. The ultimate realization of this asset is primarily based on
generating future income. We concluded at both December 31, 2017 and 2016, that the realization of substantially
all of our DTA continues to be more likely than not. In addition, 2017 includes a $6.0 million reduction of our DTA
related to a remeasurement as described earlier under ‘‘Recent Developments.’’
32
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, 2017. 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, 2017, 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,
2017, 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, 2017. Their report immediately follows our
report.
William B. Kessel
President and
Chief Executive Officer
Independent Bank Corporation
March 7, 2018
Robert N. Shuster
Executive Vice President
and Chief Financial Officer
33
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Shareholders and the Board of Directors of Independent Bank Corporation
Grand Rapids, Michigan
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated statements of financial condition of Independent Bank
Corporation (the ‘‘Corporation’’) as of December 31, 2017 and 2016, 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, 2017, and the related notes (collectively referred to as the ‘‘financial statements’’). We also have
audited the Corporation’s internal control over financial reporting as of December 31, 2017, based on criteria
established in Internal Control – Integrated Framework: (2013) issued by the Committee of Sponsoring Organizations
of the Treadway Commission (COSO).
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial
position of the Corporation as of December 31, 2017 and 2016, and the results of its operations and its cash flows
for each of the years in the three-year period ended December 31, 2017 in conformity with accounting principles
generally accepted in the United States of America. Also in our opinion, the Corporation maintained, in all material
respects, effective internal control over financial reporting as of December 31, 2017, based on criteria established in
Internal Control – Integrated Framework: (2013) issued by COSO.
Basis for Opinions
The 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 the Corporation’s financial statements and an opinion on the Corporation’s
internal control over financial reporting based on our audits. We are a public accounting firm registered with the
Public Company Accounting Oversight Board (United States) (‘‘PCAOB’’) and are required to be independent with
respect to the Corporation in accordance with the U.S. federal securities laws and the applicable rules and regulations
of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the financial statements are free of material
misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was
maintained in all material respects.
Our audits of the financial statements included performing procedures to assess the risks of material
misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to
those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in
the financial statements. Our audits also included evaluating the accounting principles used and significant estimates
made by management, as well as evaluating the overall presentation of the financial statements. 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.
Definition and Limitations of Internal Control Over Financial Reporting
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.
34
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,
We have served as the Corporation’s auditor since 2005.
Grand Rapids, Michigan
March 7, 2018
35
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
December 31,
2017
2016
(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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payment plan receivables and other assets held for sale . . . . . . . . . . . . . . . . . . .
Loans
Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mortgage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Installment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued income and other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits
Non-interest bearing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Savings and interest-bearing checking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reciprocal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Time. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Brokered time . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Subordinated debentures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other liabilities held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued expenses and other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
36,994
17,744
54,738
2,739
455
522,925
15,543
39,436
—
853,260
849,530
316,027
2,018,817
(22,587)
1,996,230
1,643
39,149
54,572
15,089
15,699
1,586
29,551
$2,789,355
$ 768,333
1,064,391
50,979
374,872
141,959
2,400,534
54,600
35,569
—
33,719
2,524,422
$
35,238
47,956
83,194
5,591
410
610,616
15,543
35,946
33,360
804,017
538,615
265,616
1,608,248
(20,234)
1,588,014
5,004
40,175
54,033
32,818
13,671
1,932
28,643
$2,548,950
$ 717,472
1,015,724
38,657
453,866
—
2,225,719
9,433
35,569
718
28,531
2,299,970
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: 21,333,869 shares at December 31, 2017 and 21,258,092
shares at December 31, 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Shareholders’ Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Liabilities and Shareholders’ Equity . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
—
324,986
(54,054)
(5,999)
264,933
$2,789,355
323,745
(65,657)
(9,108)
248,980
$2,548,950
See accompanying notes to consolidated financial statements
36
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31,
2016
(In thousands, except per share amounts)
2017
2015
INTEREST INCOME
Interest and fees on loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest on securities
Taxable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax-exempt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Interest Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
INTEREST EXPENSE
Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other borrowings and subordinated debentures . . . . . . . . . . . . . . . . . . . . . . . .
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 on assets
Mortgage loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mortgage loan servicing, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net gain on branch sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Non-interest Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
NON-INTEREST EXPENSE
Compensation and employee benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Occupancy, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Data processing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Furniture, fixtures and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Communications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loan and collection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Advertising . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Legal and professional . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interchange expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
FDIC deposit insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Credit card and bank service fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Merger related expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net (gains) losses on other real estate and repossessed assets . . . . . . . . . . . . .
Litigation settlement expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss on sale of payment plan business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Non-interest Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income Before Income Tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income per common share
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash dividends declared and paid per common share . . . . . . . . . . . . . . . . . . .
$84,281
$74,157
$70,930
10,928
2,000
1,100
98,309
6,775
2,348
9,123
89,186
1,199
87,987
12,673
8,023
11,762
260
1,647
—
8,168
42,533
55,089
8,102
7,657
3,870
2,684
2,230
1,905
1,892
1,156
894
529
284
(606)
—
—
6,396
92,082
38,438
17,963
$20,475
$
$
$
0.96
0.95
0.42
9,921
1,250
1,195
86,523
4,941
1,941
6,882
79,641
(1,309)
80,950
12,406
7,938
10,566
563
2,222
—
8,603
42,298
49,579
8,023
7,952
3,912
3,142
2,512
1,856
1,742
1,111
1,049
791
—
250
2,300
320
5,808
90,347
32,901
10,135
$22,766
$
$
$
1.06
1.05
0.34
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
1,193
8,848
40,130
48,186
8,369
7,944
3,892
2,957
3,609
2,121
2,013
1,125
1,366
797
—
(180)
—
—
6,251
88,450
29,380
9,363
$20,017
$
$
$
0.88
0.86
0.26
See accompanying notes to consolidated financial statements
37
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
2017
Year Ended December 31,
2016
(In thousands)
2015
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive income (loss)
$20,475
$22,766
$20,017
Securities available for sale
Unrealized gain (loss) arising during period . . . . . . . . . . . . . . . . . . . . . . . . .
Change in unrealized gains and losses for which a portion of other than
temporary impairment has been recognized in earnings . . . . . . . . . . . . . .
Reclassification adjustments for gains included in earnings . . . . . . . . . . . . .
Unrealized gains (losses) recognized in other comprehensive income
4,065
(4,465)
(540)
186
(215)
40
(301)
—
(75)
(615)
(215)
(loss) on securities available for sale . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax expense (benefit) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4,036
1,413
(4,726)
(1,654)
Unrealized gains (losses) recognized in other comprehensive income
(loss) on securities available for sale, net of tax . . . . . . . . . . . . . . . . . .
2,623
(3,072)
(400)
Derivative instruments
Unrealized gain arising during period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reclassification adjustment for expense recognized in earnings . . . . . . . . .
Unrealized gains recognized in other comprehensive income (loss) on
derivative instruments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unrealized gains recognized in other comprehensive income (loss) on
derivative instruments, net of tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . .
324
18
342
120
222
2,845
—
—
—
—
—
—
—
—
—
—
(3,072)
(400)
Comprehensive income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$23,320
$19,694
$19,617
See accompanying notes to consolidated financial statements
38
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
Balances at January 1, 2015 . . . . . . . . . . . . . . . . . . . . . . . . .
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 . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balances at December 31, 2015 . . . . . . . . . . . . . . . . . . . . . .
Cumulative effect of change in accounting principle . . .
Balances at December 31, 2015, as adjusted . . . . . . . . . . . .
Net income for 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash dividends declared, $.34 per share . . . . . . . . . . . . . . .
Repurchase of 1,153,136 shares of common stock . . . . . . .
Issuance of 21,402 shares of common stock . . . . . . . . . . . .
Share based compensation (issuance of 180,380 shares of
common stock) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Share based compensation withholding obligation
(withholding of 41,927 shares of common stock) . . . . . .
Other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balances at December 31, 2016 . . . . . . . . . . . . . . . . . . . . . .
Cumulative effect of change in accounting principle . . .
Balances at December 31, 2016, as adjusted . . . . . . . . . . . .
Net income for 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash dividends declared, $.42 per share . . . . . . . . . . . . . . .
Issuance of 27,046 shares of common stock . . . . . . . . . . . .
Share based compensation (issuance of 71,256 shares of
Common
Stock
Accumulated
Deficit
$352,462
—
—
(13,498)
112
$(96,455)
20,017
(5,896)
—
—
1,477
(1,091)
—
339,462
62
339,524
—
—
(16,854)
82
1,620
(627)
—
323,745
—
323,745
—
—
72
—
—
—
(82,334)
1,185
(81,149)
22,766
(7,274)
—
—
—
—
—
(65,657)
52
(65,605)
20,475
(8,960)
—
—
—
36
—
Accumulated
Other
Comprehensive
Loss
$(5,636)
—
—
—
—
Total
Shareholders’
Equity
$250,371
20,017
(5,896)
(13,498)
112
—
1,477
—
(400)
(6,036)
—
(6,036)
—
—
—
—
(1,091)
(400)
251,092
1,247
252,339
22,766
(7,274)
(16,854)
82
—
1,620
—
(3,072)
(9,108)
300
(8,808)
—
—
—
—
—
(36)
2,845
(627)
(3,072)
248,980
352
249,332
20,475
(8,960)
72
1,748
(579)
—
2,845
common stock) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,748
Share based compensation withholding obligation
(withholding of 22,525 shares of common stock) . . . . . .
Reclassification of certain deferred tax effects . . . . . . . . . .
Other comprehensive income . . . . . . . . . . . . . . . . . . . . . . . .
(579)
—
—
Balances at December 31, 2017 . . . . . . . . . . . . . . . . . . . . . .
$324,986
$(54,054)
$(5,999)
$264,933
See accompanying notes to consolidated financial statements
39
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 income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred loan fees and costs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net depreciation, amortization of intangible assets and premiums and accretion of discounts
on securities, loans and interest bearing deposits — time . . . . . . . . . . . . . . . . . . . . . .
Net gains on mortgage loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net gains on securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net (gains) losses on other real estate and repossessed assets. . . . . . . . . . . . . . . . . . . . . .
Share based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Litigation settlement expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss on sale of payment plan business. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net gain on branch sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Increase in accrued income and other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Increase (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 maturities, prepayments and calls of 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 in portfolio loans (loans originated, net of principal payments). . . . . . . . . . . .
Purchase of portfolio loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash received from the sale of Mepco Finance Corporation assets, net . . . . . . . . . . . . . . .
Net cash 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 bank-owned life insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividends paid. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from issuance of common stock. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repurchase of common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Share based compensation withholding obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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 . . .
Transfers to payment plan receivables and other assets held for sale . . . . . . . . . . . . . . . . . . .
Transfers to other liabilities held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2017
Year Ended December 31,
2016
(In thousands)
$ 22,766
2015
$ 20,017
$ 20,475
434,682
(426,410)
1,199
16,009
(5,159)
324,828
(322,342)
(1,309)
9,718
(1,911)
288,852
(285,608)
(2,714)
9,212
(1,234)
6,957
(11,762)
(260)
(606)
1,748
—
—
—
(3,708)
5,442
18,132
38,607
17,308
173,723
(100,584)
—
2,850
—
—
(406,859)
—
33,446
—
528
5,703
523
26
(4,242)
(277,578)
174,815
6,754
622,000
(583,587)
(8,960)
72
—
(579)
210,515
(28,456)
83,194
$ 54,738
$
9,163
1,970
1,735
—
1,000
—
—
5,216
(10,566)
(563)
250
1,620
2,300
320
—
(7,182)
559
938
23,704
64,103
203,029
(297,925)
—
6,253
371
(443)
(107,472)
(15,000)
—
—
4,786
4,251
2,235
416
(3,459)
(138,855)
139,756
—
—
(2,521)
(7,274)
82
(16,854)
(627)
112,562
(2,589)
85,783
$ 83,194
$
6,416
563
2,355
200
1,582
33,360
718
4,553
(7,448)
(20)
(180)
1,477
—
—
(1,193)
(1,483)
(1,376)
2,838
22,855
12,037
167,040
(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)
(5,896)
112
(13,498)
(1,091)
149,425
11,767
74,016
$ 85,783
$
5,769
295
6,694
1,203
—
—
—
See accompanying notes to consolidated financial statements
40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – ACCOUNTING POLICIES
The accounting and reporting policies and practices of Independent Bank Corporation and subsidiaries
(‘‘IBCP’’) 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 determination of the allowance for
loan losses (‘‘AFLL’’), the valuation of capitalized 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 and Ohio that are served by our Bank’s branches and loan
production offices. Through April, 2017 we also purchased payment plans from companies (which we referred to as
‘‘counterparties’’) that provided vehicle service contracts and similar products to consumers, through our wholly
owned subsidiary, Mepco Finance Corporation (‘‘Mepco’’) which was sold effective May 1, 2017. See note #26. At
December 31, 2017, 73.9% 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 prior to the sale of Mepco.
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.
PAYMENT PLAN RECEIVABLES AND OTHER ASSETS HELD FOR SALE — On December 30, 2016 Mepco
executed an Asset Purchase Agreement (the ‘‘APA’’) with Seabury Asset Management LLC (‘‘Seabury’’). Pursuant
to the terms of the APA, Mepco sold its payment plan processing business, payment plan receivables, commercial
loans and certain other assets to Seabury, who also assumed certain liabilities of Mepco effective May 1, 2017. These
assets and liabilities are categorized as ‘‘held for sale’’ in our December 31, 2016 Consolidated Statement of Financial
Condition. There were no fair value adjustments recorded in 2017 related to the sale of Mepco. See note #26.
OPERATING SEGMENTS — While chief decision-makers monitor the revenue streams of our various products
and services, operations are managed and financial performance is evaluated as one single unit. Discrete financial
information is not available other than on a consolidated basis for material lines of business. Prior to 2016, we
reported on two segments: Independent Bank and Mepco. However, given the significant reduction in the size of
Mepco’s business and its relative immateriality, we eliminated any separate segment reporting on Mepco during
2016.
CAPITALIZED MORTGAGE LOAN SERVICING RIGHTS — During the first quarter of 2017, we adopted the
fair value method of accounting for our capitalized mortgage loan servicing rights pursuant to Financial Accounting
Standards Board (‘‘FASB’’) Accounting Standards Codification topic 860 – ‘‘Transfers and Servicing’’. Prior to
January 1, 2017, we were accounting for our capitalized mortgage loan servicing rights under the amortization
method. We adopted the fair value method using a modified retrospective adjustment to beginning accumulated
deficit. The impact of the adoption of the fair value method is summarized in the table below under Adoption of New
Accounting Standards. The adjustments below reflect the recording of a $0.54 million increase in the fair value of
41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
our capitalized mortgage loan servicing rights with a $0.19 million reduction in deferred tax assets, net for a net
impact on accumulated deficit and total equity of $0.35 million.
We recognize as separate assets the rights to service mortgage loans for others. The fair value of capitalized
mortgage loan servicing rights has been determined based upon fair value indications for similar servicing. Under the
fair value method we measure capitalized mortgage loan servicing rights at fair value at each reporting date and report
changes in fair value of capitalized mortgage loan servicing rights in earnings in the period in which the changes
occur and are included in mortgage loan servicing, net in the Consolidated Statements of Operations. The fair values
of capitalized 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. Prior to January 1, 2017, capitalized mortgage loan
servicing rights were amortized in proportion to and over the period of estimated net loan servicing income. We
assessed capitalized mortgage loan servicing rights for impairment based on the fair value of those rights. For
purposes of measuring impairment, the characteristics used included interest rate, term and type. Amortization of and
changes in the impairment reserve on capitalized mortgage loan servicing rights were included in mortgage loan
servicing, net in the Consolidated Statements of Operations.
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 fair value changes or amortization of and changes in the impairment reserve
on capitalized mortgage loan servicing rights, totaled $4.4 million, $4.1 million and $4.1 million for the years ended
December 31, 2017, 2016 and 2015, 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
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, 2017 and 2016. 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 other than temporary impairment (‘‘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.
42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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.
PAYMENT PLAN RECEIVABLE REVENUE RECOGNITION — Payment plan receivables were acquired by
Mepco at a discount which was accreted into interest and fees on loans in the Consolidated Statements of Operations
over the life of the receivable computed on a level-yield method.
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. 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) boat lending, (iv) recreational vehicle lending, and (v) 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 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 AFLL 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
43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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 reasonably ensure that the overall AFLL 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 prior to the sale of Mepco) 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
loan class that are rated substandard, classified as non-performing or were classified as
each commercial
non-performing in the preceding quarter, are evaluated for impairment. Those loans included in each mortgage loan
or installment loan 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 prior to the sale of Mepco), 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 the straight-line method 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 266 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.
44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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 AFLL. 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 INTANGIBLES — 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.
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
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.
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 AFLL. 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 expense - other 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 at December 31, 2017 or 2016. 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
45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
pay-variable interest rate swap agreements related to commercial loan customers and (iii) certain purchased and
written options related to a time deposit product. The fair value of rate-lock mortgage loan commitments is based on
agency cash window loan pricing for comparable assets and the fair value of mandatory commitments to sell
mortgage loans is 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
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 in the Consolidated Statements of Operations. Fair
values of the pay-fixed and pay-variable interest rate swap agreements are derived from proprietary models which
utilize current market data and are included in net interest income in the Consolidated Statements of Operations. 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 in the Consolidated Statements of Operations.
Net cash settlements on derivatives that qualify for hedge accounting are recorded in interest expense in the
Consolidated Statements of Operations. 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) in the Consolidated Statements of Operations. 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 Consolidated
Statements of Financial Condition 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 and unrealized gains and
losses, net of tax, on securities available for sale and derivative instruments classified as cash flow hedges.
NET INCOME PER COMMON SHARE — Basic net income per common share is computed by dividing net
income 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 net income per common share, net income is
divided by the weighted average number of common shares outstanding during the period plus the assumed exercise
of stock options, restricted stock units, performance share units and stock units for a deferred compensation plan for
non-employee directors.
SHARE BASED COMPENSATION — Cost is recognized for non-vested share awards issued to employees
based on the fair value of these awards at the date of grant. 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 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, 2017, 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.
46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
RECLASSIFICATION — Certain amounts in the 2016 and 2015 consolidated financial statements have been
reclassified to conform to the 2017 presentation.
ADOPTION OF NEW ACCOUNTING STANDARDS — In March 2017, the FASB issued Accounting Standards
Update (‘‘ASU’’) 2017-08, ‘‘Receivables-Nonrefundable Fees and Other Costs (Subtopic 310-20) Premium
Amortization on Purchased Callable Debt Securities’’ (‘‘ASU 2017-08’’). This ASU shortens the amortization period
for certain callable debt securities held at a premium. Specifically, the amendments require the premium to be
amortized to the earliest call date. The amendments do not require an accounting change for securities held at a
discount; the discount continues to be accreted to maturity. This amended guidance is effective for us on January 1,
2019, with early adoption permitted. We adopted this amended guidance during the first quarter of 2017 using a
modified retrospective approach. The impact of this adoption was to adjust our January 1, 2017 Consolidated
Statement of Financial Position to reflect cumulative effect adjustments as summarized in the table below. The
adjustments below reflect the recording of $0.46 million ($0.30 million, net of tax) of additional premium
amortization on securities available for sale and a $0.30 million decrease in accumulated other comprehensive loss
to reflect the decrease in after tax unrealized losses on securities available for sale as of January 1, 2017 as a result
of adopting this amended guidance. After January 1, 2017, premium amortization on certain callable debt securities
is now amortized to the first call date.
The impact of the adoption of the fair value method of accounting for our capitalized mortgage loan servicing
rights and the adoption of ASU 2017-08 follows:
Deferred tax assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capitalized mortgage loan servicing rights . . . . . . . . . . . . . . . . . . . . . . .
January 1,
2017
Originally
Presented
$
$
32,818
13,671
Cumulative
Retrospective
Adjustments
(In thousands)
$(190)(1)
$ 542(1)
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$2,548,950
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ (65,657)
Accumulated other comprehensive loss. . . . . . . . . . . . . . . . . . . . . . . . . .
$
(9,108)
Total Shareholders’ Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 248,980
Total Liabilities and Shareholders’ Equity. . . . . . . . . . . . . . . . . . . . . . . .
$2,548,950
$ 352
$ 352(1)
$(300)(2)
$ 300(2)
$ 352
$ 352
January 1,
2017
Adjusted
$
$
32,628
14,213
$2,549,302
$ (65,605)
$
(8,808)
$ 249,332
$2,549,302
(1) Represents adjustment to capitalized mortgage loan servicing rights, deferred tax assets, net, and accumulated
deficit to reflect the adoption of the fair value method of accounting for our capitalized mortgage loan servicing
rights.
(2) Represents adjustment to accumulated deficit and accumulated other comprehensive loss to reflect the adoption
of ASU 2017-08.
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 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 was effective for us on January 1, 2018, and did not have a
material impact on our consolidated operating results or financial condition. We adopted this ASU using the modified
retrospective approach with no material impact to our accumulated deficit at January 1, 2018. Financial instruments
for the most part and related contractual rights and obligations which are the sources of the majority of our operating
47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
revenue are excluded from the scope of this amended guidance. In addition, for those operating revenue streams that
are included in the scope of this amended guidance, based upon our review of these sources of income they are not
expected to be materially impacted by this amended guidance.
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. We have
reviewed the types of financial instruments impacted by this amended guidance, including certain equity investments
and liabilities measured under the fair value election, and have determined that we do not currently own any such
instruments. The balance of this amended guidance is expected to impact certain disclosure items but is not expected
to have any impact on our consolidated operating results or financial condition.
In February 2016, the FASB issued ASU 2016-02, ‘‘Leases (Topic 842)’’. This ASU amends existing guidance
related to the accounting for leases. These amendments, among other things, requires lessees to account for most
leases on the balance sheet while recognizing expense on the income statement in a manner similar to existing
guidance. For lessors the guidance modifies the classification criteria and the accounting for sales-type and direct
finance leases. This amended guidance is effective for us on January 1, 2019 and is not expected to have a material
impact on our consolidated operating results or financial condition. Based on a review of our operating leases that
we currently have in place (see note #18) we do not expect a material change in the recognition, measurement and
presentation of lease expense or impact on cash flow. While the primary impact will be the recognition of certain
operating leases on our Consolidated Statements of Financial Condition, this impact is not expected to be material.
In June 2016,
the FASB issued ASU 2016-13, ‘‘Financial Instruments — Credit Losses (Topic 326),
Measurement of Credit Losses on Financial Instruments’’. This ASU significantly changes how entities will measure
credit losses for most financial assets and certain other instruments that are not measured at fair value through net
income. This ASU will replace today’s ‘‘incurred loss’’ approach with an ‘‘expected loss’’ model for instruments
measured at amortized cost. For securities available for sale, allowances will be recorded rather than reducing the
carrying amount as is done under the current other-than-temporary impairment model. This ASU also simplifies the
accounting model for purchased credit-impaired debt securities and loans. This amended guidance is effective for us
on January 1, 2020. We began evaluating this ASU in 2016 and have formed a committee that includes personnel
from various areas of the Bank that meets regularly to discuss the implementation of the ASU. We are currently in
the process of gathering data and reviewing loss methodologies and have engaged third party resources that will assist
us in the implementation of this ASU. While we have not yet determined what the impact will be on our consolidated
operating results or financial condition by the nature of the implementation of an expected loss model compared to
an incurred loss approach, we would expect our allowance for loan losses to increase under this ASU.
In January 2017, the FASB issued ASU 2017-01, ‘‘Business Combinations (Topic 805), Clarifying the
Definition of a Business’’. This new ASU clarifies the definition of a business with the objective of adding guidance
to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets
or businesses which distinction determines whether goodwill is recorded or not. This amended guidance was effective
for us on January 1, 2018, and did not have a material impact on our consolidated operating results or financial
condition.
In January 2017, the FASB issued ASU 2017-4, ‘‘Intangibles – Goodwill and Other (Topic 350), Simplifying
the Test for Goodwill Impairment’’. This new ASU amends the requirement that entities compare the implied fair
value of goodwill with its carrying amount as part of step 2 of the goodwill impairment test. As a result, entities
should perform their annual or interim goodwill impairment test by comparing the fair value of a reporting unit with
its carrying amount and recognize an impairment if the carrying amount exceeds the reporting unit’s fair value. This
48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
amended guidance is effective for us on January 1, 2020 with early application permitted. Due to our pending
acquisition (see note #27) and expectations this ASU will be relevant to us in 2018 we elected to adopt this amended
guidance as of January 1, 2018. The adoption of this ASU did not have a material impact on our consolidated
operating results or financial condition.
In August 2017, the FASB issued ASU 2017-12, ‘‘Derivatives and Hedging (Topic 815), Targeted Improvements
to Accounting for Hedging Activities’’. This new ASU amends the hedge accounting model in Topic 815 to enable
entities to better portray the economics of their risk management activities in the financial statements and enhance
the transparency and understandability of hedge results. The amendments expand an entity’s ability to hedge
nonfinancial and financial risk components and reduce complexity in fair value hedges of interest rate risk. The
guidance eliminates the requirement to separately measure and report hedge ineffectiveness and generally requires
the entire change in the fair value of a hedging instrument to be presented in the same income statement line as the
hedged item. The guidance also eases certain documentation and assessment requirements and modifies the
accounting for components excluded from the assessment of hedge effectiveness. This amended guidance is effective
for us on January 1, 2019, and given our current level of derivatives designated as hedges is not expected to have
a material impact on our consolidated operating results or financial condition.
In February 2018, the FASB issued ASU 2018-02, ‘‘Income Statement – Reporting Comprehensive Income
(Topic 220), Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income’’. This new
ASU allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax
effects resulting from the Tax Cuts and Jobs Act. As a result, this amended guidance eliminate the stranded tax effects
resulting from the Tax Cuts and Jobs Act and will improve the usefulness of information reported to financial
statement users. This amended guidance is effective for us on January 1, 2019, with early application permitted in
any period for which financial statements have not yet been issued. We elected to adopt this amended guidance during
the fourth quarter of 2017 and it resulted in a $0.04 million reclassification between accumulated other
comprehensive loss and accumulated deficit.
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 2017 and 2016 were $5.2 million and
$4.0 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 $0.7 million
and $2.4 million at December 31, 2017 and 2016, respectively.
49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTE 3 – SECURITIES
Securities available for sale consist of the following at December 31:
2017
U.S. Treasury. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
U.S. agency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
U.S. agency residential mortgage-backed . . . . . . . . . . . . . . . . .
U.S. agency commercial mortgage-backed . . . . . . . . . . . . . . . .
Private label mortgage-backed . . . . . . . . . . . . . . . . . . . . . . . . . .
Other asset backed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Obligations of states and political subdivisions. . . . . . . . . . . . .
Corporate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Trust preferred. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign government . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2016
U.S. agency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
U.S. agency residential mortgage-backed . . . . . . . . . . . . . . . . .
U.S. agency commercial mortgage-backed . . . . . . . . . . . . . . . .
Private label mortgage-backed . . . . . . . . . . . . . . . . . . . . . . . . . .
Other asset backed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Obligations of states and political subdivisions. . . . . . . . . . . . .
Corporate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Trust preferred. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign government . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortized
Cost
$
898
25,667
137,785
9,894
29,011
93,811
174,073
47,365
2,929
2,087
$523,520
$ 28,909
156,053
12,799
35,035
146,829
175,180
56,356
2,922
1,626
$615,709
Unrealized
Gains
Losses
Fair Value
(In thousands)
$ — $ — $
82
1,116
36
428
202
755
578
—
—
$3,197
$ 159
1,173
28
216
271
478
223
—
—
$2,548
67
983
170
330
115
1,883
90
127
27
$3,792
$
80
937
195
524
391
4,759
399
343
13
$7,641
898
25,682
137,918
9,760
29,109
93,898
172,945
47,853
2,802
2,060
$522,925
$ 28,988
156,289
12,632
34,727
146,709
170,899
56,180
2,579
1,613
$610,616
We adopted ASU 2017-08 during the first quarter of 2017 using a modified retrospective approach. As a result,
the amortized cost of securities as of January 1, 2017 was adjusted lower by $0.46 million (see note #1).
Total OTTI recognized in accumulated other comprehensive loss for securities available for sale was zero at both
December 31, 2017 and 2016, 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:
Less Than Twelve Months Twelve Months or More
Unrealized
Losses
Unrealized
Losses
Fair Value
Fair Value
Total
Fair Value
Unrealized
Losses
(In thousands)
2017
U.S. agency. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,466
22,198
U.S. agency residential mortgage-backed . . .
2,181
U.S. agency commercial mortgage-backed . .
11,390
Private label mortgage-backed. . . . . . . . . . . .
Other asset backed . . . . . . . . . . . . . . . . . . . . .
20,352
Obligations of states and political
subdivisions . . . . . . . . . . . . . . . . . . . . . . . .
Corporate . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Trust preferred . . . . . . . . . . . . . . . . . . . . . . . .
Foreign government . . . . . . . . . . . . . . . . . . . .
76,574
14,440
—
489
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $153,090
$
26
229
34
92
40
936
33
—
10
$1,400
$ 5,735
40,698
3,994
4,396
16,648
28,246
3,943
2,802
1,571
$108,033
$
41
754
136
238
75
947
57
127
17
$2,392
$ 11,201
62,896
6,175
15,786
37,000
104,820
18,383
2,802
2,060
$261,123
$
67
983
170
330
115
1,883
90
127
27
$3,792
50
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Less Than Twelve Months Twelve Months or More
Unrealized
Losses
Unrealized
Losses
Fair Value
Fair Value
Total
Fair Value
Unrealized
Losses
(In thousands)
2016
U.S. agency. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,179
62,524
U.S. agency residential mortgage-backed . . .
6,079
U.S. agency commercial mortgage-backed . .
20,545
Private label mortgage-backed. . . . . . . . . . . .
Other asset backed . . . . . . . . . . . . . . . . . . . . .
52,958
Obligations of states and political
subdivisions . . . . . . . . . . . . . . . . . . . . . . . .
Corporate . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Trust preferred . . . . . . . . . . . . . . . . . . . . . . . .
Foreign government . . . . . . . . . . . . . . . . . . . .
113,078
25,546
—
1,613
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $286,522
$
41
732
194
281
172
4,014
292
—
13
$5,739
$ 8,217
20,857
143
1,413
17,763
14,623
2,810
2,579
—
$68,405
$
39
205
1
243
219
745
107
343
—
$1,902
$ 12,396
83,381
6,222
21,958
70,721
127,701
28,356
2,579
1,613
$354,927
$
80
937
195
524
391
4,759
399
343
13
$7,641
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, 2017, we had 34 U.S. agency, 128 U.S. agency residential mortgage-backed and 12
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 mortgage backed securities — at December 31, 2017, we had 20 of this type of security whose fair
value is less than amortized cost. Unrealized losses are primarily due to credit spread widening and increases in
interest rates since their acquisition.
Six private label mortgage-backed securities (including the three securities discussed further below) were
reviewed for other than temporary impairment (‘‘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 all of these securities
whose fair value is less than amortized cost. See further discussion below.
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, 2017, we had 68 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, 2017, we had 334 municipal securities whose
fair value is less than amortized cost. The unrealized losses are primarily due to wider benchmark pricing spreads and
51
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
increases in interest rates since acquisition. Tax exempt securities have been negatively impacted by lower federal
tax rates signed into law in December, 2017. 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, 2017, we had 18 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, 2017, 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.
Two of the three securities are rated by two major rating agencies as investment grade while 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 $0.9 million as of
December 31, 2017, 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:
2017
2016
Fair
Value
Net
Unrealized
Loss
Fair
Value
(In thousands)
Net
Unrealized
Loss
Trust preferred securities
Rated issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,882
920
Unrated issues. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$(69)
(58)
$1,800
779
$(123)
(220)
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.
Foreign government — at December 31, 2017, we had two foreign government 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.
We recorded zero credit related OTTI charges in the Consolidated Statements of Operations on securities
available for sale during 2017, 2016, and 2015.
At December 31, 2017, three private label mortgage-backed securities had credit related OTTI and are
summarized as follows:
Senior
Security
Super
Senior
Security
Senior
Support
Security
(In thousands)
As of December 31, 2017
Fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortized cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-credit unrealized loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unrealized gain. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cumulative credit related OTTI. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,033
891
—
142
757
$966
800
—
166
457
$ 61
—
—
61
380
Total
$2,060
1,691
—
369
1,594
52
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Each of these securities is receiving principal and interest payments similar to principal reductions in the
underlying collateral. All three of these securities have unrealized gains at December 31, 2017. 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 these securities is now less than previously
recorded credit related OTTI amounts.
A roll forward of credit losses recognized in earnings on securities available for sale for the years ending
December 31 follow:
Balance at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Decrease to credit losses on securities for which OTTI was previously
recognized as a result of disposal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2017
2016
(In thousands)
2015
$1,594
$1,594
$1,844
—
—
—
—
—
—
—
—
(250)
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,594
$1,594
$1,594
The amortized cost and fair value of securities available for sale at December 31, 2017, 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 mortgage-backed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other asset backed. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortized
Cost
Fair
Value
(In thousands)
$ 31,572
93,867
73,967
53,613
253,019
137,785
9,894
29,011
93,811
$ 31,589
93,687
74,150
52,814
252,240
137,918
9,760
29,109
93,898
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$523,520
$522,925
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:
2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$17,308
64,103
12,037
$218
354
75
$ 3
53
—
Proceeds
Realized
Gains
Losses
(In thousands)
53
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
During 2017, 2016 and 2015, our trading securities consisted of various preferred stocks. During each of those
years, we recognized gains (losses) on trading securities of $0.05 million, $0.26 million and $(0.06) 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, 2017 and 2016.
Securities available for sale with a book value of $0.9 million and $2.4 million at December 31, 2017 and 2016,
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, 2017 or 2016.
NOTE 4 – LOANS AND PAYMENT PLAN RECEIVABLES
Our loan portfolios at December 31 follow:
2017
2016
(In thousands)
Real estate (1)
Residential first mortgages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 672,592 $ 453,348
105,550
Residential home equity and other junior mortgages . . . . . . . . . . . . . . . . . . . . . . . . . . .
77,287
Construction and land development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
525,748
Other (2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
234,632
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
206,607
Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5,076
Agricultural . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
136,560
143,188
538,880
291,091
231,786
4,720
Total loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,018,817 $1,608,248
(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 $9.3 million and $4.1 million at December 31, 2017 and 2016,
respectively.
54
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
In August 2016 and December 2015, we purchased $15.0 million and $32.6 million, respectively of
single-family residential fixed rate jumbo mortgage loans from two separate Michigan-based financial institutions.
These mortgage loans were all on properties located in Michigan, had weighted average interest rates (after a 0.25%
servicing fee) of 3.65% and 3.94%, respectively and weighted average remaining contractual maturities of 332
months and 344 months, respectively. We did not purchase any loans during 2017.
An analysis of the allowance for loan losses by portfolio segment for the years ended December 31 follows:
2017
Balance at beginning of period . . . . . . . . . . .
Additions (deductions)
Commercial Mortgage
Installment
Payment
Plan
Receivables
Subjective
Allocation
Total
(In thousands)
$ 4,880
$ 8,681
$ 1,011
$ —
$5,662
$20,234
Provision for loan losses . . . . . . . . . . . . . .
Recoveries credited to allowance . . . . . . .
Loans charged against the allowance . . . .
(327)
1,497
(455)
(567)
1,741
(1,122)
360
967
(1,474)
—
—
—
1,199
1,733
—
4,205
— (3,051)
Balance at end of period . . . . . . . . . . . . . . . .
$ 5,595
$ 8,733
$
864
$ —
$7,395
$22,587
2016
Balance at beginning of period . . . . . . . . . . .
Additions (deductions)
$ 5,670
$10,391
$ 1,181
$ 56
$5,272
$22,570
Provision for loan losses . . . . . . . . . . . . . .
Recoveries credited to allowance . . . . . . .
Loans charged against the allowance . . . .
Reclassification to loans held for sale. . . .
(1,945)
2,472
(1,317)
—
(158)
1,047
(2,599)
—
401
1,100
(1,671)
—
(4)
—
—
(52)
(1,309)
397
—
4,619
— (5,587)
(59)
(7)
Balance at end of period . . . . . . . . . . . . . . . .
$ 4,880
$ 8,681
$ 1,011
$ —
$5,662
$20,234
2015
Balance at beginning of period . . . . . . . . . .
Additions (deductions)
$ 5,445
$13,444
$ 1,814
$ 64
$5,223
$25,990
Provision for loan losses . . . . . . . . . . . . . .
Recoveries credited to allowance . . . . . . .
Loans charged against the allowance . . . .
(737)
2,656
(1,694)
(1,744)
1,258
(2,567)
(274)
1,108
(1,467)
(8)
—
—
49
(2,714)
5,022
—
— (5,728)
Balance at end of period . . . . . . . . . . . . . . . .
$ 5,670
$10,391
$ 1,181
$ 56
$5,272
$22,570
55
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Allowance for loan losses and recorded investment in loans by portfolio segment follows:
Commercial Mortgage
Subjective
Allocation
Installment
(In thousands)
Total
2017
Allowance for loan losses:
Individually evaluated for impairment . . . . . . . . . . . . . $
Collectively evaluated for impairment . . . . . . . . . . . . .
837 $ 5,725 $
4,758
3,008
Total ending allowance balance . . . . . . . . . . . . . . . . . . . . $ 5,595 $ 8,733 $
277
587
864
$ — $
7,395
6,839
15,748
$7,395
$
22,587
Loans
Individually evaluated for impairment . . . . . . . . . . . . . $ 8,420 $ 53,179 $ 3,945
313,005
Collectively evaluated for impairment . . . . . . . . . . . . .
847,140
799,629
Total loans recorded investment . . . . . . . . . . . . . . . . . . . .
Accrued interest included in recorded investment . . . . . .
855,560
2,300
852,808
3,278
316,950
923
Total loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $853,260 $849,530 $316,027
2016
Allowance for loan losses:
$
65,544
1,959,774
2,025,318
6,501
$2,018,817
Individually evaluated for impairment . . . . . . . . . . . . . $ 2,244 $ 6,579 $
Collectively evaluated for impairment . . . . . . . . . . . . .
2,102
2,636
329
682
$ — $
5,662
9,152
11,082
Total ending allowance balance . . . . . . . . . . . . . . . . . . . . $ 4,880 $ 8,681 $
1,011
$5,662
$
20,234
Loans
Individually evaluated for impairment . . . . . . . . . . . . . $ 15,767 $ 59,151 $ 4,913
261,474
Collectively evaluated for impairment . . . . . . . . . . . . .
790,228
481,828
Total loans recorded investment . . . . . . . . . . . . . . . . . . . .
Accrued interest included in recorded investment . . . . . .
805,995
1,978
540,979
2,364
266,387
771
Total loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $804,017 $538,615 $265,616
$
79,831
1,533,530
1,613,361
5,113
$1,608,248
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 $0.4 million, $0.5 million and $0.6 million of interest income would have
been recognized in 2017, 2016 and 2015, respectively. Interest income recorded on these loans was approximately
zero during the years ended 2017, 2016 and 2015.
56
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Loans on non-accrual status and past due more than 90 days (‘‘Non-performing Loans’’) at December 31 follow:
2017
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Boat lending . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Recreational vehicle lending . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total recorded investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued interest included in recorded investment . . . . . . . . . . . . . . . . . . . .
2016
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Boat lending . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Recreational vehicle lending . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total recorded investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued interest included in recorded investment . . . . . . . . . . . . . . . . . . . .
90+ and
Still
Accruing
Total Non-
Performing
Loans
Non-
Accrual
(In thousands)
$—
—
—
—
—
—
—
—
—
—
—
—
—
$—
$—
$—
—
—
—
—
—
—
—
—
—
—
—
—
$
30
9
607
$
30
9
607
5,130
1,223
326
316
—
141
159
100
25
118
5,130
1,223
326
316
—
141
159
100
25
118
$ 8,184
$ 8,184
$ —
$ —
$
628
105
4,430
$
628
105
4,430
5,248
1,507
222
317
—
266
289
219
21
112
5,248
1,507
222
317
—
266
289
219
21
112
$—
$—
$13,364
$13,364
$ —
$ —
57
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
An aging analysis of loans by class at December 31 follows:
Loans Past Due
30-59 days
60-89 days
90+ days
Total
Loans not
Past Due
Total
Loans
(In thousands)
2017
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 . . . . . . . . . . . . . . .
Boat lending . . . . . . . . . . . . . . . . . . . . . . . .
Recreational vehicle lending . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ — $ — $
30 $
30 $ 290,466 $ 290,496
9
60
1,552
713
308
353
7
90
217
59
28
275
—
—
—
44
9
104
70,182
494,769
70,191
494,873
802
5,130
— 1,223
326
38
316
155
—
—
11
94
36
20
115
141
159
100
25
118
7,484
1,936
672
824
7
242
470
195
73
508
625,638
88,620
34,689
58,834
34,104
9,213
9,001
129,777
92,737
74,734
633,122
90,556
35,361
59,658
34,111
9,455
9,471
129,972
92,810
75,242
Total recorded investment . . . . . . . . . . .
$3,671
$1,271
$7,612 $12,554 $2,012,764 $2,025,318
Accrued interest included in recorded
investment. . . . . . . . . . . . . . . . . . . . . . . . . .
$
43
$
22
$ — $
65 $
6,436 $
6,501
2016
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 . . . . . . . . . . . . . . .
Boat lending . . . . . . . . . . . . . . . . . . . . . . . .
Recreational vehicle lending . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ — $ — $ 383 $
383 $ 287,255 $ 287,638
74
100
—
1,385
31
66
2,361
—
149
470
13
311
238
184
68
289
869
5,248
— 1,507
222
—
317
218
—
2
48
41
33
33
30
266
289
219
21
112
105
1,551
8,478
1,507
371
1,005
15
625
568
436
122
431
51,670
465,031
51,775
466,582
306,063
101,541
28,645
54,232
39,122
12,025
13,390
102,489
74,413
61,888
314,541
103,048
29,016
55,237
39,137
12,650
13,958
102,925
74,535
62,319
Total recorded investment . . . . . . . . . . .
$4,257
$2,659
$8,681 $15,597 $1,597,764 $1,613,361
Accrued interest included in recorded
investment. . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
45
$
19
$ — $
64 $
5,049 $
5,113
58
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Impaired loans are as follows :
December 31,
2017
2016
(In thousands)
Impaired loans with no allocated allowance
TDR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non - TDR. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
349
175
$ 1,782
1,107
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,482
62,113
148
3,527
72,613
491
Total impaired loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$65,267
$79,520
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
684
6,089
66
Total amount of allowance for loan losses allocated . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 6,839
$ 1,868
7,146
138
$ 9,152
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 . . . . . . . . . . . . . . .
Boat lending . . . . . . . . . . . . . . . . . . . . . . . .
Recreational vehicle lending . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2017
Unpaid
Principal
Balance
Recorded
Investment
2016
Unpaid
Principal
Balance
Related
Allowance
Related
Allowance
Recorded
Investment
(In thousands)
$ —
$ —
$—
$ 517
$ 768
$—
—
524
2
—
—
—
1
—
—
—
—
—
549
469
—
—
—
69
—
—
—
—
527
1,087
—
—
—
—
—
—
—
—
—
—
—
—
31
2,341
709
3,261
2
—
—
—
—
—
—
—
—
387
—
—
—
66
—
—
—
—
2,891
5,191
—
—
—
—
—
—
—
—
—
—
—
—
59
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
2017
Unpaid
Principal
Balance
Recorded
Investment
2016
Unpaid
Principal
Balance
Related
Allowance
Related
Allowance
Recorded
Investment
(In thousands)
With an allowance recorded:
Commercial
Income producing - real estate . . . . . . . . .
Land, land development & construction-
real estate . . . . . . . . . . . . . . . . . . . . . . . .
Commercial and industrial . . . . . . . . . . . . .
5,195
5,347
166
2,535
194
2,651
Mortgage
1-4 family . . . . . . . . . . . . . . . . . . . . . . . . . .
Resort lending. . . . . . . . . . . . . . . . . . . . . . .
Home equity - 1st lien . . . . . . . . . . . . . . . .
Home equity - 2nd lien . . . . . . . . . . . . . . .
Installment
Home equity - 1st lien . . . . . . . . . . . . . . . .
Home equity - 2nd lien . . . . . . . . . . . . . . .
Boat lending . . . . . . . . . . . . . . . . . . . . . . . .
Recreational vehicle lending . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
36,848
15,978
173
178
1,667
1,793
1
90
393
38,480
16,046
236
213
1,804
1,805
5
90
418
347
9
481
3,454
2,210
43
18
108
140
1
5
23
7,737
7,880
554
239
4,902
244
5,246
41,701
16,898
235
315
1,994
2,415
1
109
394
43,479
16,931
242
398
2,117
2,443
6
108
426
36
1,654
4,100
2,453
10
16
118
182
1
6
22
65,017
67,289
6,839
76,940
79,520
9,152
Total
Commercial
Income producing - real estate . . . . . . . . .
Land, land development & construction-
real estate . . . . . . . . . . . . . . . . . . . . . . . .
Commercial and industrial . . . . . . . . . . . . .
5,195
5,347
166
3,059
194
3,200
Mortgage
1-4 family . . . . . . . . . . . . . . . . . . . . . . . . . .
Resort lending. . . . . . . . . . . . . . . . . . . . . . .
Home equity - 1st lien . . . . . . . . . . . . . . . .
Home equity - 2nd lien . . . . . . . . . . . . . . .
Installment
Home equity - 1st lien . . . . . . . . . . . . . . . .
Home equity - 2nd lien . . . . . . . . . . . . . . .
Boat lending . . . . . . . . . . . . . . . . . . . . . . . .
Recreational vehicle lending . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
36,850
15,978
173
178
1,668
1,793
1
90
393
38,949
16,046
236
213
1,873
1,805
5
90
418
347
9
481
3,454
2,210
43
18
108
140
1
5
23
8,254
8,648
554
270
7,243
953
8,507
41,703
16,898
235
315
1,994
2,415
1
109
394
43,866
16,931
242
398
2,183
2,443
6
108
426
36
1,654
4,100
2,453
10
16
118
182
1
6
22
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$65,544
$68,376
$6,839
$79,831
$84,711
$9,152
Accrued interest included in recorded
investment. . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
277
$
311
(1) There were no impaired purchased mortgage loans at December 31, 2017 or 2016.
60
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Average recorded investment in and interest income earned (of which the majority of these amounts were
received in cash and related primarily to performing TDR’s) on impaired loans by class for the years ended
December 31 follows (1):
2017
2016
2015
Average
Recorded
Investment
Interest
Income
Recognized
Average
Recorded
Investment
Interest
Income
Recognized
Average
Recorded
Investment
Interest
Income
Recognized
(In thousands)
$
177
$ — $
609
$
2
$ 4,520
$ 387
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 . . . . . . . . . . . . . . .
Boat lending . . . . . . . . . . . . . . . . . . . . . . . .
Recreational vehicle lending . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6
751
52
—
—
—
1
—
—
—
—
987
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 . . . . . . . . . . . . . . .
Boat lending . . . . . . . . . . . . . . . . . . . . . . . .
Recreational vehicle lending . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
7,059
183
3,298
39,143
16,383
209
209
1,832
2,126
1
100
377
—
22
21
—
—
—
6
—
—
—
—
49
369
8
132
1,774
616
5
7
128
112
1
5
25
330
961
10
—
—
—
—
3
—
—
—
1,913
7
54
16
—
—
—
5
—
—
—
—
84
952
2,125
79
257
19
12
—
—
—
—
—
—
—
11
—
—
—
5
—
—
—
—
7,628
739
8,069
427
12,677
1,129
5,723
44,923
17,544
226
248
2,185
2,661
2
115
433
31
189
1,918
619
10
14
147
162
1
6
28
2,219
6,663
50,421
18,448
161
172
2,539
3,055
3
127
533
439
54
104
2,140
670
8
13
176
193
1
7
30
70,920
3,182
83,258
3,552
97,018
3,835
61
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
2017
2016
2015
Average
Recorded
Investment
Interest
Income
Recognized
Average
Recorded
Investment
Interest
Income
Recognized
Average
Recorded
Investment
Interest
Income
Recognized
(In thousands)
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 . . . . . . . . . . . . . . .
Boat lending . . . . . . . . . . . . . . . . . . . . . . . .
Recreational vehicle lending . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
7,236
189
4,049
39,195
16,383
209
209
1,833
2,126
1
100
377
369
8
154
1,795
616
5
7
134
112
1
5
25
8,678
1,459
6,684
44,933
17,544
226
248
2,185
2,664
2
115
433
429
38
243
1,934
619
10
14
152
162
1
6
28
17,197
3,171
8,788
50,440
18,460
161
172
2,539
3,055
3
127
533
826
133
361
2,151
670
8
13
181
193
1
7
30
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$71,907
$3,231
$85,171
$3,636
$104,646
$4,574
(1) There were no impaired payment plan receivables or purchased mortgage loans during the years ending
December 31, 2017, 2016 and 2015.
Troubled debt restructurings at December 31 follow:
Performing TDR’s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-performing TDR’s (2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Performing TDR’s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-performing TDR’s (2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(1) Retail loans include mortgage and installment loan segments.
(2)
Included in non-performing loans table above.
Commercial
2017
Retail (1)
(In thousands)
Total
$7,748
323
$8,071
$52,367
4,506(3)
$56,873
$60,115
4,829
$64,944
Commercial
$10,560
3,565
$14,125
2016
Retail (1)
(In thousands)
Total
$59,726
4,071(3)
$63,797
$70,286
7,636
$77,922
(3) Also includes loans on non-accrual at the time of modification until six payments are received on a timely basis.
62
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
We have allocated $6.8 million and $9.0 million of specific reserves to customers whose loan terms have been
modified in troubled debt restructurings as of December 31, 2017 and 2016, respectively. We have committed to lend
additional amounts totaling up to $0.04 million at both December 31, 2017 and 2016, 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.
Loans that have been classified as troubled debt restructurings during the years ended December 31 follow (1):
Number of
Contracts
Pre-modification
Recorded
Balance
Post-modification
Recorded
Balance
(Dollars in thousands)
2017
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Boat lending . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Recreational vehicle lending . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2016
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Boat lending . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Recreational vehicle lending . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
—
15
6
1
—
—
3
10
—
—
2
37
4
—
9
9
1
1
2
6
6
—
—
2
40
63
$ —
—
925
456
189
—
—
86
391
—
—
74
$2,121
$ 290
—
2,044
927
116
107
77
141
154
—
—
46
$3,902
$ —
—
925
462
189
—
—
90
394
—
—
75
$2,135
$ 290
—
2,027
1,004
117
78
78
145
157
—
—
46
$3,942
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Installment
Home equity - 1st lien . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Home equity - 2nd lien . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Boat lending . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Recreational vehicle lending . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2
—
17
8
1
1
1
6
8
—
—
2
46
$ 229
—
3,188
1,345
313
20
27
220
228
—
—
19
$5,589
$ 227
—
2,960
1,128
307
20
27
186
217
—
—
25
$5,097
(1) There were no payment plan receivables or purchased mortgage loans classified as troubled debt restructurings
during the years ending December 31, 2017, 2016 and 2015.
The troubled debt restructurings described above increased (decreased) the AFLL by $0.1 million, $(0.1) million
and $0.4 million during the years ended December 31, 2017, 2016 and 2015, respectively and resulted in charge offs
of zero, $0.53 million and $0.16 million during the years ended December 31, 2017, 2016 and 2015, 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:
Number of
Contracts
Recorded
Balance
(Dollars in thousands)
2017
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Boat lending. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Recreational vehicle lending . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
—
6
—
—
—
—
1
—
—
—
—
7
$ —
—
164
—
—
—
—
13
—
—
—
—
$177
64
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Number of
Contracts
Recorded
Balance
(Dollars in thousands)
2016
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Boat lending. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Recreational vehicle lending . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Installment
Home equity - 1st lien . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Home equity - 2nd lien . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Boat lending. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Recreational vehicle lending . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
—
1
—
—
—
—
—
—
—
—
—
1
—
—
2
2
—
—
—
—
—
—
—
1
5
$ —
—
1,767
—
—
—
—
—
—
—
—
—
$1,767
$ —
—
157
73
—
—
—
—
—
—
—
4
$ 234
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 AFLL
by $0.04 million, $(0.17) million and $(0.03) million during the years ended December 31, 2017, 2016 and 2015,
respectively and resulted in charge offs of $0.05 million, $0.51 million, and zero during the years ended
December 31, 2017, 2016 and 2015, respectively.
65
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The terms of certain other loans were modified during the years ending December 31, 2017, 2016 and 2015 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 loans, (c) credit scores of mortgage and installment loan borrowers, and (d) delinquency
history and non-performing loans.
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. These ratings include
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.
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. Our doubtful rating includes a sub classification for a loss rate other than 50% (which is the
standard doubtful loss rate). These ratings include 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
$288,869
$ 1,293
$ 304
$ 30
$290,496
70,122
463,570
60
28,351
—
2,345
$2,649
$
8
9
607
70,191
494,873
$646
$855,560
$ — $ 2,300
2017
Income producing - real estate . . . . . . . . . . . . . . . .
Land, land development and construction - real
estate. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial and industrial. . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$822,561
$29,704
Accrued interest included in total . . . . . . . . . . . . . .
$ 2,198
$
94
66
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
2016
Income producing - real estate . . . . . . . . . . . . . . . .
Land, land development and construction - real
estate. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial and industrial. . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$783,854
$13,642
Accrued interest included in total . . . . . . . . . . . . . .
$ 1,915
$
52
Non-watch
1-6
Watch
7-8
Commercial
Substandard
Accrual
9
(In thousands)
Non-
Accrual
10-11
Total
$282,886
$ 3,787
$ 337
$ 628
$287,638
51,603
449,365
67
9,788
—
2,998
$3,335
$
11
105
4,431
51,775
466,582
$5,164
$805,995
$ — $ 1,978
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
Home
Equity
2nd Lien
(In thousands)
Purchased
Loans
Total
2017
800 and above. . . . . . . . . . . . . . . . . . . .
750-799 . . . . . . . . . . . . . . . . . . . . . . . . .
700-749 . . . . . . . . . . . . . . . . . . . . . . . . .
650-699 . . . . . . . . . . . . . . . . . . . . . . . . .
600-649 . . . . . . . . . . . . . . . . . . . . . . . . .
550-599 . . . . . . . . . . . . . . . . . . . . . . . . .
500-549 . . . . . . . . . . . . . . . . . . . . . . . . .
Under 500 . . . . . . . . . . . . . . . . . . . . . . .
Unknown . . . . . . . . . . . . . . . . . . . . . . . .
$ 70,540
265,907
146,302
83,695
25,087
15,136
9,548
2,549
14,358
$ 11,625
36,015
22,099
12,145
3,025
2,710
1,009
269
1,659
$ 6,169
16,561
7,317
2,793
1,189
518
397
260
157
$ 7,842
24,126
15,012
7,420
2,512
1,118
1,156
385
87
$ 7,983
17,651
7,937
426
—
—
—
—
114
$104,159
360,260
198,667
106,479
31,813
19,482
12,110
3,463
16,375
Total. . . . . . . . . . . . . . . . . . . . . . . . . .
$633,122
$ 90,556
$35,361
$59,658
$34,111
$852,808
Accrued interest included in total . . . . . .
$ 2,361
$
371
$
157
$
294
$
95
$ 3,278
2016
800 and above. . . . . . . . . . . . . . . . . . . .
750-799 . . . . . . . . . . . . . . . . . . . . . . . . .
700-749 . . . . . . . . . . . . . . . . . . . . . . . . .
650-699 . . . . . . . . . . . . . . . . . . . . . . . . .
600-649 . . . . . . . . . . . . . . . . . . . . . . . . .
550-599 . . . . . . . . . . . . . . . . . . . . . . . . .
500-549 . . . . . . . . . . . . . . . . . . . . . . . . .
Under 500 . . . . . . . . . . . . . . . . . . . . . . .
Unknown . . . . . . . . . . . . . . . . . . . . . . . .
$ 36,534
102,382
69,337
50,621
25,270
13,747
9,215
5,145
2,290
$ 10,484
41,999
24,727
13,798
5,769
3,030
1,438
92
1,711
$ 6,048
10,006
5,706
4,106
1,674
455
486
255
280
$ 8,392
20,113
12,360
8,167
3,067
1,699
981
279
179
$ 8,462
20,984
9,115
437
—
—
—
—
139
$ 69,920
195,484
121,245
77,129
35,780
18,931
12,120
5,771
4,599
Total. . . . . . . . . . . . . . . . . . . . . . . . . .
$314,541
$103,048
$29,016
$55,237
$39,137
$540,979
Accrued interest included in total . . . . . .
$ 1,466
$
450
$
111
$
226
$
111
$ 2,364
(1) Credit scores have been updated within the last twelve months.
67
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Installment (1)
Home
Equity
1st Lien
Home
Equity
2nd Lien
Boat Lending
Recreational
Vehicle
Lending
Other
Total
(In thousands)
2017
800 and above. . . . . . . . . . . . . . . . . . . .
750-799 . . . . . . . . . . . . . . . . . . . . . . . . .
700-749 . . . . . . . . . . . . . . . . . . . . . . . . .
650-699 . . . . . . . . . . . . . . . . . . . . . . . . .
600-649 . . . . . . . . . . . . . . . . . . . . . . . . .
550-599 . . . . . . . . . . . . . . . . . . . . . . . . .
500-549 . . . . . . . . . . . . . . . . . . . . . . . . .
Under 500 . . . . . . . . . . . . . . . . . . . . . . .
Unknown . . . . . . . . . . . . . . . . . . . . . . . .
$
815
1,912
1,825
1,840
1,567
950
499
32
15
$
825
1,952
2,142
2,036
1,065
1,028
303
88
32
$ 15,531
73,251
28,922
9,179
2,052
640
281
57
59
Total. . . . . . . . . . . . . . . . . . . . . . . . . .
$ 9,455
$ 9,471
$129,972
$16,754
52,610
17,993
4,270
754
305
83
6
35
$92,810
$ 7,060
28,422
20,059
9,258
2,402
871
475
194
6,501
$ 40,985
158,147
70,941
26,583
7,840
3,794
1,641
377
6,642
$75,242
$316,950
Accrued interest included in total . . . . . .
$
39
$
43
$
346
$
254
$
241
$
923
2016
800 and above. . . . . . . . . . . . . . . . . . . .
750-799 . . . . . . . . . . . . . . . . . . . . . . . . .
700-749 . . . . . . . . . . . . . . . . . . . . . . . . .
650-699 . . . . . . . . . . . . . . . . . . . . . . . . .
600-649 . . . . . . . . . . . . . . . . . . . . . . . . .
550-599 . . . . . . . . . . . . . . . . . . . . . . . . .
500-549 . . . . . . . . . . . . . . . . . . . . . . . . .
Under 500 . . . . . . . . . . . . . . . . . . . . . . .
Unknown . . . . . . . . . . . . . . . . . . . . . . . .
$ 1,354
2,478
1,920
2,852
1,691
1,231
981
114
29
$ 1,626
3,334
2,686
2,541
1,775
1,063
692
220
21
$ 21,422
50,508
20,045
7,559
1,846
882
440
73
150
Total. . . . . . . . . . . . . . . . . . . . . . . . . .
$12,650
$13,958
$102,925
$23,034
35,827
11,049
3,205
821
280
189
16
114
$74,535
$ 8,911
21,918
13,183
8,913
2,269
833
511
211
5,570
$ 56,347
114,065
48,883
25,070
8,402
4,289
2,813
634
5,884
$62,319
$266,387
Accrued interest included in total . . . . . .
$
54
$
59
$
264
$
203
$
191
$
771
(1) Credit scores have been updated within the last twelve months.
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. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
FHLB . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,001,388
637,204
130,284
47,527
34
$ 944,703
622,885
85,290
6,031
84
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,816,437
$1,658,993
2017
2016
(In thousands)
68
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Custodial deposit accounts maintained in connection with mortgage loans serviced for others totaled
$20.7 million and $18.9 million, at December 31, 2017 and 2016, 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. 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 all loans serviced for others.
An analysis of capitalized mortgage loan servicing rights for the years ended December 31 follows:
Balance at beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in accounting (see note #1). . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance at beginning of period, as adjusted . . . . . . . . . . . . . . . . . . . . . .
Originated servicing rights capitalized. . . . . . . . . . . . . . . . . . . . . . . . .
Amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in fair value due to price . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in fair value due to pay downs. . . . . . . . . . . . . . . . . . . . . . . .
Balance at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2017
2016
(In thousands)
2015
$
$
13,671
542
14,213
4,230
—
—
(718)
(2,026)
12,436
—
12,436
3,119
(2,850)
966
—
—
15,699
$
13,671
— $
2,306
$
$
$
$
12,106
—
12,106
2,697
(2,868)
501
—
—
12,436
3,272
$
$
$
$
Loans sold and serviced that have had servicing rights capitalized. . . .
$1,815,668
$1,657,996
$1,643,086
The fair value of capitalized mortgage loan servicing rights was $15.7 million and $14.2 million at
December 31, 2017 and 2016, respectively. Fair value was determined using an average coupon rate of 4.17%,
average servicing fee of 0.258%, average discount rate of 10.11% and an average Public Securities Association
(‘‘PSA’’) prepayment rate of 169 for December 31, 2017; and an average coupon rate of 4.20%, average servicing
fee of 0.256%, average discount rate of 10.07% and an average PSA prepayment rate of 175 for December 31, 2016.
NOTE 5 – OTHER REAL ESTATE
A summary of other real estate activity for the years ended December 31 follows (1):
Balance at beginning of year, net of valuation allowance . . . . . . . . . . .
Loans transferred to other real estate. . . . . . . . . . . . . . . . . . . . . . . . . .
Sales of other real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additions to valuation allowance charged to expense . . . . . . . . . . . .
Balance at end of year, net of valuation allowance . . . . . . . . . . . . . . . .
2017
2016
(In thousands)
2015
$ 4,956
1,735
(4,737)
(326)
$ 1,628
$ 7,070
2,355
(3,596)
(873)
$ 4,956
$ 6,370
6,694
(5,502)
(492)
$ 7,070
(1) Table excludes other repossessed assets totaling $0.02 and $0.05 million at December 31, 2017 and 2016,
respectively.
69
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
We periodically review our real estate 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 follows:
2017
2016
(In thousands)
2015
Balance at beginning of year. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additions charged to expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Direct write-downs upon sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 793
326
(996)
$ 1,692
873
(1,772)
$ 2,511
492
(1,311)
Balance at end of year. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 123
$
793
$ 1,692
At December 31, 2017 and 2016, the balance of other real estate includes $1.6 million and $1.9 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 $0.8 million and
$1.0 million at December 31, 2017 and 2016, respectively.
Other real estate and repossessed assets totaling $1.6 million and $5.0 million at December 31, 2017 and 2016,
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:
2017
2016
(In thousands)
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 16,199
55,434
69,604
$ 15,486
54,656
72,090
Accumulated depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
141,237
(102,088)
142,232
(102,057)
Property and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 39,149
$ 40,175
Depreciation expense was $5.3 million, $5.8 million and $6.6 million in 2017, 2016 and 2015, respectively.
NOTE 7 – INTANGIBLE ASSETS
Intangible assets, net of amortization, at December 31 follows:
2017
2016
Gross
Carrying
Amount
Accumulated
Amortization
Gross
Carrying
Amount
Accumulated
Amortization
(In thousands)
Amortized intangible assets - core deposits. . . . . . . . . . . . . . . . . .
$6,118
$4,532
$6,118
$4,186
Intangible amortization expense was $0.3 million in each of 2017, 2016 and 2015, respectively.
A summary of estimated core deposit intangible amortization at December 31, 2017, follows:
2018. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2019. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2020. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2021. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2022. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(In thousands)
$ 346
346
346
346
202
$1,586
70
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTE 8 – DEPOSITS
A summary of interest expense on deposits for the years ended December 31 follows:
Savings and interest bearing checking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Time deposits under $100,000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Time deposits of $100,000 or more . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2017
2016
(In thousands)
2015
$1,530
1,594
3,651
$6,775
$1,115
1,628
2,198
$4,941
$1,056
1,586
1,367
$4,009
Aggregate time deposits in denominations of $250,000 or more amounted to $92.2 million and $174.6 million
at December 31, 2017 and 2016, respectively.
A summary of the maturity of time deposits at December 31, 2017, follows:
2018. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2019. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2020. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2021. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2022. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2023 and thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$446,835
65,810
15,595
17,275
8,761
542
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$554,818
(In thousands)
Reciprocal 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
NOTE 9 – OTHER BORROWINGS
A summary of other borrowings at December 31 follows:
Advances from the FHLB. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal funds purchased . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2017
2016
(In thousands)
$10,146
2,846
37,987
$50,979
$ 3,055
4,350
31,252
$38,657
2017
2016
(In thousands)
$47,841
6,750
9
$54,600
$9,428
—
5
$9,433
Advances from the FHLB are secured by unencumbered qualifying mortgage and home equity loans with a
market value equal to at least 132% to 165%, respectively, of outstanding advances. Advances are also secured by
FHLB stock that we own, which totaled $7.8 million at December 31, 2017. Unused borrowing capacity with the
71
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
FHLB (subject to the FHLB’s credit requirements and policies) was $304.5 million at December 31, 2017. Interest
expense on advances amounted to $0.9 million, $0.8 million and $0.8 million for the years ended December 31, 2017,
2016 and 2015, respectively. No FHLB advances were terminated during 2017, 2016 or 2015.
As a member of the FHLB, we must own FHLB stock equal to the greater of 0.75% of the unpaid principal
balance of residential mortgage loans or 4.5% of our outstanding advances. At December 31, 2017, 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:
2017
2016
Amount
Rate
Amount
(Dollars in thousands)
Rate
Fixed-rate advances
2017. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2019. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2020. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total fixed-rate advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Variable-rate advances - 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$19,910
10,000
7,931
37,841
10,000
2.43%
1.60
3.80
2.50
1.67
$1,192
5,183
—
3,053
9,428
—
7.04%
5.99
7.49
6.61
Total advances. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$47,841
2.33% $9,428
6.61%
A summary of contractually required repayments of FHLB advances at December 31, 2017 follow:
2018. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2019. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2020. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(In thousands)
$30,042
10,143
7,656
$47,841
Borrowings with the FRB at December 31, 2017 and 2016 were zero. Average borrowings with the FRB during
the years ended December 31, 2017, 2016 and 2015 totaled $0.05 million, zero and zero. We had unused borrowing
capacity with the FRB (subject to the FRB’s credit requirements and policies) of $441.2 million at December 31,
2017. Collateral for FRB borrowings are certain commercial loans.
Interest expense on federal funds purchased totaled $0.1 million, zero and zero for the years ended December 31,
2017, 2016 and 2015.
Assets, consisting of FHLB stock and loans, pledged to secure other borrowings and unused borrowing capacity
totaled $1.184 billion at December 31, 2017.
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, 2017 and 2016, 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.
72
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Summary information regarding subordinated debentures as of December 31 follows:
Entity Name
2017 and 2016
Issue
Date
Subordinated
Debentures
Trust
Preferred
Securities
Issued
Common
Stock
Issued
IBC Capital Finance III. . . . . . . . . . . . . . . . . . . . . . . . . . . . . May 2007
IBC Capital Finance IV . . . . . . . . . . . . . . . . . . . . . . . . . . . .
September 2007
Midwest Guaranty Trust I . . . . . . . . . . . . . . . . . . . . . . . . . . . November 2002
(In thousands)
$12,372
15,465
7,732
$35,569
$12,000
15,000
7,500
$34,500
$ 372
465
232
$1,069
Other key terms for the subordinated debentures and trust preferred securities that were outstanding at
December 31, 2017 and 2016 follow:
Entity Name
Maturity
Date
Interest Rate
First Permitted
Redemption Date
IBC Capital Finance III. . . . .
IBC Capital Finance IV . . . .
Midwest Guaranty Trust I . . . November 7, 2032
July 30, 2037
September 15, 2037
3 month LIBOR plus 1.60% July 30, 2012
3 month LIBOR plus 2.85% September 15, 2012
3 month LIBOR plus 3.45% 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, 2017 and 2016.
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.
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 – other borrowings and subordinated
debentures in the Consolidated Statements of Operations.
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:
Financial instruments whose risk is represented by contract amounts
Commitments to extend credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Standby letters of credit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$439,663
4,596
$364,270
3,140
2017
2016
(In thousands)
73
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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 3.75% to 7.50% and mature through 2019.
In the fourth quarter of 2016, we reached a tentative settlement regarding litigation initiated against the Bank
in Wayne County, Michigan Circuit Court. The Court issued a preliminary approval of this settlement in the first
quarter of 2017 and a final approval of this settlement in January 2018. This litigation concerned the Bank’s checking
account transaction sequencing during a period from February 2009 to June 2011. Under the terms of the settlement,
we agreed to pay $2.2 million and we are also responsible for class notification costs and certain other expenses
which are estimated to total approximately $0.1 million. The $2.2 million was paid in January 2018. We recorded a
$2.3 million expense in the fourth quarter of 2016 for this settlement. Although, we deny any liability associated with
this matter and believe we have meritorious defenses to the allegations in the complaint, given the costs and
uncertainty of litigation, we determined that this settlement was in the best interests of the organization.
We are also involved in various other 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 other
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 insignificant. 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). 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.
In connection with the sale of Mepco (see notes #1 and #26), we agreed to contractually indemnify the purchaser
from certain losses it may incur, including as a result of its failure to collect certain receivables it purchased as part
of the business as well as breaches of representations and warranties we made in the sale agreement, subject to
various limitations. We have not accrued any liability related to these indemnification requirements in our
December 31, 2017 Consolidated Statement of Financial Condition because we believe the likelihood of having to
pay any amount as a result of these indemnification obligations is remote. However, if the purchaser is unable to
collect the receivables it purchased from Mepco or otherwise encounters difficulties in operating the business, it is
possible it could make one or more claims against us pursuant to the sale agreement. In that event, we may incur
expenses in defending any such claims and/or amounts paid to such purchaser to resolve such claims. As of
December 31, 2017 these receivables balances had declined to $13.7 million and to date, the purchaser has made no
claims for indemnification.
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, Ginnie Mae and the FHLB).
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. The provision for loss
reimbursement on sold loans was an expense (credit) of $0.17 million, $0.03 million and $(0.06) million for the years
ended December 31, 2017, 2016 and 2015, respectively. The reserve for loss reimbursements on sold mortgage loans
74
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
totaled $0.7 million and $0.6 million at December 31, 2017 and 2016, 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. 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.
NOTE 12 – SHAREHOLDERS’ EQUITY AND INCOME PER COMMON SHARE
In January, 2017, 2016 and 2015, our Board of Directors authorized share repurchase plans to buy back up to
5% of our outstanding common stock through the end of each respective year. In addition, on April 26, 2016 our
Board of Directors authorized a $5.0 million expansion of the 2016 repurchase plan. During 2017, 2016 and 2015
repurchases were made through open market transactions and totaled zero, 1,153,136 and 967,199 shares of common
stock, respectively for an aggregate purchase price of zero, $16.9 million and $13.5 million, respectively.
A reconciliation of basic and diluted net income per common share for the years ended December 31 follows:
2017
2016
(In thousands, except per share amounts)
2015
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$20,475
$22,766
$20,017
Weighted average shares outstanding (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Effect of stock options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock units for deferred compensation plan for non-employee directors . .
Performance share units . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restricted stock units . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
21,327
142
121
60
—
21,378
151
115
48
35
22,716
119
112
—
233
Weighted average shares outstanding for calculation of diluted
earnings per share. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
21,650
21,727
23,180
Net income per common share
Basic (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 0.96
$ 1.06
$ 0.88
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 0.95
$ 1.05
$ 0.86
(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 zero, zero and 0.03 million for 2017, 2016 and 2015,
respectively.
NOTE 13 – INCOME TAX
The composition of income tax expense for the years ended December 31 follows:
Current expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in statutory rate. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Valuation allowance - change in estimate. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 1,927
10,071
5,965
—
$
362
9,756
—
17
$ 200
9,128
—
35
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$17,963
$10,135
$9,363
2017
2016
(In thousands)
2015
75
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The deferred income tax expense of $10.1 million in 2017 can be primarily attributed to the utilization of our
net operating loss (‘‘NOL’’) carryfoward while the deferred income tax expense of $9.8 million and $9.1 million
during 2016 and 2015, respectively can be primarily attributed to the utilization of our NOL carryfoward and decrease
in our AFLL.
On December 22, 2017, President Donald Trump signed into law ‘‘H.R. 1’’, also known as the ‘‘Tax Cuts and
Jobs Act’’, which among other things, reduced the federal corporate income tax rate to 21% effective January 1, 2018.
As a result, we concluded that our deferred tax assets, net had to be remeasured. Our deferred tax assets, net
represents expected corporate tax benefits anticipated to be realized in the future. The reduction in the federal
corporate income tax rate reduces these anticipated future benefits. The remeasurement of our deferred tax assets, net
at December 31, 2017 resulted in a reduction of these net assets and a corresponding increase in income tax expense
of $6.0 million that was recorded in the fourth quarter of 2017.
A reconciliation of income tax expense 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 . . . . . . . . . . . . . . . . . . . . . . . . .
Change in statutory rate. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax-exempt income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Bank owned life insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Share-based compensation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unrecognized tax benefit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-deductible meals, entertainment and memberships . . . . . . . . . . . . . . . . . . . . . .
Net change in valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2017
$13,453
5,965
(777)
(372)
(287)
(123)
64
—
40
$17,963
2016
(In thousands)
$11,515
—
(534)
(477)
(348)
(155)
46
17
71
$10,135
2015
$10,283
—
(434)
(449)
—
(135)
43
35
20
$ 9,363
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:
2017
2016
(In thousands)
Deferred tax assets
Alternative minimum tax credit carry forward . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Allowance for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss carryforwards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchase premiums, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Share based payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Litigation settlement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unrealized loss on trading securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reserve for unfunded lending commitments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other than temporary impairment charge on securities available for sale . . . . . . . . . . .
Non accrual loan interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss reimbursement on sold loans reserve. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unrealized loss on securities available for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vehicle service contract counterparty contingency reserve . . . . . . . . . . . . . . . . . . . . . . .
Valuation allowance on other real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross deferred tax assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Valuation allowance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross deferred tax assets net of valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . .
$ 6,113
4,743
3,752
1,686
699
677
477
283
236
229
210
176
140
125
117
26
123
19,812
—
19,812
$ 4,064
7,104
17,131
3,143
1,460
1,011
805
486
228
375
400
246
196
1,782
500
277
1
39,209
(1,071)
38,138
76
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
2017
2016
(In thousands)
Deferred tax liabilities
Capitalized mortgage loan servicing rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred loan fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unrealized gain on derivative financial instruments . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal Home Loan Bank stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,297
1,327
72
27
4,723
$15,089
4,785
490
—
45
5,320
$32,818
We 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. The ultimate realization of this asset
is primarily based on generating future income. We concluded at both December 31, 2017 and 2016, that the
realization of substantially all of our deferred tax assets continues to be more likely than not.
We had maintained a valuation allowance against our deferred tax assets of approximately $1.1 million at
December 31, 2016. This valuation allowance on our deferred tax assets related to state income taxes at Mepco. In
this instance, we determined that the future realization of these particular deferred tax assets was not more likely than
not. That conclusion was based on the pending sale of Mepco’s payment plan business. After accounting for the May
2017 sale of our payment plan business, all that remained of these deferred tax assets were loss carryforwards that
we wrote off against the related valuation allowance during the second quarter of 2017 as we will no longer be doing
business in those states.
Because of our NOL 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 NOL 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.
At December 31, 2017, we had federal NOL carryforwards of approximately $17.9 million which, if not used
against taxable income, will expire in 2032. In addition to this amount we also had $6.1 million of alternative
minimum tax credit carryforwards with indefinite lives at December 31, 2017.
Changes in unrecognized tax benefits for the years ended December 31 follow:
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance at end of year. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2017
2016
(In thousands)
2015
$ 840
7
(123)
—
$ 724
$ 976
19
(155)
—
$ 840
$1,091
20
(135)
—
$ 976
If recognized, the entire amount of unrecognized tax benefits, net of $0.15 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, 2017, 2016 and 2015. No amounts were accrued for interest and penalties at
December 31, 2017, 2016 or 2015. At December 31, 2017, U.S. Federal tax years 2014 through the present remain
open to examination.
77
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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 0.5 million shares of common stock as of December 31, 2017. 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, 2017. 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 2017, 2016 and 2015 pursuant to our long-term incentive plan, we granted 0.05 million, 0.10 million and
0.07 million shares, respectively of restricted stock and 0.02 million, 0.05 million and 0.03 million performance stock
units (‘‘PSUs’’), respectively to certain officers. The shares of restricted stock issued during 2017 and 2015 cliff vest
after a period of three years and the shares of restricted stock issued during 2016 cliff vest after periods ranging from
one to four years. The PSUs issued during 2017 and 2015 cliff vest after a period of three years and the PSUs issued
during 2016 cliff vest after periods ranging from three to five years. The performance feature of the PSUs is based
on a comparison of our total shareholder return over the vesting period starting on the grant date to the total
shareholder return over that period for a banking index of our peers.
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 to directors during each of the
years ending 2017, 2016 and 2015 and expensed their value during those same periods.
Total compensation expense recognized for grants pursuant to our long-term incentive plan was $1.6 million,
$1.5 million and $1.4 million in 2017, 2016 and 2015, respectively. The corresponding tax benefit relating to this
expense was $0.6 million, $0.5 million and $0.5 million in 2017, 2016 and 2015, respectively. Total expense
recognized for non-employee director share based payments was $0.2 million, $0.1 million and $0.1 million in 2017,
2016 and 2015, respectively. The corresponding tax benefit relating to this expense was $0.06 million, $0.04 million
and $0.03 million in 2017, 2016 and 2015, respectively.
At December 31, 2017, the total expected compensation cost related to non-vested restricted stock and PSUs not
yet recognized was $1.9 million. The weighted-average period over which this amount will be recognized is
2.1 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, 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
211,018
—
(34,963)
—
—
$5.05
4.07
Outstanding at December 31, 2017 . . . . . . . . . . . . . . . . . . . . . . . .
176,055
$5.24
4.07
$3,012
Vested and expected to vest at
December 31, 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
176,055
$5.24
Exercisable at December 31, 2017. . . . . . . . . . . . . . . . . . . . . . . . .
176,055
$5.24
4.07
4.07
$3,012
$3,012
78
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
A summary of outstanding non-vested stock and related transactions follows:
Outstanding at January 1, 2017. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Outstanding at December 31, 2017. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Number
of Shares
296,422
68,473
(63,799)
(10,569)
290,527
Weighted-
Average
Grant Date
Fair Value
$14.52
21.07
14.91
15.66
$15.88
Certain information regarding options exercised during the periods ending December 31 follows:
Intrinsic value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash proceeds received . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax benefit realized . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2017
$623
$142
$218
2016
(In thousands)
$254
$ 85
$ 89
2015
$444
$137
$155
We maintain 401(k) and employee stock ownership plans covering substantially all of our full-time employees.
During 2017, 2016 and 2015, we matched 50% of employee contributions to the 401(k) plan up to a maximum of
6%, 6% and 4% of participating employees’ eligible wages, respectively. 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 2017, 2016
and 2015. Amounts expensed for these retirement plans were $1.6 million, $1.4 million, and $1.2 million in 2017,
2016 and 2015, respectively.
Our employees participate in various performance-based compensation plans. Amounts expensed for all
incentive plans totaled $8.0 million, $6.2 million and $5.7 million, in 2017, 2016 and 2015, respectively.
We also provide certain health care and life insurance programs to substantially all full-time employees.
Amounts expensed for these programs totaled $4.0 million, $3.5 million and $3.6 million in 2017, 2016 and 2015
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total other non-interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2017
$1,968
1,446
1,061
3,693
$8,168
2016
(In thousands)
$1,647
1,496
1,124
4,336
$8,603
2015
$1,827
1,551
1,282
4,188
$8,848
79
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:
Cash flow hedge designation
Pay-fixed interest rate swap agreements . . . . . . . . . . . . . . . . . . . . . . .
Interest rate cap 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2017
Average
Maturity
(years)
(Dollars in thousands)
3.7
3.5
3.6
0.1
0.1
6.2
6.2
3.5
3.5
4.1
2016
Average
Maturity
(years)
(Dollars in thousands)
0.1
0.1
8.6
8.6
4.5
4.5
4.4
Notional
Amount
$ 15,000
45,000
$ 60,000
$ 25,032
56,127
75,990
75,990
3,119
3,119
$239,377
Notional
Amount
$ 26,658
61,954
46,121
46,121
3,119
3,119
$187,092
Fair
Value
$ 245
976
$1,221
$ 530
37
292
(292)
322
(322)
$ 567
Fair
Value
$ 646
630
249
(249)
238
(238)
$1,276
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 included certain pay-fixed interest rate swaps and interest rate cap agreements.
Pay-fixed interest rate swaps convert
the variable-rate cash flows on debt obligations to fixed-rates. Under
interest-rate cap agreements, we will receive cash if interest rates rise above a predetermined level. As a result, we
80
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
effectively have variable-rate debt with an established maximum rate. We pay an upfront premium on interest rate
caps which is recognized in earnings in the same period in which the hedged item affects earnings. Unrecognized
premiums from interest rate caps aggregated to $0.9 million at December 31, 2017.
It is anticipated that $0.10 million, net of tax, of unrealized gains on Cash Flow Hedges at December 31, 2017,
will be reclassified into earnings over the next twelve months. The maximum term of any Cash Flow Hedge at
December 31, 2017 is 3.9 years.
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
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 in the Consolidated Statements of
Operations. 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.
We currently offer 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.
We have 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 with
no hedge designation in the table above relate to this program.
81
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,
2017
Balance
Sheet
Location
Fair
Value
2016
Balance
Sheet
Location
Fair
Value
2017
Balance
Sheet
Location
Fair
Value
2016
Balance
Sheet
Location
Fair
Value
(In thousands)
Derivatives designated
as hedging instruments
Pay-fixed interest rate
swap agreements . . . . . . Other assets
Interest rate cap
agreements . . . . . . . . . . Other assets
Derivatives not designated
as hedging instruments
Rate-lock mortgage
loan commitments . . . . . Other assets
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
$ 245 Other assets
$ — Other liabilities
$ — Other liabilities
$ —
976 Other assets
1,221
— Other liabilities
—
— Other liabilities
—
530 Other assets
646 Other liabilities
— Other liabilities
37 Other assets
630 Other liabilities
— Other liabilities
—
—
—
—
631 Other assets
493 Other liabilities
339 Other liabilities
244
339 Other assets
322 Other assets
— Other assets
244 Other liabilities
238 Other liabilities
— Other liabilities
631 Other liabilities
— Other liabilities
322 Other liabilities
493
—
238
975
$975
Total derivatives. . . . . . .
1,859
$3,080
2,251
$2,251
1,292
$1,292
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 Reclassified from
Accumulated Other
Comprehensive
Loss into Income
(Effective Portion)
2016
2015
2017
Location of
Gain (Loss)
Recognized
in Income (1)
Gain (Loss)
Recognized
in Income (1)
2016
2015
2017
Gain Recognized
in Other
Comprehensive
Income (Loss)
(Effective Portion)
2016
2015
2017
Cash Flow Hedges
Interest rate cap
agreements . . . . . . . .
$108
Pay-fixed interest rate
swap agreements . . . .
Total . . . . . . . . . . . . . .
216
$324
$—
—
$—
$—
—
$—
Interest
expense
$ — $—
(18)
$(18)
—
$—
$—
—
$—
Interest
expense
No hedge designation
(In thousands)
$ — $ — $ —
(12)
—
$ (12) $ — $ —
—
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net gains on
mortgage
loans
Net gains on
mortgage
loans
Interest
income
Interest
income
Interest
expense
Interest
expense
$(116) $ 96
$ 113
(593)
43
561
746
(43)
(746)
84
116
253
(315)
315
122
(84)
(116)
$(709) $ 657
(122)
$ 366
(1) For cash flow hedges, this location and amount refers to the ineffective portion.
82
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 2017 and 2016.
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2017
2016
(In thousands)
$ 415
2,945
(791)
$2,569
$ 190
594
(369)
$ 415
Deposits held by us for directors and executive officers totaled $1.4 million and $1.0 million at December 31,
2017 and 2016, 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, 2017,
follows:
2018. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2019. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2020. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2021. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2022. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2023 and thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,310
974
849
460
112
387
$4,092
(In thousands)
Rental expense on operating leases totaled $1.4 million, $1.2 million and $1.2 million in 2017, 2016 and 2015,
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, 2017, include $809.2 million of loans secured by residential real estate and
$143.2 million of construction and development loans.
83
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, 2017: Lessors of Nonresidential
Real Estate ($263.5 million); Lessors of Residential Real Estate ($99.6 million); Construction ($71.4 million) and
Manufacturing ($62.9 million). A geographic concentration arises because we primarily conduct our lending activities
in the State of Michigan.
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 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, 2017, the Bank had positive undivided profits of $17.4 million. 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 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, 2017 and 2016, 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.
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 capital conservation buffer began to phase in on January 1, 2016 with 1.25% and 0.625% added to the minimum
ratio for adequately capitalized institutions for 2017 and 2016, respectively and 0.625% will be added each
subsequent year until fully phased in during 2019. This capital conservation buffer is not reflected in the table that
follows. To avoid limits on capital distributions and certain discretionary bonus payments we must meet the minimum
ratio for adequately capitalized institutions plus the phased in buffer. 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.
84
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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
2017
Total capital to risk-weighted assets
Consolidated . . . . . . . . . . . . . . . . . . . . . . . .
Independent Bank. . . . . . . . . . . . . . . . . . . .
$312,163
290,188
15.16% $164,782
164,675
14.10
8.00%
8.00
NA
$205,843
NA
10.00%
Tier 1 capital to risk-weighted assets
Consolidated . . . . . . . . . . . . . . . . . . . . . . . .
Independent Bank. . . . . . . . . . . . . . . . . . . .
$288,451
266,476
14.00% $123,586
123,506
12.95
6.00%
6.00
NA
$164,675
NA
8.00%
Common equity tier 1 capital to
risk-weighted assets
Consolidated . . . . . . . . . . . . . . . . . . . . . . . .
Independent Bank. . . . . . . . . . . . . . . . . . . .
Tier 1 capital to average assets
$255,934
266,476
12.43% $ 92,690
92,630
12.95
4.50%
4.50
NA
$133,798
NA
6.50%
Consolidated . . . . . . . . . . . . . . . . . . . . . . . .
Independent Bank. . . . . . . . . . . . . . . . . . . .
$288,451
266,476
10.57% $109,209
109,041
9.78
4.00%
4.00
NA
$136,301
NA
5.00%
2016
Total capital to risk-weighted assets
Consolidated . . . . . . . . . . . . . . . . . . . . . . . .
Independent Bank. . . . . . . . . . . . . . . . . . . .
$286,289
270,855
15.86% $144,413
144,223
15.02
8.00%
8.00
NA
$180,279
NA
10.00%
Tier 1 capital to risk-weighted assets
Consolidated . . . . . . . . . . . . . . . . . . . . . . . .
Independent Bank. . . . . . . . . . . . . . . . . . . .
$265,405
249,971
14.70% $108,309
108,167
13.87
6.00%
6.00
NA
$144,223
NA
8.00%
Common equity tier 1 capital to
risk-weighted assets
Consolidated . . . . . . . . . . . . . . . . . . . . . . . .
Independent Bank. . . . . . . . . . . . . . . . . . . .
Tier 1 capital to average assets
$238,996
249,971
13.24% $ 81,232
81,126
13.87
4.50%
4.50
NA
$117,181
NA
6.50%
Consolidated . . . . . . . . . . . . . . . . . . . . . . . .
Independent Bank. . . . . . . . . . . . . . . . . . . .
$265,405
249,971
10.50% $101,112
101,019
9.90
4.00%
4.00
NA
$126,274
NA
5.00%
NA - Not applicable
85
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The components of our regulatory capital are as follows:
Consolidated
December 31,
Independent Bank
December 31,
2017
2016
2017
2016
(In thousands)
Total shareholders’ equity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$264,933
$248,980
$269,481
$258,814
Add (deduct)
Accumulated other comprehensive loss for regulatory
purposes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Disallowed deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . .
Common equity tier 1 capital. . . . . . . . . . . . . . . . . . . . . . .
Qualifying trust preferred securities . . . . . . . . . . . . . . . . . . . .
Disallowed deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . .
201
(1,269)
(7,931)
255,934
34,500
(1,983)
3,310
(1,159)
(12,135)
238,996
34,500
(8,091)
Tier 1 capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
288,451
265,405
201
(1,269)
(1,937)
266,476
—
—
266,476
3,310
(1,159)
(10,994)
249,971
—
—
249,971
Allowance for loan losses and allowance for unfunded
lending commitments limited to 1.25% of total risk-
weighted assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
23,712
20,884
23,712
20,884
Total risk-based capital . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$312,163
$286,289
$290,188
$270,855
NOTE 21 – FAIR VALUE 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. 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
86
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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 primarily include agency securities, private label mortgage-backed
securities, other asset backed securities, obligations of states and political subdivisions, trust preferred securities,
corporate securities and foreign government securities.
Loans held for sale: The fair value of mortgage loans held for sale is based on agency cash window loan 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 AFLL 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, 2017 and 2016, 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 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, or a
member of our Collateral Evaluation Department (for commercial properties), or a member of our Special
Assets/ORE Group (for residential 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 residential 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. Prior to January 1, 2017, capitalized mortgage loan servicing rights were accounted for using the
amortization method of accounting and were measured at fair value on a non-recurring basis. During the first quarter
of 2017, we adopted the fair value method of accounting for our capitalized mortgage loan servicing rights (see note
#1) and are now measured at fair value on a recurring basis.
87
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Derivatives: The fair value of rate-lock mortgage loan commitments is based on agency cash window loan
pricing for comparable assets and the fair value of 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 and
interest rate cap agreements are derived from proprietary models which utilize current market data. The 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).
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
Un-
observable
Inputs
(Level 3)
(In thousands)
Fair Value
Measure-
ments
$
455
$455
$
— $ —
December 31, 2017:
Measured at Fair Value on a Recurring Basis:
Assets
Trading securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Securities available for sale
U.S. treasury . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
U.S. agency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
U.S. agency residential mortgage-backed . . . . . . . . . . . . . . . . .
U.S. agency commercial mortgage-backed . . . . . . . . . . . . . . . .
Private label mortgage-backed. . . . . . . . . . . . . . . . . . . . . . . . .
Other asset backed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Obligations of states and political subdivisions . . . . . . . . . . . .
Corporate. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Trust preferred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign government . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans held for sale. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capitalized mortgage loan servicing rights. . . . . . . . . . . . . . . . . .
Derivatives (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
898
25,682
137,918
9,760
29,109
93,898
172,945
47,853
2,802
2,060
39,436
15,699
3,080
Liabilities
Derivatives (2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,292
Measured at Fair Value on a Non-recurring basis:
Assets
Impaired loans (3)
Commercial
Income producing - real estate . . . . . . . . . . . . . . . . . . . . . .
Land, land development & construction-real estate. . . . . . . .
Commercial and industrial . . . . . . . . . . . . . . . . . . . . . . . . .
Mortgage
1-4 family . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Resort lending . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other real estate (4)
Mortgage
1-4 family . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Resort lending . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
274
9
1,051
339
207
186
65
898
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
25,682
137,918
9,760
29,109
93,898
172,945
47,853
2,802
2,060
39,436
—
3,080
—
—
—
—
—
—
—
—
—
—
—
15,699
—
1,292
—
—
—
—
—
—
—
—
274
9
1,051
339
207
186
65
(1)
Included in accrued income and other assets.
(2)
Included in accrued expenses and other liabilities.
(3) Only includes impaired loans with specific loss allocations based on collateral value.
(4) Only includes other real estate with subsequent write downs to fair value.
88
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
Un-
observable
Inputs
(Level 3)
(In thousands)
Fair Value
Measure-
ments
$
410
$410
$
— $ —
December 31, 2016:
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 mortgage-backed . . . . . . . . . . . . . . . . . . . . . . .
Other asset backed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Obligations of states and political subdivisions. . . . . . . . . . .
Corporate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Trust preferred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign government . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Derivatives (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Derivatives (2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
28,988
156,289
12,632
34,727
146,709
170,899
56,180
2,579
1,613
35,946
2,251
975
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 . . . . . . . . . . . . . . . . . . . . . . . .
8,163
255
54
1,342
Mortgage
1-4 family . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
361
Other real estate (5)
Commercial
Income producing - real estate (6) . . . . . . . . . . . . . . . . . .
Land, land development & construction-real estate. . . . . .
Mortgage
1-4 family . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Resort lending. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,863
176
98
133
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
28,988
156,289
12,632
34,727
146,709
170,899
56,180
2,579
1,613
35,946
2,251
975
—
—
—
—
—
—
—
—
—
—
—
—
—
8,163
—
—
—
—
2,863
—
—
—
255
54
1,342
361
—
176
98
133
(1)
Included in accrued income and other assets.
(2)
Included in accrued expenses and other liabilities.
(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.
(6) Level 2 valuation is based on a signed purchase agreement.
There were no transfers between Level 1 and Level 2 during the years ended December 31, 2017 and 2016.
89
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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:
Net Gains (Losses)
on Assets
Securities
Mortgage
Loans
Mortgage
Loan
Servicing, net
(In thousands)
Total
Change
in Fair
Values
Included
in Current
Period
Earnings
2017
Trading securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capitalized mortgage loan servicing rights . . . . . . . . . . . . . . . .
$ 45
—
—
$ —
407
—
$ —
—
(2,744)
$
45
407
(2,744)
2016
Trading securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$262
—
$ —
(277)
$ —
—
2015
Trading securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ (55)
—
$ —
90
$ —
—
$
$
262
(277)
(55)
90
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 received.
The following represent impairment charges recognized during the years ended December 31, 2017, 2016 and
2015 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 $8.2 million, which is net of a valuation allowance of $2.3 million, at December 31,
2016. A recovery of $1.0 million and $0.5 million was included in our results of operations for the years
ending December 31, 2016 and 2015, respectively.
Loans which are measured for impairment using the fair value of collateral for collateral dependent loans
had a carrying amount of $2.6 million, with a valuation allowance of $0.7 million at December 31, 2017,
and had a carrying amount of $4.0 million, with a valuation allowance of $2.0 million at December 31,
2016. An additional provision for loan losses relating to impaired loans of $0.5 million, $0.2 million and
$1.1 million was included in our results of operations for the years ending December 31, 2017, 2016 and
2015, respectively.
Other real estate, which is measured using the fair value of the property, had a carrying amount of
$0.3 million which is net of a valuation allowance of $0.1 million at December 31, 2017, and a carrying
amount of $3.2 million, which is net of a valuation allowance of $0.8 million, at December 31, 2016. An
additional charge relating to other real estate measured at fair value of $0.1 million, $0.6 million and
$0.3 million was included in our results of operations during the years ended December 31, 2017, 2016 and
2015, respectively.
90
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
A reconciliation for all assets and (liabilities) measured at fair value on a recurring basis using significant
unobservable inputs (Level 3) for the years ended December 31 follows:
Beginning balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in accounting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Beginning balance, as adjusted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total losses realized and unrealized:
Included in results of operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Included in other comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchases, issuances, settlements, maturities and calls . . . . . . . . . . . . . . . . . . . . .
Transfers in and/or out of Level 3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capitalized Mortgage
Loan Servicing Rights
2017
2016
2015
(In thousands)
$ —
14,213
14,213
(2,744)
—
4,230
—
$—
—
—
—
—
—
—
$—
—
—
—
—
—
—
Ending balance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$15,699
$—
$—
Amount of total losses for the period included in earnings attributable to the
change in unrealized gains (losses) relating to assets and liabilities still held at
December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ (2,744)
$—
$—
As discussed above we changed the accounting for capitalized mortgage loan servicing rights during the first
quarter of 2017 (see note #1) and are now measuring valuation on a recurring basis. The fair value of our capitalized
mortgage loan servicing rights has been determined based on a valuation model used by an independent third party
as discussed above. The significant unobservable inputs used in the fair value measurement of the capitalized
mortgage loan servicing rights are discount rate, cost to service, ancillary income and float rate. Significant changes
in all four of these assumptions in isolation would result in significant changes to the value of our capitalized
mortgage loan servicing rights. Quantitative information about our Level 3 fair value measurements measured on a
recurring basis follows:
Asset
Fair
Value
(In thousands)
Valuation
Technique
Unobservable
Inputs
Range
Weighted
Average
Capitalized mortgage loan
servicing rights . . . . . . . . . . . .
$15,699
Present value of
net servicing
revenue
Discount rate
Cost to service
Ancillary income
Float rate
9.88% to 11.00%
$66 to $216
20 to 36
2.24% to 2.24%
10.11%
$81
23
2.24%
91
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
Range
Weighted
Average
2017
Impaired loans
Commercial . . . . . . . . . . .
$1,334
Sales comparison
approach
Mortgage . . . . . . . . . . . . .
546
Sales comparison
approach
Other real estate-Mortgage . . .
251
Sales comparison
approach
(32.5)% to 25.0%
(4.5)%
(21.1) to 34.1
(2.7)
(33.0) to 44.5
(1.0)
Adjustment for
differences
between
comparable sales
Adjustment for
differences
between
comparable sales
Adjustment for
differences
between
comparable sales
2016
Capitalized mortgage loan
servicing rights . . . . . . . . .
$ 8,163
Present value of
net servicing
revenue
Discount rate
Cost to service
Ancillary income
Float rate
10.00% to
11.00%
$66 to $168
20 to 40
1.97% to 1.97%
10.07%
$ 83
24
1.97 %
Impaired loans
Commercial (1). . . . . . . . .
1,446
Sales comparison
approach
Mortgage . . . . . . . . . . . . .
361
Sales comparison
approach
Other real estate
Commercial . . . . . . . . . . .
176
Sales comparison
approach
Mortgage and installment . .
231
Sales comparison
approach
(25.0)% to 17.0%
(1.5) %
(23.2) to 19.4
(4.7)
(35.0) to 0.0
(22.5)
(26.8) to 2.8
(5.1)
Adjustment for
differences
between
comparable sales
Adjustment for
differences
between
comparable sales
Adjustment for
differences
between
comparable sales
Adjustment for
differences
between
comparable sales
(1)
In addition to the valuation techniques and unobservable inputs discussed above, at December 31, 2016, we had
an impaired collateral dependent commercial relationship that totaled $0.2 million that was primarily secured by
collateral other than real estate. Collateral securing this relationship primarily included machinery and
equipment and inventory at December 31, 2016. Valuation techniques at December 31, 2016, 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.
92
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
Contractual
Principal
Difference
(In thousands)
Loans held for sale
2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$39,436
35,946
27,866
$844
437
714
$38,592
35,509
27,152
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
may not be a precise estimate. 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. Fair
value methodologies discussed below do not necessarily represent an exit price in the determination of the fair value
of these financial instruments.
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 and U.S. treasury securities available for sale are classified as Level 1 while all other
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 and do not
necessarily represent an exit price. Loans are classified as Level 3. 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. Payment
plan receivables held for sale are also classified as Level 2 based on a signed APA as described in note #1.
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 is based on agency
cash window loan pricing for comparable assets, the fair value of mandatory commitments to sell mortgage loans is
based on mortgage backed security pricing for comparable assets, the fair value of interest rate swap and interest rate
cap agreements is derived from proprietary models which utilize current market data 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.
93
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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 time deposits, 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.
Subordinated debentures: Subordinated debentures have generally been valued based on a quoted market price
of similar instruments resulting in a Level 2 classification.
94
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The estimated recorded book balances and fair values at December 31 follow:
Recorded
Book
Balance
Fair Value
Fair Value Using
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
(In thousands)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Un-
observable
Inputs
(Level 3)
2017
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 Reserve Bank
Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net loans and loans held for sale . . . . . . . . . . . . . . .
Accrued interest receivable . . . . . . . . . . . . . . . . . . .
Derivative financial instruments . . . . . . . . . . . . . . . .
$
36,994 $
17,744
2,739
455
522,925
36,994
17,744
2,740
455
522,925
15,543
2,035,666
8,609
3,080
NA
1,962,937
8,609
3,080
36,994
17,744
—
455
898
NA
—
1
—
$
— $
—
2,740
—
522,027
—
—
—
—
—
NA
39,436
2,192
3,080
NA
1,923,501
6,416
—
Liabilities
Deposits with no stated maturity (1). . . . . . . . . . . . . $1,845,716 $1,845,716
551,489
Deposits with stated maturity (1) . . . . . . . . . . . . . . .
54,918
Other borrowings . . . . . . . . . . . . . . . . . . . . . . . . . .
29,946
Subordinated debentures . . . . . . . . . . . . . . . . . . . . .
892
Accrued interest payable . . . . . . . . . . . . . . . . . . . . .
1,292
Derivative financial instruments . . . . . . . . . . . . . . . .
554,818
54,600
35,569
892
1,292
$1,845,716
—
—
—
48
—
— $
$
551,489
54,918
29,946
844
1,292
2016
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 Reserve Bank
Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net loans and loans held for sale (2) . . . . . . . . . . . .
Accrued interest receivable . . . . . . . . . . . . . . . . . . .
Derivative financial instruments . . . . . . . . . . . . . . . .
$
35,238 $
47,956
5,591
410
610,616
35,238
47,956
5,611
410
610,616
15,543
1,655,335
7,316
2,251
NA
1,629,587
7,316
2,251
35,238
47,956
—
410
—
NA
—
5
—
Liabilities
$
— $
—
5,611
—
610,616
NA
67,321
2,364
2,251
NA
1,562,266
4,947
—
—
—
—
—
—
—
—
—
—
—
—
Deposits with no stated maturity (1). . . . . . . . . . . . . $1,740,601 $1,740,601
483,469
Deposits with stated maturity (1) . . . . . . . . . . . . . . .
10,371
Other borrowings . . . . . . . . . . . . . . . . . . . . . . . . . .
25,017
Subordinated debentures . . . . . . . . . . . . . . . . . . . . .
932
Accrued interest payable . . . . . . . . . . . . . . . . . . . . .
975
Derivative financial instruments . . . . . . . . . . . . . . . .
485,118
9,433
35,569
932
975
$1,740,601
—
—
—
21
—
— $
$
483,469
10,371
25,017
911
975
—
—
—
—
—
—
(1) Deposits with no stated maturity include reciprocal deposits with a recorded book balance of $13.0 million and
$7.4 million at December 31, 2017 and 2016, respectively. Deposits with a stated maturity include reciprocal
deposits with a recorded book balance of $38.0 million and $31.3 million at December 31, 2017 and 2016,
respectively.
(2) Net loans and loans held for sale at December 31, 2016 include $31.4 million of payment plan receivables and
commercial loans held for sale.
95
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 – 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
Gains
(Losses) on
Securities
Available
for Sale
Dispropor-
tionate
Tax Effects
from
Securities
Available
for Sale
Dispropor-
tionate
Tax Effects
from
Cash Flow
Hedges
Unrealized
Gains on
Cash Flow
Hedges
Total
2017
Balances at beginning of period . . . . . . . . . . . . . . . . . . . . . .
Cumulative effect of change in accounting. . . . . . . . . . . .
$(3,310)
300
$(5,798)
—
$ —
—
$ — $(9,108)
300
—
Balances at beginning of period, as adjusted . . . . . . . . . . . .
Other comprehensive income before reclassifications . . .
Amounts reclassified from AOCL . . . . . . . . . . . . . . . . . . .
Net current period other comprehensive income . . . . .
Disproportionate tax effects due to change in tax rate. . .
Reclassification of certain deferred tax effects (1) . . . . . .
(3,010)
2,763
(140)
2,623
(83)
—
(5,798)
—
—
—
83
(83)
—
210
12
222
47
—
—
—
—
—
(47)
47
(8,808)
2,973
(128)
2,845
—
(36)
Balances at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ (470)
$(5,798)
$269
$ — $(5,999)
2016
Balances at beginning of period . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive loss before reclassifications . . . . . .
Amounts reclassified from AOCL . . . . . . . . . . . . . . . . . . .
$ (238)
(2,876)
(196)
$(5,798)
—
—
Net current period other comprehensive loss . . . . . . . .
(3,072)
—
$ —
—
—
—
$ — $(6,036)
(2,876)
(196)
—
—
—
(3,072)
Balances at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . .
$(3,310)
$(5,798)
$ —
$ — $(9,108)
2015
Balances at beginning of period . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive loss before reclassifications . . . . . .
Amounts reclassified from AOCL . . . . . . . . . . . . . . . . . . .
$
Net current period other comprehensive loss . . . . . . . .
162
(351)
(49)
(400)
$(5,798)
—
—
—
$ —
—
—
—
$ — $(5,636)
(351)
(49)
—
—
—
(400)
Balances at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ (238)
$(5,798)
$ —
$ — $(6,036)
(1) Amounts reclassified to accumulated deficit due to early adoption of ASU 2018-02. See note #1.
The disproportionate tax effects from securities available for sale arose primarily 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
96
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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. Release of material disproportionate tax effects from other comprehensive income to earnings is done by
the portfolio method whereby the effects will remain in AOCL as long as we carry a more than insubstantial portfolio
of securities available for sale.
A summary of reclassifications out of each component of AOCL for the years ended December 31 follows:
AOCL Component
2017
Unrealized gains (losses) on securities
available for sale
Unrealized gains on cash flow hedges
2016
Unrealized gains (losses) on securities
available for sale
2015
Unrealized gains (losses) on securities
available for sale
Reclassified
From
AOCL
(In thousands)
Affected Line Item in
Consolidated Statements of Operations
$215
—
215
75
$140
$ 18
6
$ 12
$128
$301
—
301
105
$196
$ 75
—
75
26
Net gains on securities
Net impairment loss recognized in earnings
Total reclassifications before tax
Income tax expense
Reclassifications, net of tax
Interest expense
Income tax expense
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
Reclassifications, net of tax
Net gains on securities
Net impairment loss recognized in earnings
Total reclassifications before tax
Income tax expense
$ 49
Reclassifications, net of tax
97
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTE 24 – INDEPENDENT BANK CORPORATION (PARENT COMPANY ONLY) FINANCIAL
INFORMATION
Presented below are condensed financial statements for our parent company.
CONDENSED STATEMENTS OF FINANCIAL CONDITION
ASSETS
Cash and due from banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest bearing deposits - time . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment in subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued income and other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
LIABILITIES AND SHAREHOLDERS’ EQUITY
Subordinated debentures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued expenses and other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Shareholders’ equity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Liabilities and Shareholders’ Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31,
2017
2016
(In thousands)
$ 16,454
5,000
271,315
8,375
$301,144
$ 35,569
500
265,075
$301,144
$ 9,515
5,000
259,883
10,489
$284,887
$ 35,569
379
248,939
$284,887
CONDENSED STATEMENTS OF OPERATIONS
2017
Year Ended December 31,
2016
(In thousands)
2015
OPERATING INCOME
Dividends from subsidiary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Operating Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$16,000
29
41
16,070
$ 5,000
27
153
5,180
$ —
72
31
103
OPERATING EXPENSES
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Administrative and other expenses . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Operating Expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income (Loss) Before Income Tax and Equity in Undistributed
Net Income of Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax expense (benefit) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income (Loss) Before Equity in Undistributed Net Income of
Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity in undistributed net income of subsidiaries . . . . . . . . . . . . . . .
1,347
714
2,061
14,009
1,587
12,422
8,053
1,167
554
1,721
3,459
(615)
4,074
18,692
1,021
560
1,581
(1,478)
(542)
(936)
20,953
Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$20,475
$22,766
$20,017
98
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
CONDENSED STATEMENTS OF CASH FLOWS
2017
Year Ended December 31,
2016
(In thousands)
2015
Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 20,475
$ 22,766
$ 20,017
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH
FROM (USED) IN OPERATING ACTIVITIES
Deferred income tax expense (benefit) . . . . . . . . . . . . . . . . . . . . . . . .
Share based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(Increase) decrease in accrued income and other assets . . . . . . . . . . .
Increase (decrease) in accrued expenses and other liabilities. . . . . . .
Equity in undistributed net income of subsidiaries . . . . . . . . . . . . . . .
Total Adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net Cash From (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 USED IN FINANCING ACTIVITIES
Dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from issuance of common stock. . . . . . . . . . . . . . . . . . . . . .
Share based compensation withholding obligation . . . . . . . . . . . . . . .
Repurchase of common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net Cash Used in Financing Activities . . . . . . . . . . . . . . . . . . . . . .
Net Increase (Decrease) in Cash and Cash Equivalents . . . . . . . . .
Cash and Cash Equivalents at Beginning of Year. . . . . . . . . . . . . . . . . .
2,146
45
(32)
121
(8,053)
(5,773)
14,702
(10,000)
10,000
—
—
(8,960)
1,776
(579)
—
(7,763)
6,939
9,515
(615)
29
246
1
(18,692)
(19,031)
3,735
(7,500)
7,500
18,000
18,000
(7,274)
1,735
(627)
(16,854)
(23,020)
(1,285)
10,800
(542)
21
5
(6)
(20,953)
(21,475)
(1,458)
(5,000)
12,500
18,500
26,000
(5,896)
1,569
(1,091)
(13,498)
(18,916)
5,626
5,174
Cash and Cash Equivalents at End of Year. . . . . . . . . . . . . . . . .
$ 16,454
$ 9,515
$ 10,800
NOTE 25 – 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.
NOTE 26 – MEPCO SALE
On December 30, 2016, Mepco, entered into an APA with Seabury Asset Management LLC (‘‘Seabury’’).
Pursuant to the terms of the APA, we sold our payment plan processing business, payment plan receivables, and
certain other assets to Seabury, who also assumed certain liabilities of Mepco. These assets and liabilities were
categorized as ‘‘held for sale’’ in the December 31, 2016 Consolidated Statement of Financial Condition. We also
recorded a $0.32 million loss related to the sale of these assets in the fourth quarter of 2016.
99
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
This transaction closed on May 18, 2017, with an effective date of May 1, 2017. As a result of the closing,
Mepco sold $33.1 million of net payment plan receivables, $0.5 million of commercial loans, $0.2 million of
furniture and equipment and $1.6 million of other assets to Seabury, who also assumed $2.0 million of specified
liabilities. We received cash totaling $33.4 million and recorded no gain or loss in 2017 as the assets were sold and
the liabilities were assumed at book value.
Assets sold and liabilities assumed were as follows:
May 1,
2017
December 31,
2016
(In thousands)
Assets sold
Payment plan receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$33,128
525
1,765
Total assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$35,418
$30,582
794
1,984
$33,360
Liabilities assumed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 1,972
$
718
NOTE 27 – PENDING ACQUISITION
On December 4, 2017, we entered into an Agreement and Plan of Merger with TCSB Bancorp, Inc. (‘‘TCSB’’)
(the ‘‘Merger Agreement’’) providing for a business combination of IBCP and TCSB. The Merger Agreement
provides that, upon the terms and subject to the conditions set forth in the Merger Agreement, TCSB will be merged
with and into IBCP, with IBCP as the surviving corporation (the ‘‘Merger’’). In addition, IBCP intends to consolidate
Traverse City State Bank, TCSB’s wholly-owned subsidiary bank, with and into the Bank (with the Bank as the
surviving institution).
Subject to the terms and conditions of the Merger Agreement, we will pay aggregate Merger consideration of
approximately $63.2 million in IBCP common stock or stock options for all of the shares of TCSB common stock
and TCSB stock options issued and outstanding immediately before the effective time of the Merger. The Merger
consideration is subject to adjustment in certain limited circumstances, as set forth in the Merger Agreement.
Completion of the Merger is subject to certain closing conditions. These include, among others, (i) in the case
of both parties, receipt of the requisite approval of TCSB’s shareholders, receipt of required regulatory approvals, the
absence of any law or order prohibiting completion of the Merger and the absence of a material adverse effect (as
defined in the Merger Agreement), and (ii) in the case of IBCP, the consolidated shareholders’ equity of TCSB must
be at least $33 million (subject to adjustment as provided in the Merger Agreement) as of the final statement date (as
defined in the Merger Agreement). The Merger Agreement provides certain termination rights for both IBCP and
TCSB and further provides that, upon termination of the Merger Agreement under certain circumstances, TCSB will
be obligated to pay IBCP a termination fee of approximately $2.5 million.
The proposed transaction has been approved by both the Federal Reserve Bank of Chicago and the Michigan
Department of Insurance and Financial Services. A meeting of the TCSB shareholders has been scheduled for
March 14, 2018 to consider and vote upon a proposal to approve the merger agreement between IBCP and TSCB.
Assuming requisite TCSB shareholder approval and satisfaction of other closing conditions, the merger of IBCP and
TCSB is currently expected to be effective on April 1, 2018.
Our 2017 non-interest expenses include $0.3 million of costs incurred through December 31, 2017 related to the
loans of
Merger. As of December 31, 2017, TCSB Bancorp, Inc. had total assets of $338.5 million,
$291.5 million, total deposits of $280.5 million, and total shareholders’ equity of $34.5 million.
total
100
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)
2017
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . .
Income before income tax. . . . . . . . . . . . . . . . . . . . . . . . .
Net income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$23,379
21,466
(359)
8,595
5,974
$23,533
21,492
583
8,594
5,931
$25,371
22,912
582
10,018
6,859
$26,026
23,316
393
11,231
1,711
Net income per common share
Basic. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
0.28
0.28
0.28
0.27
0.32
0.32
0.08
0.08
2016
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . .
Income before income tax. . . . . . . . . . . . . . . . . . . . . . . . .
Net income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$21,354
19,763
(530)
6,057
4,100
$21,267
19,630
(734)
9,049
6,438
$21,745
19,998
(175)
9,352
6,373
$22,157
20,250
130
8,443
5,855
Net income per common share
Basic. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
0.19
0.19
0.30
0.30
0.30
0.30
0.28
0.27
During the fourth quarter of 2017, we recognized a remeasurement of our net deferred tax assets recording an
increase in income tax expense of $6.0 million (see note #13). During the fourth quarter of 2016, we recognized a
recovery of impairment on our capitalized mortgage loan servicing rights of $2.4 million (see note #4) and recorded
a litigation settlement expense of $2.3 million (see note #11).
QUARTERLY SUMMARY (UNAUDITED)
. . . . . . . . . . . . .
First quarter
Second quarter . . . . . . . . . . .
Third quarter . . . . . . . . . . . . .
Fourth quarter . . . . . . . . . . . .
High
$22.40
23.65
22.90
23.60
Reported Sales Prices of Common Shares
2016
2017
Low
Low
Close
High
$19.25
19.75
18.50
20.90
$20.70
21.75
22.65
22.35
$16.15
15.32
17.00
22.25
$13.89
13.42
14.32
16.33
Cash Dividends
Declared
Close
$14.55
14.51
16.83
21.70
2017
$0.10
0.10
0.10
0.12
2016
$0.08
0.08
0.08
0.10
We have approximately 1,400 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).
101
INDEPENDENT BANK CORPORATION
SENIOR OFFICERS
BOARD OF DIRECTORS*
William B. Kessel
Michael M. Magee, Jr., Chairman
Robert N. Shuster
James J. Twarozynski
William J. Boer
Joan A. Budden
Michael J. Cok
Stephen L. Gulis, Jr.
Terry L. Haske
Christina L. Keller
William B. Kessel
James E. McCarty
Matthew J. Missad
Charles C. Van Loan
INDEPENDENT BANK
SENIOR OFFICERS
William B. Kessel
Cheryl L. McKellar
Robert N. Shuster
Dean M. Morse
Larry R. Daniel
Patrick J. Ervin
Steven M. Potter
Tricia L. Raquepaw
Stefanie M. Kimball
Edward W. Ryan
Dennis J. Mack
David C. Reglin
Raymond P. Stecko
Michael J. Stodolak
Cheryl A. Bartholic
James J. Twarozynski
Martha A. Blandford
Joane E. VanLuven
Denise E. Wheaton
Mark L. Collins
Peter R. Graves
Beth J. Jungel
Keith J. Lightbody
*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
Broadridge Corporate Issuer Solutions, Inc., P.O. Box 1342, Brentwood,
New York 11717, shareholder.broadridge.com, (telephone 866.741.7930),
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
Our Dividend Reinvestment & Direct Stock Purchase and Sale Plan is
sponsored and administered by Broadridge Corporate Issuer Solutions, Inc.,
the transfer agent for Independent Bank Corporation. The plan materials
are available at Stockplans.broadridge.com.
FORM 10-K
Shareholders may obtain, without charge, a copy of Form 10-K,
the 2017 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.