2018 ANNUAL
REPORT
Serving CUSTOMERS. Investing in COMMUNITIES. Inspiring LEADERS.
LETTER FROM
THE PRESIDENT & CEO
Dear Shareholders:
As we enter the Company’s 155th year of business, it is my honor
and pleasure to provide you with an update on Independent Bank
Corporation. We continue to be focused on building shareholder
value and positioning the Company to be successful in view
of ever-changing market conditions. This includes maintaining
disciplined lending standards, a diversified earning asset
mix, ample liquidity, continuous emphasis on growing our
core deposit base, and maintaining strong capital levels.
STRONG FINANCIAL RESULTS FOR 2018
In 2018, we generated excellent growth in our earnings and earnings per share. For the year ended December
31, 2018, the Company reported net income of $39.8 million, or $1.68 per diluted share compared to net income
of $20.5 million, or $0.95 per diluted share, in 2017. This represents increases of $19.4 million, or 95%, and 73
cents, or 77%, in net income and diluted earnings per share, respectively. For all of 2018, our pre-tax pre-provision
earnings increased by $11.0 million or 27.6% to $50.6 million, from $39.6 million in 2017. Over this same period, our
tangible book value per share increased by 4.5%, to $12.90 per share from $12.34 per share at the end of 2017.
As reflected in our balance sheet, our fundamentals continue to be solid. The increase in our earnings was
fueled by strong loan growth and improved operating leverage. Loans, excluding loans held for sale, totaled
$2.58 billion at December 31, 2018, an increase of 28% from $2.02 billion at December 31, 2017. This increase
includes $294.5 million of portfolio loans acquired in the Traverse City State Bank merger (the “Merger”). For the
year, our commercial loan portfolio increased by 34%, our consumer installment loan portfolio by 25% and our
mortgage loan portfolio by 23%. Excluding the Merger, total portfolio loans increased by $269.2 million, or 13.3%.
On the funding side, deposits totaled $2.91 billion at December 31, 2018, compared to $2.40 billion at
December 31, 2017. The $512.9 million increase in total deposits during 2018 reflects growth in all categories,
due primarily to the Merger, as well as increases in reciprocal deposits and brokered deposits. When excluding
non-brokered deposits acquired in the Merger and brokered deposits, total deposits increased by $130.0
million, or 5.8%, since December 31, 2017. At year-end 2018, our loans to deposits ratio was a healthy 89%,
up from 84% at the prior year end, but still with capacity for additional growth. We continue to position our
balance sheet to be slightly asset sensitive, in an effort to generally benefit from rising interest rates.
On the credit quality front, our loan portfolio continues to perform well with past due loans continuing near
historic lows. The Company realized loan net recoveries for the second consecutive year. Non-performing loans
at December 31, 2018, increased slightly to $9.0 million from $8.2 million at the prior year end. Other real estate
and repossessed assets totaled just $1.3 million at December 31, 2018, compared to $1.6 million at December
2
31, 2017. The ratio of our non-performing assets to total assets declined to 31 basis points at year-end 2018,
compared to 35 basis points at year-end 2017. We recorded loan net recoveries of $0.8 million (0.03% of
average loans) in 2018, as compared to loan net recoveries of $1.2 million (0.06% of average loans) in 2017.
Our capital levels continue to be strong, which supports our growth initiatives and provides us with flexibility to
address changes in market and business conditions. Common shareholders’ equity increased to $339.0 million
at December 31, 2018, from $264.9 million at December 31, 2017, due primarily to shares issued in the Merger
and our net income that was partially offset by share repurchases and dividends. Our ratio of tangible common
equity to tangible assets was 9.17% as of the end of 2018, compared to 9.45% at the end of 2017. In 2018, we
increased our total annual cash dividends by 43%, from $0.42 per share to $0.60 cents per share. In January
2019, your Board of Directors increased the quarterly cash dividend by 20%, from $0.15 per share to $0.18 per
share. Also in 2018, we repurchased 587,969 shares of our common stock at average cost of $21.57 per share.
SUCCESSFUL INTEGRATION OF TRAVERSE CITY STATE BANK
During 2018, we closed on the acquisition of TCSB Bancorp, Inc. and its subsidiary Traverse City State
Bank. As I shared last year, 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. I am very pleased
with our integration of the TCSB team and customer base into IBC. In addition to successfully retaining the
key leadership through this process, I am also pleased with recent additions to the team to strengthen our
presence in the Northwestern Michigan market and further position us to gain additional market share in this
growing region. As part of the Merger, in April 2018, we added Terance Beia to the IBC Board of Directors.
Terry is a well-respected leader in the Traverse City market and an experienced bank board member. He has
been a welcome addition to our Board.
EVER-CHANGING MARKET CONDITIONS
This time last year, the US economy, as measured by GDP, was growing at a 2.3% annual rate, inflation was
low, the unemployment rate was low, consumer confidence was high, and we were digesting the impact of
a significant U.S. corporate income tax rate cut. The overnight target Federal Funds rate was 1.5% and the
futures market was forecasting three additional rate hikes in 2018. During 2018, the Federal Reserve did
in fact move with not just three, but rather four 0.25% rate hikes. At the present time, we are nearing the
tenth anniversary of this economic expansion. GDP grew at 2.9% during 2018 and the unemployment rate
continues to be low, both nationally and in Michigan. Businesses have benefited from a lower corporate
income tax rate, Independent Bank Corporation included. Today we have an overnight target Federal Funds
rate of 2.50%. However, the futures market indicates very little probability of any rate hikes in 2019. At the
same time, the yield curve is relatively flat and in recent months, portions of the yield curve have inverted.
As we speak with our customer base, their optimism about the future continues, albeit somewhat tempered.
Many of the economic indicators are positive; however, uncertainty is high over the impact of a shortage of
workers, trade tariffs, a global slowdown, and government gridlock.
On the regulatory front, we continue to invest additional resources to meet the ever-changing requirements
and expectations of the banking industry. This includes investments in technology as well as people. While the
number of new regulations has slowed, and the tone at the top of the regulatory agencies has been positive
and sensitive to the concerns of community banks, the regulatory operating environment continues to require
an extraordinarily high level of attention. While not a new regulation, but rather a new accounting standard, the
impact of the Current Expected Credit Loss (CECL) accounting standard is anticipated to have a significant
impact on the financial services industry. Our team has been diligently preparing for the implementation of this
new accounting standard, which will materially change how we calculate our allowance for loan losses.
3
As banks work to improve earnings, grow market share and compete in a business that is moving more
and more digital, we expect to continue to see consolidation within our industry. Most recently, several
larger banks have partnered in mergers of equals, two of which are in our markets. As the marketplace
digests these changes, there continues to be a place for larger community banks, like Independent Bank,
with scale, but yet knowledgeable about the local markets and able to serve individuals and businesses in
the community with personalized service.
INVESTING IN OUR COMMUNITIES
Consistent with our mission, we continue to invest in our communities and focus on the importance of
providing exceptional customer service. We are very pleased that our commitment to customer service has
been recognized. In 2018, we were named one of the Best-In-State Banks by Forbes magazine and as the best
bank headquartered in Michigan.
In October 2018, we held our third 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 for a variety of organizations and non-profits, located in our markets. The volunteer
activities ranged from assisting in new home construction for Habitat for Humanity, bike trail or highway clean-
up, reading to elementary students, or serving meals to those in need. Our teams throughout Michigan and Ohio
continue to make a positive difference in their communities. Assisting the homeless, the hungry, and providing
financial literacy in our markets has been and will continue to be a focus for our Company. This past year, our
900 plus associates volunteered in excess of 20,000 hours to our local communities.
THE PATH FORWARD
As we look to 2019 and beyond, the key to our success is our ability to continue to execute on our operating
plan. Having reached our targeted performance metrics in 2018, our new performance targets are a 1.30%
or better return on average assets and a 13.0% or better return on average equity. Our operating plan has
four primary objectives.
Growth - The first objective of our operating plan is organic growth. We will work to improve net interest
income through balanced loan growth, disciplined risk-adjusted loan pricing, and the active management of
our funding costs. Our plans include adding new customers through outbound calling efforts. We will use
innovative and targeted customer acquisition, retention and cross-sales strategies, leveraging data analytics,
inside sales staff, and intra-company referrals with strategic business unit partners. Finally, we will target new
customers and grow revenue through the addition of talented sales professionals in our existing markets. In
addition to these organic growth strategies, we may supplement our organic growth through selective and
opportunistic bank and branch acquisitions with disciplined pricing.
Process Improvement and Cost Controls - Our second objective is continuing to generate operating
efficiencies through controlling costs while growing revenue. For the past several years, we have improved
our operating efficiency. We have identified a number of areas to focus on for the next 12 to 24 months to
continue this positive trend. These include a review of our core processing, debit card processing, and digital
channel partners. We believe there is opportunity for both reducing our costs as well as further improving the
service offering for our customers. We will continue our on-going branch optimization efforts that include:
assessing existing locations; exploring new locations; reviewing service hours, staffing and workflow; and
leveraging technology. Our plans also include the continued modernization of our branch delivery technology
and systems as well as the expansion of our digital branch (call center) services. Finally, all business lines and
departments are focused on streamlining and automating operating processes and workflows.
4
Risk Management - Our third objective is a strong on-going enterprise-wide risk management framework for
credit risk, market risk (economic, capital, interest rate and liquidity), operating risk (including cyber), and legal
and regulatory risk. Included within this objective is being a good steward 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.
Talent Management – Our fourth objective is to continue to attract, retain and develop our team.
We recognize the path to our organization’s success is through the success of each and every one of our team
members. Accordingly, we encourage and support the professional development of our colleagues through
our leadership programs, mentoring and other initiatives. We are passionate about our desire to ensure
that our team members are empowered and supported in a way that will best position them to serve our
customers. Finally, we believe that if we are committed to the well-being of our team members, and recognize
and reward their contributions, they will promote our success.
CLOSING
In closing, I would like to acknowledge and thank James McCarty for his service to the IBC Board. In 2018,
Jim retired from the IBC Board after 17 years of service. While on the IBC Board, Jim also served as Chairman
of the Compensation Committee for 12 years. In addition, Jim served the Company as a Director on the
Independent Bank Board for a period of 25 years. Jim owned a family business and continues to be very
active in numerous community leadership roles. His contributions were many.
I encourage you to attend the 2019 Annual Meeting of Shareholders of Independent Bank Corporation at
3:00 p.m. Eastern Time, on Tuesday, April 23, 2019. This meeting will be held at our corporate headquarters,
4200 East Beltline Avenue, Grand Rapids, Michigan.
I would like to thank you, our shareholders, for investing in IBC, 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
2018
2017
CHANGE
AMOUNT
CHANGE
PERCENT
$ 130,773
$ 98,309
$ 32,464
33.02 %
17,491
9,1 23
8,368
Net interest income
113,282
89,186
24,096
Provision for loan losses
1,503
1,1 9 9
Net gains on securities
138
260
304
(122)
Other non-interest income
44,677
42,273
2,404
Non-interest expense
107,461
92,082
15,379
Income before income tax
49,1 3 3
38,438
10,695
Income tax expense
9,294
1 7,963
(8,669)
Net income
$ 39,839
$ 20,475
$ 19,364
PER COMMON SHARE DATA
Net income per common share
Basic
Diluted
Cash dividends declared and paid
0.60
0.42
0.1 8
$ 1 .70
$ 0.96
$ 0.74
77.08 %
1 .68
0.95
0.73
AT YEAR END
Assets
Loans
Deposits
$ 3,353,2 8 1
$ 2,789,355
$ 563,926
20.22 %
2,582,520
2,018,8 1 7
563,703
2,913,428
2,400,534
5 1 2,894
Interest-earning assets
3,162,9 1 1
2,6 1 7,659
545,252
Shareholders' equity
338,994
264,933
74,061
Book value per common share
14.38
12.42
1.96
RATIOS
Net income to
Average common equity
12.38 % 7.82 % 4.56 %
Average assets
1.27
0.77
0.50
As a percent of average
interest-earning assets
Interest income
Interest expense
4.48 % 4.02 % 0.46 %
1 1.44 %
0.60
0.37
0.23
Net interest income
3.88
3.65
0.23
6
91.72
27.02
25.35
(46.92)
5.69
16.70
27.82
(48.26)
94.57 %
76.84
42.86
27.92
2 1.37
20.83
27.95
1 5 .78
58.3 1 %
64.94
62.1 6
6.30
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
32
33
35
40
102
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, 2013 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 Bank Corporation
NASDAQ Composite Index
NASDAQ Bank
$250
$200
$150
e
u
l
a
V
x
e
d
n
I
$100
12/31/13
12/31/14
12/31/15
12/31/16
12/31/17
12/31/18
Index
12/31/13
12/31/14
12/31/15
12/31/16
12/31/17
12/31/18
Independent Bank Corporation. . . . . . . . . . . . . . . . 100.00
NASDAQ Composite . . . . . . . . . . . . . . . . . . . . . . . 100.00
NASDAQ Bank. . . . . . . . . . . . . . . . . . . . . . . . . . . . 100.00
110.30
114.75
111.83
131.19 191.04 200.58 193.54
122.74 133.62 173.22 168.30
114.30 144.63 171.24 143.15
Period Ending
8
SELECTED CONSOLIDATED FINANCIAL DATA
SUMMARY OF OPERATIONS
2018
Year Ended December 31,
2016
(Dollars in thousands, except per share amounts)
2015
2017
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 130,773 $
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. . . . . . . . . . . . . . . . . . . . . . . .
17,491
113,282
1,503
138
—
—
44,677
107,461
49,133
9,294
39,839 $
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . $
PER COMMON SHARE DATA
Net income per common share
98,309 $
9,123
89,186
1,199
260
—
—
42,273
92,082
38,438
17,963
20,475 $
86,523 $
6,882
79,641
(1,309)
563
—
—
41,735
90,347
32,901
10,135
22,766 $
80,842 $
5,856
74,986
(2,714)
20
1,193
—
38,917
88,450
29,380
9,363
20,017 $
2014
80,555
7,299
73,256
(3,136)
320
—
500
37,955
89,951
25,216
7,195
18,021
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash dividends declared and paid . . . . . . . . . . . .
Book value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1.70 $
1.68
0.60
14.38
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
SELECTED BALANCES
Assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,353,281 $2,789,355 $2,548,950 $2,409,066 $2,248,730
1,409,962
2,582,520
Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Allowance for loan losses. . . . . . . . . . . . . . . . . . .
25,990
24,888
1,924,302
2,913,428
Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
250,371
338,994
Shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . .
12,470
25,700
Other borrowings . . . . . . . . . . . . . . . . . . . . . . . . .
35,569
39,388
Subordinated debentures . . . . . . . . . . . . . . . . . . . .
1,515,050
22,570
2,085,963
251,092
11,954
35,569
2,018,817
22,587
2,400,534
264,933
54,600
35,569
1,608,248
20,234
2,225,719
248,980
9,433
35,569
SELECTED RATIOS
Net interest income to average interest earning
assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3.88%
3.65%
3.52%
3.58%
3.67%
Net income to
Average common equity . . . . . . . . . . . . . . . . . .
Average assets . . . . . . . . . . . . . . . . . . . . . . . . . .
Average shareholders’ equity to average assets . .
Tier 1 capital to average assets . . . . . . . . . . . . . .
Non-performing loans to Portfolio Loans . . . . . .
12.38
1.27
10.27
10.47
0.35
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
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, 2018, 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 and have
recently opened two loan production offices in Ohio (Columbus and Fairlawn). 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.
10
Generally, these improvements have continued into 2018, albeit at an uneven pace. 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, ‘‘H.R. 1’’, also known as the ‘‘Tax Cuts and Jobs Act’’ was
signed into law. H.R.1, 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 reduced 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. On April 1, 2018, TCSB was
merged with and into IBCP, with IBCP as the surviving corporation (the ‘‘Merger’’). In connection with the Merger,
on April 1, 2018, IBCP consolidated Traverse City State Bank, TCSB’s wholly-owned subsidiary bank, with and into
Independent Bank (with Independent Bank as the surviving institution).
We paid aggregate Merger consideration of approximately $64.5 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. Based on a preliminary valuation of the assets acquired and liabilities assumed in the
Merger, we initially recorded: $29.0 million of goodwill, a core deposit intangible (‘‘CDI’’) of $5.8 million, discounts
of $6.5 million, $0.4 million and $1.5 million on loans, time deposits and borrowings, respectively, and a $0.5 million
write-down of property and equipment. In the third quarter of 2018, goodwill was reduced by $0.7 million (to
$28.3 million) related to the collection of a TCSB acquired loan that had been charged off in full prior to the Merger.
Because of the status of the collection activities related to this loan at the time of the Merger, we determined that this
transaction was a measurement period adjustment and reduced goodwill accordingly. The goodwill will be
periodically tested for impairment and the CDI will be amortized over a ten year period ($0.6 million of amortization
for this CDI was recorded in 2018). The discounts will be accreted based on the lives of the related assets or
liabilities. On or before March 31, 2019, we will finalize the valuation of the assets acquired and liabilities assumed
in the Merger and record and disclose any additional adjustments to the preliminary valuation.
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 2018, 1.875%
was 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. 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, 2018 and 2017 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 2018 as compared
to earlier periods.
11
RESULTS OF OPERATIONS
Summary. We recorded net income of $39.8 million, or $1.68 per diluted share, in 2018, net income of
$20.5 million, or $0.95 per diluted share, in 2017, and net income of $22.8 million, or $1.05 per diluted share, in
2016. 2018 results include the benefit of a reduced federal income tax rate pursuant to H.R. 1 and 2017 results include
an additional $6.0 million ($0.28 per diluted share) of income tax expense related to the remeasurement of our DTA,
both as described earlier under ‘‘Recent Developments.’’
KEY PERFORMANCE RATIOS
Year Ended December 31,
2016
2017
2018
Net income to
Average common equity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Average assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
12.38% 7.82% 9.21%
0.77
1.27
0.92
Net income per common share
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 1.70
1.68
$0.96
0.95
$1.06
1.05
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 $113.3 million during 2018, compared to $89.2 million and $79.6 million during
2017 and 2016, respectively. The increase in net interest income in 2018 compared to 2017 primarily reflects a
$462.0 million increase in average interest-earning assets and a 23 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 the Merger and 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 2017 compared to 2016 primarily reflects a $191.2 million increase in
average interest-earning assets and a 13 basis point increase in our net interest margin.
Our net interest income is also impacted by our level of non-accrual loans. Average non-accrual loans totaled
$8.4 million, $9.5 million and $10.9 million in 2018, 2017 and 2016, respectively.
12
AVERAGE BALANCES AND RATES
2018
2017
2016
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 . . . . . . .
$2,418,421
6,118
394,160
67,574
32,593
16,936
$116,634
292
10,874
2,192
371
920
4.82% $1,845,661
3,199
4.77
485,343
2.76
86,902
3.24
37,119
1.14
15,543
5.43
$84,169
172
10,928
3,063
264
836
4.56% $1,596,136
5.38
3,763
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%
5.85
1.86
3.52
0.51
5.12
Interest earning assets . .
2,935,802
131,283
4.48
2,473,767
99,432
4.02
2,282,602
87,267
3.82
Cash and due from banks . .
Other assets, net . . . . . . . .
33,384
162,750
Total assets . . . . . . . . . .
$3,131,936
31,980
144,442
$2,650,189
36,831
155,778
$2,475,211
LIABILITIES
Savings and interest-
bearing checking . . . . . .
Time deposits . . . . . . . . . .
Other borrowings . . . . . . .
Interest bearing
$1,218,243
632,330
79,519
4,146
10,332
3,013
0.34
1.63
3.79
$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
liabilities . . . . . . . . .
1,930,092
17,491
0.91
1,629,375
9,123
0.56
1,512,986
6,882
0.45
Non-interest bearing
deposits . . . . . . . . . . . .
Other liabilities . . . . . . . . .
Shareholders’ equity. . . . . .
846,718
33,354
321,772
Total liabilities and
shareholders’ equity . .
$3,131,936
728,208
30,838
261,768
688,697
26,439
247,089
$2,650,189
$2,475,211
Net interest income . . . .
$113,792
$90,309
$80,385
Net interest income as a
percent of average
interest earning
assets . . . . . . . . . . . .
3.88%
3.65%
3.52%
(1)
Interest on tax-exempt loans and securities is presented on a fully tax equivalent basis assuming a marginal tax
rate of 21% in 2018 and 35% in 2017 and 2016.
RECONCILIATION OF NET INTEREST MARGIN, FULLY TAXABLE EQUIVALENT (‘‘FTE’’)
2018
Year Ended December 31,
2017
(Dollars in thousands)
2016
Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $113,282 $89,186 $79,641
744
Add: taxable equivalent adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,123
510
Net interest income - taxable equivalent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $113,792 $90,309 $80,385
Net interest margin (GAAP) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3.85% 3.61% 3.49%
Net interest margin (FTE) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3.88% 3.65% 3.52%
13
CHANGE IN NET INTEREST INCOME
2018 compared to 2017
Rate
Volume
2017 compared to 2016
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 . . . . . . . . . . . . . . . . . . . . . . . . . .
$27,388
141
(2,263)
(641)
(35)
76
$5,077
(21)
2,209
(230)
142
8
$32,465
120
(54)
(871)
107
84
$11,398
(31)
(966)
1,146
(260)
4
$(1,243) $10,155
(48)
1,007
1,146
(139)
44
(17)
1,973
—
121
40
Total interest income . . . . . . . . . . . . . . . . . . . . . .
24,666
7,185
31,851
11,291
874
12,165
Increase (decrease) in interest expense (1)
Savings and interest bearing checking . . . . . . . . . .
Time deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total interest expense . . . . . . . . . . . . . . . . . . . . .
275
1,599
153
2,027
2,341
3,488
512
6,341
2,616
5,087
665
8,368
38
508
952
1,498
Net interest income . . . . . . . . . . . . . . . . . . . . .
$22,639
$ 844
$23,483
$ 9,793
$
377
911
(545)
743
131
415
1,419
407
2,241
$ 9,924
(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 21% in 2018 and 35% in 2017 and 2016.
COMPOSITION OF AVERAGE INTEREST EARNING ASSETS AND INTEREST BEARING
LIABILITIES
Year Ended December 31,
2016
2017
2018
As a percent of average interest earning assets
Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other interest earning assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
82.6% 74.7% 70.1%
25.3
17.4
29.9
Average interest earning assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
100.0% 100.0% 100.0%
Savings and NOW . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Time deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Brokered CDs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
41.5% 42.5% 44.6%
18.2
14.7
2.2
6.8
3.0
2.7
19.6
—
2.1
Average interest bearing liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
65.7% 65.9% 66.3%
Earning asset ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Free-funds ratio (1). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
93.7% 93.3% 92.2%
34.1
34.3
33.7
(1) Average interest earning assets less average interest bearing liabilities.
Provision for loan losses. The provision for loan losses was an expense of $1.5 million and $1.2 million in 2018
and 2017, respectively, and was a credit of $1.3 million in 2016. 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.
14
Non-interest income. Non-interest income is a significant element in assessing our results of operations.
Non-interest income totaled $44.8 million during 2018 compared to $42.5 million and $42.3 million during 2017 and
2016, respectively. We adopted Financial Accounting Standards Board Accounting Standards Update 2014-09
‘‘Revenue from Contracts with Customers (Topic 606)’’ (‘‘ASU 2014-09’’) on January 1, 2018, using the modified
retrospective method. Although ASU 2014-09 did not have any impact on our January 1, 2018 shareholders’ equity
or 2018 net income, it did result in a classification change in non-interest income and non-interest expense as
compared to the prior year periods. Specifically, in 2018, interchange income and interchange expense each increased
by $1.5 million, due to classification changes under ASU 2014-09 (also see notes #1 and #25 to our Consolidated
Financial Statements).
NON-INTEREST INCOME
2018
Year Ended December 31,
2017
(In thousands)
2016
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$12,258
9,905
$12,673
8,023
$12,406
7,938
10,597
138
3,157
1,971
970
5,819
11,762
260
1,647
1,968
1,061
5,139
10,566
563
2,222
1,647
1,124
5,832
Total non-interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$44,815
$42,533
$42,298
Service charges on deposit accounts totaled $12.3 million in 2018, as compared to $12.7 million in 2017 and
$12.4 million during 2016. These yearly variations primarily reflect changes in service charges on commercial
accounts and in non-sufficient funds fees.
Interchange income totaled $9.9 million in 2018 compared to $8.0 million in 2017 and $7.9 million in 2016. The
increase in 2018 as compared to 2017, is primarily due to the aforementioned impact of ASU 2014-09 as well as
increased transaction volume. The increase in 2017 as compared to 2016, is primarily due to increased transaction
volume.
We realized net gains of $10.6 million on mortgage loans during 2018, compared to $11.8 million and
$10.6 million during 2017 and 2016 respectively. Mortgage loan activity is summarized as follows:
MORTGAGE LOAN ACTIVITY
2018
Year Ended December 31,
2017
(Dollars in thousands)
2016
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 . . . . . . . . . . . . . . . . .
$807,408
491,798
10,597
$871,222
423,327
11,762
$428,249
313,985
10,566
2.15%
(0.02)
2.78%
(0.07)
3.37%
0.12
The increase in mortgage loan originations, sales and net gains in 2018 and 2017 as compared to 2016 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). This business expansion has
accelerated the growth of portfolio mortgage loans and mortgage loans serviced for others, leading to increased
15
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 2018 on an industry-wide basis. It is important to our
future results of operations that we continue to 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 2.17% in 2018, 2.85% in 2017 and 3.25% in 2016. The higher Loan Sales Margin in 2016
as compared to 2018 and 2017, was principally due to more favorable competitive conditions including wider
primary-to-secondary market pricing spreads for much of that year. In 2018 and 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. In addition, we recorded a
loss on mortgage loans of $0.25 million in the fourth quarter of 2018 on the pending sale of approximately
$41.5 million of portfolio mortgage loans. These loans were classified as held for sale at December 31, 2018 and
carried at the lower of cost or fair value. This sale closed on January 30, 2019.
We generated net gains on securities of $0.14 million, $0.26 million and $0.56 million in 2018, 2017 and 2016,
respectively. These net gains were due to the sales of securities and changes in the fair value of equity/trading
securities as outlined in the table below. We recorded no net impairment losses in 2018, 2017 or 2016 for other than
temporary impairment of securities available for sale.
GAINS AND LOSSES ON SECURITIES
Year Ended December 31,
Losses (2)
Gains (1)
Proceeds
(In thousands)
2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$48,736
17,308
64,103
$336
263
616
$198
3
53
Net
$138
260
563
(1) Gains in 2018 include $0.144 million related to the sale of 1,000 VISA Class B shares. 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 2018 include $0.062 million related to a decrease in the fair value of equity securities at fair value.
Mortgage loan servicing generated net earnings of $3.2 million, $1.6 million and $2.2 million in 2018, 2017 and
2016, respectively. This activity is summarized in the following table:
MORTGAGE LOAN SERVICING ACTIVITY
2018
2017
(In thousands)
2016
Mortgage loan sevicing:
Revenue, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fair value change due to price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fair value change due to pay-downs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Impairment (charge) recovery . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 5,480
191
(2,514)
—
—
$ 4,391
(718)
(2,026)
$ 4,106
—
—
— (2,850)
966
—
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 3,157
$ 1,647
$ 2,222
16
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
2018
2017
(In thousands)
2016
Balance at January 1, . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in accounting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$15,699
—
$13,671
542
$12,436
—
Balance at January 1, as adjusted. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Originated servicing rights capitalized . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Servicing rights acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in valuation allowance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
15,699
4,977
3,047
—
—
(2,323)
14,213
4,230
—
—
—
(2,744)
12,436
3,119
—
(2,850)
966
—
Balance at December 31, . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$21,400
$15,699
$13,671
Valuation allowance at December 31, . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ — $ — $ 2,306
At December 31, 2018, we were servicing approximately $2.33 billion in mortgage loans for others on which
servicing rights have been capitalized. This servicing portfolio had a weighted average coupon rate of 4.23% and a
weighted average service fee of approximately 25.8 basis points. Remaining capitalized mortgage loan servicing
rights at December 31, 2018 totaled $21.4 million, representing approximately 91.7 basis points on the related
amount of mortgage loans serviced for others.
Investment and insurance commissions totaled $2.0 million in both 2018 and 2017 as compared to $1.6 million
in 2016. The higher levels of revenue in 2018 and 2017 as compared to 2016 was due primarily to growth in sales
and assets under management.
We earned $1.0 million, $1.1 million and $1.1 million in 2018, 2017 and 2016, 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 a fixed income investment
manager. 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 $55.1 million and $54.6 million at
December 31, 2018 and 2017, respectively.
Other non-interest income totaled $5.8 million, $5.1 million and $5.8 million in 2018, 2017 and 2016,
respectively. The increase in 2018 as compared to 2017 is primarily due to increases in a variety of categories
including: wire transfer fees, credit card interchange income, merchant processing fees, income from a small business
investment company and proceeds from a retired director’s life insurance policy. The decrease in 2017 as compared
to 2016 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.
17
Non-interest expense totaled $107.5 million in 2018, $92.1 million in 2017, and $90.3 million in 2016. Many
of our components of non-interest expense increased in 2018 due to the Merger. The components of non-interest
expense are as follows:
NON-INTEREST EXPENSE
2018
Year ended December 31,
2017
(In thousands)
2016
Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Performance-based compensation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payroll taxes and employee benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 37,878
11,942
12,258
$35,397
9,874
9,818
$33,080
7,866
8,633
Compensation and employee benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Occupancy, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Data processing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Furniture, fixtures and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Merger related expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Communications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interchange expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loan and collection. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Advertising . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Legal and professional . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
FDIC deposit insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Supplies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Credit card and bank service fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Costs (recoveries) related to unfunded lending commitments . . . . . . . . . . . . . . .
Provision 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
62,078
8,912
8,262
4,080
3,465
2,848
2,702
2,682
2,155
1,839
1,081
969
689
414
171
10
(672)
—
—
5,776
55,089
8,102
7,657
3,870
284
2,684
1,156
2,230
1,905
1,892
894
346
666
529
475
171
(606)
—
—
4,738
49,579
8,023
7,952
3,912
—
3,142
1,111
2,512
1,856
1,742
1,049
347
728
791
(2)
30
250
2,300
320
4,705
Total non-interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$107,461
$92,082
$90,347
Compensation expense, which is primarily salaries, totaled $37.9 million, $35.4 million and $33.1 million in
2018, 2017 and 2016, respectively. The increase in 2018 as compared to 2017 is primarily due to annual merit based
salary increases and the Merger. 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.
Performance-based compensation expense totaled $11.9 million, $9.9 million and $7.9 million in 2018, 2017
and 2016, respectively. The increases in 2018 as compared to 2017, and in 2017 as compared to 2016, are both
primarily related to higher compensation under our Management Incentive Compensation Plan (‘‘MICP’’) based on
our performance relative to plan targets, increased mortgage loan officer commissions and increased employee stock
ownership plan contributions. In computing MICP results for 2017, our Board of Directors determined that it was
appropriate to exclude the impact of the $6.0 million 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 2018, 2017 and 2016 for share-based awards under our long-term equity based
incentive plan was $1.5 million, $1.6 million and $1.5 million, respectively. In 2018, 2017 and 2016, the Board and
Compensation Committee of the Board authorized the grant of restricted stock and performance share awards under
the plan.
18
Payroll taxes and employee benefits expense totaled $12.3 million, $9.8 million and $8.6 million in 2018, 2017
and 2016, respectively. The increase in 2018 as compared to 2017 is primarily due to a $0.5 million increase in
payroll taxes, a $1.1 million increase in health care insurance and a $0.6 million increase in 401(k) plan employer
contributions. A portion of the increases in 2018 were due to the Merger. However, we maintain a self-insured health
care plan (with an individual claim stop loss limit) and we experienced a significant rise in claims in 2018. In 2018,
we also increased the 401(k) employer match to 4% (from 3%) of an employee’s eligible compensation. 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.
Occupancy expenses, net, totaled $8.9 million, $8.1 million and $8.0 million in 2018, 2017 and 2016,
respectively. The increase in 2018 as compared to 2017 is primarily due to additional locations acquired in the Merger
and additional loan production offices opened during 2017. 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.
Data processing expenses totaled $8.3 million, $7.7 million, and $8.0 million in 2018, 2017 and 2016,
respectively. The increase in 2018 as compared to 2017 is primarily due to the Merger as well as higher mobile
banking activity and software costs for new applications in several departments. 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.
Furniture, fixtures and equipment expense totaled $4.1 million, $3.9 million, and $3.9 million in 2018, 2017 and
2016, respectively. The increase in 2018 as compared to 2017 is primarily due to the Merger.
Merger related expenses totaled $3.5 million and $0.3 million in 2018 and 2017, respectively. These expenses
include our investment banking fees, certain accounting and legal costs, various contract termination fees, data
processing conversion costs, payments made on officer change-in-control contracts, and employee severance costs.
Communications expense totaled $2.8 million, $2.7 million and $3.1 million in 2018, 2017 and 2016,
respectively. The increase in 2018 as compared to 2017 is primarily due the Merger. 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.
Interchange expense, which totaled $2.7 million, $1.2 million, and $1.1 million in 2018, 2017 and 2016,
respectively, primarily represents fees paid to our core information systems processor and debit card licensor related
to debit card and ATM transactions. The increase in 2018 is due primarily to the impact of the implementation of ASU
2014-09 on January 1, 2018. Prior to 2018, certain processing costs were being netted against interchange income.
As described above, under ASU 2014-09 these costs are no longer being netted against interchange income but
instead are being reported as part of interchange expense.
Loan and collection expenses reflect costs related to new lending activity as well as the management and
collection of non-performing loans and other problem credits. These expenses totaled $2.7 million, $2.2 million and
$2.5 million in 2018, 2017 and 2016, respectively. The reduced level of expense in 2017 primarily reflects a higher
level of recoveries of previously incurred expenses related to the resolution and collection of non-performing or
previously charged-off loans.
Advertising expense totaled $2.2 million, $1.9 million, and $1.9 million in 2018, 2017 and 2016, respectively.
The increase in 2018 as compared to 2017 is primarily due to increased outdoor advertising (billboards) as well as
the Merger.
Legal and professional fees totaled $1.8 million, $1.9 million, and $1.7 million in 2018, 2017 and 2016,
respectively. The decrease in 2018 as compared to 2017 is primarily due to lower consulting costs for certain deposit
account programs. 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.
FDIC deposit insurance expense totaled $1.1 million, $0.9 million, and $1.0 million in 2018, 2017 and 2016,
respectively. The increase in 2018 as compared to 2017 is primarily due to the Merger and growth in total assets. The
19
decline in 2017 compared to 2016 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.
The amortization of intangible assets primarily relates to the Merger (for 2018) and branch acquisitions and the
related amortization of the deposit customer relationship value, including core deposit value, which was acquired in
connection with those transactions. We had remaining unamortized intangible assets of $6.4 million and $1.6 million
at December 31, 2018 and 2017 respectively. See note #7 to the Consolidated Financial Statements for a schedule
of future amortization of intangible assets.
Supplies expenses were relatively unchanged at approximately $0.7 million for all periods presented.
Credit card and bank service fees totaled $0.4 million, $0.5 million, and $0.8 million in 2018, 2017 and 2016,
respectively. The declines in 2018 and 2017 compared to 2016 is primarily due to the sale of our payment plan
processing business in May 2017.
The changes in costs (recoveries) related to unfunded lending commitments are primarily impacted by changes
in the amounts of such commitments to originate Portfolio Loans as well as (for commercial loan commitments) the
grade (pursuant to our loan rating system) of such commitments.
The provision for loss reimbursement on sold loans was an expense of $0.01 million, $0.17 million and
$0.03 million in 2018, 2017 and 2016, respectively. 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 $0.78 million and $0.67 million
at December 31, 2018 and 2017, 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 $0.7 million in 2018 was
primarily due to improved market conditions leading to better sales prices for both commercial and residential
properties. 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.
We incurred a $2.3 million expense in 2016 for the settlement of a litigation matter as described in note #11 to
the Consolidated Financial Statements.
We incurred a $0.3 million loss in 2016 related to the sale of our payment plan business as described in note #27
to the Consolidated Financial Statements.
Other non-interest expenses totaled $5.8 million, $4.7 million, and $4.7 million in 2018, 2017 and 2016,
respectively. The increase in 2018 compared to 2017 and 2016 is due to increases in several expense categories,
including: directors’ fees (a new director was added in each of 2018 and 2017), travel and entertainment expenses
(in part due to the Merger), debit card and check fraud losses and certain outsourcing costs related to mortgage
lending.
Income tax expense. We recorded an income tax expense of $9.3 million, $18.0 million and $10.1 million in
2018, 2017 and 2016, respectively. 2018 reflects a lower corporate federal income tax rate and 2017 includes an
additional $6.0 million of income tax expense related to the remeasurement of our DTA, both as described earlier
under ‘‘Recent Developments.’’
20
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, share based compensation 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).
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, 2018 and 2017 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.
FINANCIAL CONDITION
Summary. Our total assets increased to $3.35 billion at December 31, 2018, compared to $2.79 billion at
December 31, 2017, primarily due to the Merger and organic loan growth. The total assets, loans and deposits
acquired in the Merger were approximately $343.5 million, $295.8 million (including $1.3 million of loans held for
sale) and $287.7 million, respectively.
Loans, excluding loans held for sale (‘‘Portfolio Loans’’), totaled $2.58 billion at December 31, 2018, an
increase of 27.9% from $2.02 billion at December 31, 2017. (See ‘‘Portfolio Loans and asset quality’’). The increase
in Portfolio Loans, excluding the impact of the Merger, 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 $2.91 billion at December 31, 2018, compared to $2.40 billion at December 31, 2017. The
$512.9 million increase in total deposits during the period reflects growth in all categories, due primarily to the
Merger as well as increases in reciprocal deposits and brokered time deposits.
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 $95.0 million during 2018 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.
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 2018, 2017 or 2016.
21
SECURITIES
Securities available for sale
Amortized
Cost
Unrealized
Gains
(In thousands)
Losses
Fair
Value
December 31, 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $433,224 $1,520 $6,818 $427,926
522,925
December 31, 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
523,520
3,792
3,197
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.
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 and adjustable rate
jumbo mortgage loans in the future. In March 2018 and July 2018, we sold $16.5 million and $11.1 million,
respectively of single-family residential fixed and adjustable rate mortgage loans servicing retained to another
financial institution. These mortgage loans were all on properties located in Ohio. In addition, in the fourth quarter
of 2018 we reclassified $41.7 million (fair value of $41.5 million) of adjustable rate mortgage loans to held for sale.
These loans are on properties located in Michigan and Ohio and were sold to another financial institution on a
servicing released basis on January 30, 2019. These loan sales were executed primarily for asset/liability management
purposes.
LOAN PORTFOLIO COMPOSITION
December 31,
2018
2017
(In thousands)
Real estate (1)
Residential first mortgages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 811,719 $ 672,592
136,560
Residential home equity and other junior mortgages . . . . . . . . . . . . . . . . . . . . . . . . . . .
143,188
Construction and land development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
538,880
Other (2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
291,091
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
231,786
Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4,720
Agricultural . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
177,574
180,286
707,347
379,607
319,058
6,929
Total loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,582,520 $2,018,817
(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.
22
NON-PERFORMING ASSETS (1)
2018
December 31,
2017
(Dollars in thousands)
2016
Non-accrual loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans 90 days or more past due and still accruing interest . . . . . . . . . . . . . . . . . . .
$ 9,029
5
$ 8,184
—
$13,364
—
Total non-performing loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other real estate and repossessed assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
9,034
1,299
8,184
1,643
13,364
5,004
Total non-performing assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$10,333
$ 9,827
$18,368
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 . . . . . . . . . . . . . . .
0.35%
0.96
0.31
275.49
0.41%
1.12
0.35
275.99
0.83%
1.26
0.72
151.41
(1) Excludes loans classified as ‘‘troubled debt restructured’’ that are performing and vehicle service contract
counterparty receivables, net.
TROUBLED DEBT RESTRUCTURINGS
Performing TDR’s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-performing TDR’s (2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Performing TDR’s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-performing TDR’s (2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31, 2018
Commercial
Retail (1)
Total
(In thousands)
$6,460
74
$6,534
$46,627
2,884(3)
$53,087
2,958
$49,511
$56,045
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
(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 $9.0 million, $8.2 million and $13.4 million at December 31, 2018, 2017 and
2016, respectively. The increase in 2018 as compared to 2017 is primarily due to an increase in non-performing
commercial loans. The decline in 2017 as compared to 2016 primarily reflects the pay-off or liquidation of
non-performing commercial loans. In general, stable economic conditions in our market areas, as well as our
collection and resolution efforts, have resulted in relatively low levels of 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 $53.1 million, or 2.1% of total Portfolio Loans, and $60.1 million, or 3.0% of total Portfolio
Loans, at December 31, 2018 and 2017, respectively. The decrease in the amount of performing TDRs during 2018
reflects declines in both commercial loan and mortgage loan TDRs due primarily to payoffs and amortization.
23
ORE and repossessed assets totaled $1.3 million at December 31, 2018, compared to $1.6 million at
December 31, 2017. The decrease in ORE during 2018 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 . . . . . . . . . . . . . . . . . . . . . . . .
2018
$ 6,310
1,861
7,792
8,925
December 31,
2017
(In thousands)
$ 6,839
1,228
7,125
7,395
2016
$ 9,152
491
4,929
5,662
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$24,888
$22,587
$20,234
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
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.
The third AFLL element (historical
loss allocations) is determined by assigning allocations to higher rated
(‘‘non-watch credit’’) commercial loans using a probability of default and loss given default similar to the second
AFLL element and to homogenous mortgage and installment loan groups based upon borrower credit score and
portfolio segment. For homogenous mortgage and installment loans a probability of default for each homogenous
pool is calculated by way of credit score migration. Historical loss data for each homogenous pool coupled with the
associated probability of default is utilized to calculate an expected loss allocation rate. The fourth AFLL element
(additional allocations based on subjective factors) is based on factors that cannot be associated with a specific credit
or loan category and reflects our attempt to ensure that the overall 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.
No allowance for loan losses was brought forward on any of the TCSB loans acquired in the Merger as any credit
deterioration evident in the loans was included in the determination of the fair value of the loans at the acquisition
date. An allowance for loan losses will be established for any subsequent credit deterioration or adverse changes in
expected cash flows.
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.
24
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 $2.3 million to $24.9 million at December 31, 2018 from $22.6 million at
December 31, 2017 and was equal to 0.96% of total Portfolio Loans at December 31, 2018 (1.06% when excluding
TCSB loans acquired in the Merger) compared to 1.12% at December 31, 2017.
Three of the four components of the allowance for loan losses outlined above increased during 2018. The
allowance for loan losses related to specific loans decreased $0.5 million in 2018 due primarily to a decline in the
balance of individually impaired loans and charge-offs. The allowance for loan losses related to other adversely rated
commercial loans increased $0.6 million in 2018 primarily due to an increase in the balance of such loans included
in this component to $44.7 million at December 31, 2018 from $27.2 million at December 31, 2017. The allowance
for loan losses related to historical losses increased $0.7 million during 2018 due principally to loan growth. The
allowance for loan losses related to subjective factors increased $1.5 million during 2018 primarily due to loan
growth.
By comparison, three of the four components of the allowance for loan losses outlined above also 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.
ALLOWANCE FOR LOSSES ON LOANS AND UNFUNDED COMMITMENTS
2018
2017
2016
Loan
Losses
Unfunded
Commitments
Unfunded
Commitments
Loan
Losses
(Dollars in thousands)
Loan
Losses
Unfunded
Commitments
Balance at beginning of year . . . . . . . . . . . . $22,587
Additions (deductions)
Provision for loan losses . . . . . . . . . . . . . .
Recoveries credited to allowance . . . . . . .
Loans charged against the allowance . . . .
Reclassification to loans held for sale . . .
1,503
4,622
(3,824)
—
Additions (deductions) included in non-
$1,125
$20,234
$ 650
$22,570
$652
—
—
—
—
1,199
4,205
(3,051)
—
—
—
—
—
(1,309)
4,619
(5,587)
(59)
—
—
—
—
interest expense . . . . . . . . . . . . . . . . . . . . .
—
171
—
475
—
(2)
Balance at end of year . . . . . . . . . . . . . . . . . $24,888
$1,296
$22,587
$1,125
$20,234
$650
Net loans charged against the allowance to
average Portfolio Loans . . . . . . . . . . . . . .
(0.03)%
(0.06)%
0.06%
In 2018 and 2017, we recorded loan net recoveries of $0.8 million and $1.2 million, respectively. This compares
to loan net charge-offs of $1.0 million in 2016. The net recoveries in 2018 occurred in the commercial loan category
and 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 modest level of loan net charge-offs in 2016 was primarily 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
25
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 $2.91 billion and $2.40 billion at December 31, 2018 and 2017, respectively. The
$512.9 million increase in deposits during 2018 is primarily due to the TCSB Merger and growth in reciprocal
deposits and brokered time deposits. Reciprocal deposits totaled $182.1 million and $51.0 million at
December 31, 2018 and 2017, 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. The significant
increase in reciprocal deposits is due in part to an automated sweep product we introduced in mid-2018 as well as
the marketing and sales efforts of our treasury management team. We also added $129.0 million of brokered time
deposits during 2018.
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, 2018, we had an estimated $600.1 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 $25.7 million and $54.6 million at December 31, 2018 and 2017, 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, 2018, our use of such
wholesale funding sources (including reciprocal deposits) amounted to approximately $478.7 million, or 16.3% 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 have historically employed derivative financial instruments to manage our exposure to changes in interest
rates. During 2018, 2017 and 2016, we entered into $23.9 million, $39.1 million and $24.1 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 $0.459 million, $0.413 million and
$0.380 million of fee income related to these transactions during 2018, 2017 and 2016, respectively. Also in 2018
and 2017, we entered into (notional amounts): $10.0 million and $15.0 million, respectively, of pay fixed interest rate
swaps and $105.0 million and $45.0 million, respectively, 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
26
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, 2018, we had $555.4 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, $2.20 billion of our deposits
at December 31, 2018, 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
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 $32.6 million as of December 31, 2018 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, 2018.
CONTRACTUAL COMMITMENTS (1)
1 Year or Less
1-3 Years
3-5 Years After 5 Years
Total
(In thousands)
Time deposit maturities . . . . . . . . . . . . . . . . . . . . . . . . . .
FHLB advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Subordinated debentures. . . . . . . . . . . . . . . . . . . . . . . . . .
Operating lease obligations . . . . . . . . . . . . . . . . . . . . . . .
Purchase obligations (2) . . . . . . . . . . . . . . . . . . . . . . . . . .
$555,436
10,143
—
1,805
2,525
$
864
$131,924 $27,710
—
—
— 39,388
321
—
15,553
—
2,670
3,156
1,136
—
$715,934
25,696
39,388
5,932
5,681
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$569,909
$153,303 $28,846
$40,573
$792,631
(1) Excludes approximately $0.6 million of accrued tax and interest relative to uncertain tax benefits due to the high
degree of uncertainty as to when, or if, those amounts would be paid.
(2)
Includes contracts with a minimum annual payment of $1.0 million and are not cancellable within one year.
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.
27
CAPITALIZATION
December 31,
2018
2017
(In thousands)
Subordinated debentures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amount not qualifying as regulatory capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 39,388
(1,224)
$ 35,569
(1,069)
Amount qualifying as regulatory capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
38,164
34,500
Shareholders’ equity
Common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total shareholders’ equity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
377,372
(28,270)
(10,108)
338,994
324,986
(54,090)
(5,963)
264,933
Total capitalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$377,158
$299,433
We currently have four special purpose entities with $38.2 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 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 Condensed Consolidated Statements of Financial
Condition.
As part of the Merger we acquired TCSB Statutory Trust I (a statutory business trust formed solely to issue
capital securities) and assumed approximately $5.2 million of subordinated debentures that had a fair value of
approximately $3.8 million on April 1, 2018. The trust preferred securities issued by TCSB Statutory Trust I mature
in March 2035. The discount recorded on these subordinated debentures is being accreted over their remaining life.
The FRB has issued rules regarding trust preferred securities as a component of the Tier 1 capital of bank
holding companies. The aggregate amount of trust preferred securities (and certain other capital elements) are limited
to 25 percent of Tier 1 capital elements, net of goodwill (net of any associated deferred tax liability). The amount of
trust preferred securities and certain other elements in excess of the limit can be included in Tier 2 capital, subject
to restrictions. At the parent company, all of these securities qualified as Tier 1 capital at December 31, 2018 and
2017. 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 $339.0 million at December 31, 2018 from $264.9 million at
December 31, 2017 due primarily to shares issued in the TCSB Merger and our net income that was partially offset
by an increase in our accumulated other comprehensive loss, share repurchases and by dividends that we paid. Our
tangible common equity (‘‘TCE’’) totaled $304.3 million and $263.3 million, respectively, at those same dates. Our
ratio of TCE to tangible assets was 9.17% and 9.45% at December 31, 2018 and 2017, respectively. TCE and the ratio
of TCE to tangible assets are non-GAAP measures. TCE represents total common equity less intangible assets.
In January 2018 and 2017, our Board of Directors authorized share repurchase plans. Under the terms of these
share repurchase plans, we are authorized to buy back up to 5% of our outstanding common stock. These share
repurchase plans expired on December 31, 2018 and 2017, respectively. We repurchased 587,969 shares during 2018
(all in the fourth quarter) at an average cost of $21.57 per share. We did not repurchase any shares during 2017.
In December 2018, our Board of Directors authorized the 2019 share repurchase plan. Under the terms of the
2019 share repurchase plan, we are authorized to buy back up to 5% of our outstanding common stock. The
repurchase plan is authorized to commence on January 1, 2019 and last through December 31, 2019.
We pay a quarterly cash dividend on our common stock. The annual total dividends paid were $0.60, $0.42 and
$0.34 per share for 2018, 2017 and 2016, respectively. We generally favor a dividend payout ratio between 30% and
50% of net income.
28
As of December 31, 2018 and 2017, 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).
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
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, 2018
200 basis point rise . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
100 basis point rise . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Base-rate scenario . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
100 basis point decline . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$481,100
495,400
497,900
482,800
(3.37)% $126,200
124,800
(0.50)
122,200
—
119,600
(3.03)
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)
3.27%
2.13
—
(2.13)
2.27%
1.75
—
(5.47)
(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.
29
FAIR VALUATION OF FINANCIAL INSTRUMENTS
Financial Accounting Standards Board (‘‘FASB’’) Accounting Standards Codification (‘‘ASC’’) topic 820 -
‘‘Fair Value Measurements and Disclosures’’ (‘‘FASB ASC topic 820’’) defines fair value as the exchange price that
would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous
market for the asset or liability in an orderly transaction between market participants on the measurement date.
We utilize fair value measurements to record fair value adjustments to certain financial instruments and to
determine fair value disclosures. FASB ASC topic 820 differentiates between those assets and liabilities required to
be carried at fair value at every reporting period (‘‘recurring’’) and those assets and liabilities that are only required
to be adjusted to fair value under certain circumstances (‘‘nonrecurring’’). Equity securities, securities available for
sale, loans held for sale, derivatives and capitalized mortgage loan servicing rights 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 fair value accounting or
write-downs of individual assets. See note #21 to the Consolidated Financial Statements for a complete discussion
on our use of fair valuation of financial instruments and the related measurement techniques.
LITIGATION MATTERS
As described in note #11 to the Consolidated Financial Statements 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 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 and capitalized mortgage loan servicing rights are deemed critical since they
involve the use of estimates and require significant management judgments. Application of assumptions different than
those that we have used could result in material changes in our financial position or results of operations.
We determined in the fourth quarter of 2018 that accounting and reporting for income taxes was no longer a
critical accounting policy as we have now utilized all of our net operating loss carryforwards and our DTA has
declined to $5.8 million at December 31, 2018.
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
30
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, 2018 and 2017, we had approximately $21.4 million and $15.7 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).
31
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, 2018. 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, 2018, 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,
2018, 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, 2018. Their report immediately follows our
report.
William B. Kessel
President and
Chief Executive Officer
Independent Bank Corporation
March 7, 2019
Robert N. Shuster
Executive Vice President
and Chief Financial Officer
32
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, 2018 and 2017, 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, 2018, 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, 2018, 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, 2018 and 2017, and the results of its operations and its cash flows
for each of the years in the three-year period ended December 31, 2018 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, 2018, 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.
33
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, 2019
34
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
December 31,
2018
2017
(In thousands, except share amounts)
ASSETS
Cash and due from banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest bearing deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash and Cash Equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest bearing deposits - time . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity securities at fair value. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Trading securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Securities available for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal Home Loan Bank and Federal Reserve Bank stock, at cost . . . . . . . . . .
Loans held for sale, carried at fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans held for sale, carried at lower of cost or fair value . . . . . . . . . . . . . . . . . .
Loans
Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mortgage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Installment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Allowance for loan losses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other real estate and repossessed assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property and equipment, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Bank-owned life insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax assets, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capitalized mortgage loan servicing rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued income and other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
23,350
46,894
70,244
595
393
—
427,926
18,359
44,753
41,471
1,144,481
1,042,890
395,149
2,582,520
(24,888)
2,557,632
1,299
38,777
55,068
5,779
21,400
6,415
28,300
34,870
$3,353,281
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits
Non-interest bearing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Savings and interest-bearing checking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reciprocal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Time. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Brokered time . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Subordinated debentures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued expenses and other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 879,549
1,194,865
182,072
385,981
270,961
2,913,428
25,700
39,388
35,771
3,014,287
$
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
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: 23,579,725 shares at December 31, 2018 and 21,333,869
shares at December 31, 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Shareholders’ Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Liabilities and Shareholders’ Equity . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
—
377,372
(28,270)
(10,108)
338,994
$3,353,281
324,986
(54,054)
(5,999)
264,933
$2,789,355
See accompanying notes to consolidated financial statements
35
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31,
2017
(In thousands, except per share amounts)
2016
2018
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Non-interest Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
NON-INTEREST EXPENSE
Compensation and employee benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Occupancy, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Data processing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Furniture, fixtures and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Merger related expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Communications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interchange expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loan and collection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Advertising . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Legal and professional . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
FDIC deposit insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Credit card and bank service fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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
$116,865
$84,281
$74,157
10,874
1,743
1,291
130,773
14,478
3,013
17,491
113,282
1,503
111,779
12,258
9,905
10,597
138
3,157
8,760
44,815
62,078
8,912
8,262
4,080
3,465
2,848
2,702
2,682
2,155
1,839
1,081
414
(672)
—
—
7,615
107,461
49,133
9,294
$ 39,839
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
284
2,684
1,156
2,230
1,905
1,892
894
529
(606)
—
—
6,396
92,082
38,438
17,963
$20,475
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
1,111
2,512
1,856
1,742
1,049
791
250
2,300
320
5,808
90,347
32,901
10,135
$22,766
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
1.70
1.68
$
$
0.96
0.95
$
$
1.06
1.05
See accompanying notes to consolidated financial statements
36
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
2018
Year Ended December 31,
2017
(In thousands)
2016
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive income (loss)
$39,839
$20,475
$22,766
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
(4,594)
4,065
(4,465)
(53)
(56)
186
(215)
40
(301)
(loss) on securities available for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax expense (benefit) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(4,703)
(988)
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 . . . . . . . . . . . . . . . . . . . .
(3,715)
2,623
(3,072)
Derivative instruments
Unrealized gains (losses) arising during period . . . . . . . . . . . . . . . . . . . . . . . . .
Reclassification adjustment for (income) expense recognized in earnings . . . .
Unrealized gains (losses) recognized in other comprehensive income
(loss) on derivative instruments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax expense (benefit) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(262)
(237)
(499)
(105)
324
18
342
120
Unrealized gains (losses) recognized in other comprehensive income
(loss) on derivative instruments, net of tax . . . . . . . . . . . . . . . . . . . . . . . .
(394)
222
—
—
—
—
—
Other comprehensive income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(4,109)
2,845
(3,072)
Comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$35,730
$23,320
$19,694
See accompanying notes to consolidated financial statements
37
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
Balances at January 1, 2016 . . . . . . . . . . . . . . . . . . . . . . . . .
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
1,620
(627)
—
323,745
—
323,745
—
—
72
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 . . . . . . . . . . . . . . . . . . . . . . . .
Balances at December 31, 2017 . . . . . . . . . . . . . . . . . . . . . .
Net income for 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash dividends declared, $.60 per share . . . . . . . . . . . . . . .
Repurchase of 587,969 shares of common stock. . . . . . . . .
Acquistion of TCSB Bancorp, Inc.
. . . . . . . . . . . . . . . . . .
Issuance of 152,549 shares of common stock . . . . . . . . . . .
Share based compensation (issuance of 80,028 shares of
(579)
—
—
324,986
—
—
(12,681)
64,536
267
Common
Stock
Accumulated
Deficit
Accumulated
Other
Comprehensive
Loss
Total
Shareholders’
Equity
(Dollars in thousands, except per share amounts)
$339,524
—
—
(16,854)
82
$(81,149)
22,766
(7,274)
—
—
$ (6,036)
—
—
—
—
$252,339
22,766
(7,274)
(16,854)
82
—
—
—
(65,657)
52
(65,605)
20,475
(8,960)
—
—
—
36
—
(54,054)
39,839
(14,055)
—
—
—
—
1,620
—
(3,072)
(9,108)
300
(8,808)
—
—
—
(627)
(3,072)
248,980
352
249,332
20,475
(8,960)
72
—
1,748
—
(36)
2,845
(5,999)
—
—
—
—
—
(579)
—
2,845
264,933
39,839
(14,055)
(12,681)
64,536
267
common stock) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,731
Share based compensation withholding obligation
(withholding of 108,185 shares of common stock) . . . . .
Other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . . .
(1,467)
—
—
—
—
—
1,731
—
(4,109)
(1,467)
(4,109)
Balances at December 31, 2018 . . . . . . . . . . . . . . . . . . . . . .
$377,372
$(28,270)
$(10,108)
$338,994
See accompanying notes to consolidated financial statements
38
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. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Increase in accrued income and other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Increase 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from the sale 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). . . . . . . . . . . .
Proceeds from the sale of portfolio loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchase of portfolio loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash received in the acquisition of TCSB Bancorp, Inc. . . . . . . . . . . . . . . . . . . . . . . . . .
Cash received from the sale of Mepco Finance Corporation assets, net . . . . . . . . . . . . . . .
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6,033
(10,597)
(138)
(672)
1,731
—
—
(4,890)
240
5,082
44,921
48,736
160,627
(114,362)
2,474
3,728
—
(2,038)
(344,330)
38,527
—
23,516
—
511
2,526
474
106
(3,862)
(183,367)
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
225,185
(6,600)
1,272,000
(1,308,697)
(14,055)
267
(12,681)
(1,467)
153,952
15,506
54,738
70,244
$
Cash paid during the year for
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Transfers to other real estate and repossessed assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Transfer of mortgage loans to held for sale. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Common stock and stock options issued in TCSB Bancorp, Inc. acquisition . . . . . . . . . . . . .
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
16,737
120
1,510
41,471
64,536
—
—
—
See accompanying notes to consolidated financial statements
39
2018
Year Ended December 31,
2017
(In thousands)
$ 20,475
39,839
2016
$ 22,766
463,699
(457,077)
1,503
9,294
(4,044)
434,682
(426,410)
1,199
16,009
(5,159)
324,828
(322,342)
(1,309)
9,718
(1,911)
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
—
—
1,582
33,360
718
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’’) and the valuation of capitalized mortgage loan servicing rights. 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 #27. At
December 31, 2018, 72.7% 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 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 and for short-term
borrowings.
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.
Certain portfolio loans were reclassified to held for sale as of December 31, 2018 and are carried at the lower of cost
or fair value on an aggregate loan basis.
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.
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.
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
40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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 $5.5 million, $4.4 million and $4.1 million for the years ended
December 31, 2018, 2017 and 2016, 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 equity, trading, held to maturity or available for sale. Equity
securities are investments in certain preferred stocks and are reported at fair value with realized and unrealized gains
and losses included in earnings. 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. We
reclassified certain preferred stocks previously reported as trading to equity securities pursuant to the adoption of
Accounting Standards Update (‘‘ASU’’) 2016-01, ‘‘Financial Instruments – Overall (Subtopic 825-10) – Recognition
and Measurement of Financial Assets and Financial Liabilities’’ at January 1, 2018 (see additional discussion below).
As a result we did not have any trading securities at December 31, 2018. 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, 2018 and 2017. Securities available for sale represent those securities not
classified as equity, 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.
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.
41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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 income – 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 and (iv) home equity – 2nd lien. 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 AFLL amounts using this first element. The
second AFLL element (other adversely rated commercial loans) reflects the application of our loan rating system.
This rating system is similar to those employed by state and federal banking regulators. Commercial loans that are
rated below a certain predetermined classification are assigned a loss allocation factor for each loan classification
category that is based upon a historical analysis of both the probability of default and the expected loss rate (‘‘loss
given default’’). The lower the rating assigned to a loan or category, the greater the allocation percentage that is
applied. The third AFLL element (historical loss allocations) is determined by assigning allocations to higher rated
(‘‘non-watch credit’’) commercial loans using a probability of default and loss given default similar to the second
42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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
each commercial
loan class that are rated substandard, classified as non-performing or were classified as
non-performing in the preceding quarter, are evaluated for impairment. Those loans included in each mortgage loan
or installment 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.
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 net (gains) losses on other real estate and repossessed assets in the
Consolidated Statements of Operations. Non-real estate repossessed assets are treated in a similar manner.
43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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.
GOODWILL — Goodwill arises from business combinations and is generally determined as the excess of the
fair value of the consideration transferred over the fair value of the net assets acquired and liabilities assumed as of
the acquisition date. Goodwill acquired in a purchase business combination and determined to have an indefinite
useful life is not amortized, but tested for impairment at least annually or more frequently if events and circumstances
exists that indicate that a goodwill impairment test should be performed. We have selected December 31 as the date
to perform the annual impairment test. Goodwill is the only intangible asset with an indefinite life on our
Consolidated Statements of Financial Condition.
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, 2018 or 2017. 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
44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
and mandatory forward commitments for the future delivery of these mortgage loans, (ii) certain pay-fixed and
pay-variable interest rate swap agreements related to commercial loan customers and (iii) certain purchased and
written options related to a time deposit product. 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 income (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. Forfeitures are recognized as they occur.
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.
45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
COMMON STOCK — At December 31, 2018, 0.1 million shares of common stock were reserved for issuance
under the dividend reinvestment plan and 0.8 million shares of common stock were reserved for issuance under our
long-term incentive plans.
RECLASSIFICATION — Certain amounts in the 2017 and 2016 consolidated financial statements have been
reclassified to conform to the 2018 presentation.
ADOPTION OF NEW ACCOUNTING STANDARDS — In May 2014, the FASB issued ASU 2014-09,
‘‘Revenue from Contracts with Customers (Topic 606)’’, (‘‘ASU 2014-09’’). This ASU supersedes and replaces
nearly all existing revenue recognition guidance, including industry-specific guidance, establishes a new control-
based revenue recognition model, changes the basis for deciding when revenue is recognized over time or at a point
in time, provides new and more detailed guidance on specific topics and expands and improves disclosures about
revenue. In addition, this ASU specifies the accounting for some costs to obtain or fulfill a contract with a customer.
We adopted this ASU using the modified retrospective approach with no 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 revenue are excluded from the scope of this amended guidance. Those
operating revenue streams that are included in the scope of this amended guidance were not materially impacted.
Results for reporting periods beginning after January 1, 2018 are presented under this ASU while prior period
amounts continue to be reported in accordance with legacy GAAP. The impact of the adoption of this ASU on our
Consolidated Statements of Operations for the year ending December 31, 2018 is summarized in the table below. See
note #25.
The impact of the adoption of ASU 2014-09 on our Consolidated Statement of Operations follows:
Non-interest income - Interchange income . . . . . . . . . . . . . . . . . . . . . . .
Non-interest expense - interchange expense . . . . . . . . . . . . . . . . . . . . . .
$9,905
$2,702
$8,434
$1,231
Impact on net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,471(1)
1,471(1)
$ —
As Reported
Under
Legacy GAAP
(In thousands)
Impact of
ASU 2014-09
(1) Represents certain costs charged by payment networks that were previously netted against interchange income.
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, require
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, require
public business entities to use the exit price notion when measuring the fair value of financial instruments for
disclosure purposes, require separate presentation of financial assets and financial liabilities by measurement
category and form of financial asset and eliminate 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 was effective for us on January 1, 2018. The
adoption of this ASU did not have a material impact on our consolidated operating results or financial condition. As
a result of the adoption of this ASU our equity securities previously classified as trading securities are now classified
as equity securities at fair value on our December 31, 2018 Consolidated Statement of Financial Condition. In
addition, this amended guidance impacted certain fair value disclosure items (see note #21).
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.
46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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
amended guidance is effective for us on January 1, 2020 with early application permitted. Due to our recent
acquisition (see note #26) and expectations this ASU would 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 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 eliminates 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.
In February 2016, the Financial Accounting Standards Board (‘‘FASB’’) issued ASU 2016-02, ‘‘Leases (Topic
842)’’. This ASU amends existing guidance related to the accounting for leases. These amendments, among other
things, require 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 was effective for us on January 1,
2019 and did not 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 we do not expect a material change in the recognition,
measurement and presentation of lease expense or impact on cash flow. The primary impact is the recognition of
certain operating leases on our Consolidated Statements of Financial Condition which resulted in the recording of
right to use assets and offsetting lease liabilities each totaling approximately $7.7 million at January 1, 2019.
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 have completed
historical data validation and are currently in the process of reviewing credit loss estimation methodologies and
performing test calculations. We have not yet determined what the impact will be on our consolidated operating
results or financial condition, which will be impacted by several variables, including the economic environment and
forecast at adoption. Though, by the nature of the implementation of an expected loss model compared to an incurred
loss approach, we would anticipate our AFLL to increase under this ASU. The Bank expects to begin full parallel runs
mid-2019, with a goal of providing an estimated impact range in our 2019 second quarter Form 10-Q.
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
47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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 was
effective for us on January 1, 2019, and did not have a material impact on our consolidated operating results or
financial condition.
In August 2018, the FASB issued ASU 2018-13, ‘‘Fair Value Measurement (Topic 820), Disclosure Framework
– Changes to the Disclosure Requirements for Fair Value Measurement’’. This new ASU amends disclosure
requirements in Topic 820 to eliminate, add and modify certain disclosure requirements for fair value measurements
as part of its disclosure framework project. The amended guidance eliminates the requirements to disclose the amount
of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, the entity’s policy for the timing
of transfers between levels of the fair value hierarchy and the entity’s valuation processes for Level 3 fair value
measurements. The amended guidance adds the requirements to disclose the changes in unrealized gains and losses
for the period included in other comprehensive income (loss) for recurring Level 3 fair value measurements of
instruments held at
the end of the reporting period and for recurring and nonrecurring Level 3 fair value
measurements, the range and weighted average used to develop significant unobservable inputs and how the weighted
average was calculated, with certain exceptions. This amended guidance is effective for us on January 1, 2020, and
is not expected to have a material impact on our consolidated operating results or financial condition.
NOTE 2 – RESTRICTIONS ON CASH AND DUE FROM BANKS
Our Bank is required to maintain reserve balances in the form of vault cash and non-interest earning balances
with the FRB. The average reserve balances to be maintained during 2018 and 2017 were $9.6 million and
$5.2 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 $0.1 million
and $0.7 million at December 31, 2018 and 2017, respectively.
NOTE 3 – SECURITIES
Securities available for sale consist of the following at December 31:
2018
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortized
Cost
$ 20,198
124,777
5,909
29,735
83,481
130,244
34,866
1,964
2,050
Unrealized
Gains
Losses
Fair Value
(In thousands)
$
9
817
1
321
86
257
29
—
—
$ 193
1,843
184
637
248
2,946
586
145
36
$6,818
$ 20,014
123,751
5,726
29,419
83,319
127,555
34,309
1,819
2,014
$427,926
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$433,224
$1,520
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
898
25,667
137,785
9,894
29,011
93,811
$ — $ — $
82
1,116
36
428
202
67
983
170
330
115
898
25,682
137,918
9,760
29,109
93,898
48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Obligations of states and political subdivisions. . . . . . . . . . . . .
Corporate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Trust preferred. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign government . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortized
Cost
174,073
47,365
2,929
2,087
Unrealized
Gains
Losses
Fair Value
(In thousands)
755
578
—
—
1,883
90
127
27
172,945
47,853
2,802
2,060
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$523,520
$3,197
$3,792
$522,925
Total OTTI recognized in accumulated other comprehensive loss for securities available for sale was zero at both
December 31, 2018 and 2017, 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)
2018
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 . . . . . . . . . . . . . . . . . . . .
7,150
18,374
566
8,273
53,043
25,423
17,758
939
—
$
46
180
3
57
160
262
343
61
—
$ 11,945
48,184
5,094
16,145
10,235
80,701
9,222
880
2,014
$ 147
1,663
181
580
88
2,684
243
84
36
$ 19,095
66,558
5,660
24,418
63,278
106,124
26,980
1,819
2,014
$ 193
1,843
184
637
248
2,946
586
145
36
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $131,526
$1,112
$184,420
$5,706
$315,946
$6,818
2017
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 . . . . . . . . . . . . . . . . . . . .
5,466
22,198
2,181
11,390
20,352
76,574
14,440
—
489
$
26
229
34
92
40
936
33
—
10
$
5,735
40,698
3,994
4,396
16,648
28,246
3,943
2,802
1,571
$
41
754
136
238
75
947
57
127
17
$ 11,201
62,896
6,175
15,786
37,000
104,820
18,383
2,802
2,060
$
67
983
170
330
115
1,883
90
127
27
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $153,090
$1,400
$108,033
$2,392
$261,123
$3,792
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
49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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, 2018, we had 48 U.S. agency, 127 U.S. agency residential mortgage-backed and 15
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, 2018, we had 33 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.
Four private label mortgage-backed securities (including two of 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. 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, 2018, we had 94 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, 2018, we had 339 municipal securities whose
fair value is less than amortized cost. The unrealized losses are primarily due to wider benchmark pricing spreads and
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, 2018, we had 37 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, 2018, we had two trust preferred securities whose fair value is less
than amortized cost. Both of our trust preferred securities are single issue securities issued by a trust subsidiary of
a bank holding company. The pricing of trust preferred securities has suffered from credit spread widening. One of
the securities is rated by a major rating agency 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 $0.94 million as of December 31, 2018, continues to have
satisfactory credit metrics and make interest payments. As management does not intend to liquidate this security and
it is more likely than not that we will not be required to sell this security prior to recovery of the unrealized loss, this
decline is not deemed to be other than temporary.
Foreign government — at December 31, 2018, 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.
50
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
We recorded zero credit related OTTI charges in the Consolidated Statements of Operations on securities
available for sale during 2018, 2017, and 2016.
At December 31, 2018, 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, 2018
Fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortized cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-credit unrealized loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unrealized gain. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cumulative credit related OTTI. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$792
664
—
128
757
$741
578
—
163
457
$ 25
—
—
25
380
Total
$1,558
1,242
—
316
1,594
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, 2018. The original
amortized cost (current amortized cost excluding cumulative credit related OTTI) 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018
2017
(In thousands)
2016
$1,594
$1,594
$1,594
—
—
—
—
—
—
—
—
—
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,594
$1,594
$1,594
The amortized cost and fair value of securities available for sale at December 31, 2018, 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)
$ 10,167
77,824
57,654
43,677
189,322
124,777
5,909
29,735
83,481
$ 10,150
77,042
56,301
42,218
185,711
123,751
5,726
29,419
83,319
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$433,224
$427,926
51
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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:
2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$48,736
17,308
64,103
$192
218
354
Proceeds
Realized
Gains (1)
(In thousands)
Losses
$136
3
53
(1) 2018 excludes a $0.144 million gain on the sale of 1,000 VISA Class B shares.
Certain preferred stocks have been classified as equity securities at fair value in our Consolidated Statement of
Financial Condition beginning on January 1, 2018. Previously these preferred stocks were classified as trading
securities. See note #1. During 2018, 2017 and 2016, we recognized gains (losses) on these preferred stocks of
$(0.06) million, $0.05 million and $0.26 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 preferred stock
still held at December 31, 2018 and 2017.
Securities available for sale with a book value of zero and $0.9 million at December 31, 2018 and 2017,
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, 2018 or 2017.
NOTE 4 – LOANS AND PAYMENT PLAN RECEIVABLES
Our loan portfolios at December 31 follow:
2018
2017
(In thousands)
Real estate (1)
Residential first mortgages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 811,719 $ 672,592
136,560
Residential home equity and other junior mortgages . . . . . . . . . . . . . . . . . . . . . . . . . . .
143,188
Construction and land development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
538,880
Other (2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
291,091
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
231,786
Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4,720
Agricultural . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
177,574
180,286
707,347
379,607
319,058
6,929
Total loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,582,520 $2,018,817
(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 $13.3 million and $9.3 million at December 31, 2018 and 2017,
respectively.
In August 2016, we purchased $15.0 million of single-family residential fixed rate jumbo mortgage loans from
a Michigan-based financial institution. These mortgage loans were all on properties located in Michigan, had a
weighted average interest rate (after a 0.25% servicing fee) of 3.65% and a weighted average remaining contractual
maturity of 332 months. We did not purchase any loans during 2018 or 2017.
52
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
An analysis of the allowance for loan losses by portfolio segment for the years ended December 31 follows:
2018
Balance at beginning of period . . . . . . . . . . .
Additions (deductions)
Commercial Mortgage
Installment
Payment
Plan
Receivables
Subjective
Allocation
Total
(In thousands)
$ 5,595
$ 8,733
$
864
$ —
$7,395
$22,587
Provision for loan losses . . . . . . . . . . . . . .
Recoveries credited to allowance . . . . . . .
Loans charged against the allowance . . . .
(946)
2,889
(448)
457
734
(1,946)
462
999
(1,430)
—
—
—
1,530
1,503
4,622
—
— (3,824)
Balance at end of period . . . . . . . . . . . . . . . .
$ 7,090
$ 7,978
$
895
$ —
$8,925
$24,888
2017
Balance at beginning of period . . . . . . . . . . .
Additions (deductions)
$ 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
53
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Allowance for loan losses and recorded investment in loans by portfolio segment at December 31 follows:
Commercial Mortgage
Installment
(In thousands)
Subjective
Allocation
Total
2018
Allowance for loan losses:
Individually evaluated for impairment. . . . . . . . . . . $
Collectively evaluated for impairment. . . . . . . . . . .
Loans acquired with deteriorated credit quality . . .
1,305 $
5,785
—
4,799 $
3,179
—
Total ending allowance for loan losses balance . . . . . $
7,090 $
7,978 $
206
689
—
895
$ — $
8,925
—
6,310
18,578
—
$8,925
$
24,888
Loans
Individually evaluated for impairment. . . . . . . . . . . $
Collectively evaluated for impairment. . . . . . . . . . .
Loans acquired with deteriorated credit quality . . .
1,137,586
1,609
Total loans recorded investment. . . . . . . . . . . . . . . . . .
Accrued interest included in recorded investment . . .
1,147,892
3,411
8,697 $
46,394 $
1,000,038
555
1,046,987
4,097
3,370
392,460
349
396,179
1,030
Total loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,144,481 $1,042,890 $395,149
58,461
$
2,530,084
2,513
2,591,058
8,538
$2,582,520
2017
Allowance for loan losses:
Individually evaluated for impairment. . . . . . . . . . . $
Collectively evaluated for impairment. . . . . . . . . . .
837 $
4,758
5,725 $
3,008
Total ending allowance for loan losses balance . . . . . $
5,595 $
8,733 $
277
587
864
$ — $
7,395
6,839
15,748
$7,395
$
22,587
Loans
Individually evaluated for impairment. . . . . . . . . . . $
Collectively evaluated for impairment. . . . . . . . . . .
Total loans recorded investment. . . . . . . . . . . . . . . . . .
Accrued interest included in recorded investment . . .
8,420 $
847,140
855,560
2,300
53,179 $
799,629
852,808
3,278
3,945
313,005
316,950
923
Total loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 853,260 $ 849,530 $316,027
65,544
$
1,959,774
2,025,318
6,501
$2,018,817
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, $0.4 million and $0.5 million of interest income would have
been recognized in 2018, 2017 and 2016, respectively. Interest income recorded on these loans was approximately
zero during the years ended 2018, 2017 and 2016.
54
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(1):
2018
Commercial
Income producing - real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Land, land development and construction - real estate . . . . . . . . . . . . . .
Commercial and industrial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mortgage
1-4 family . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Resort lending. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Home equity - 1st lien . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Home equity - 2nd lien. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Installment
Home equity - 1st lien . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Home equity - 2nd lien. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Boat lending . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Recreational vehicle lending . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total recorded investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued interest included in recorded investment . . . . . . . . . . . . . . . . . . . .
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. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Installment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Home equity - 1st lien . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Home equity - 2nd lien. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Boat lending . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Recreational vehicle lending . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total recorded investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued interest included in recorded investment . . . . . . . . . . . . . . . . . . . .
(1) Non-performing loans exclude purchase credit impaired loans.
90+ and
Still
Accruing
Total Non-
Performing
Loans
Non-
Accrual
(In thousands)
$—
—
—
5
—
—
—
—
—
—
—
—
$ 5
$—
$—
—
—
—
—
—
—
—
—
—
—
—
$—
$—
$ —
—
2,220
4,694
755
159
419
179
226
166
7
204
$ —
—
2,220
4,699
755
159
419
179
226
166
7
204
$9,029
$ —
$9,034
$ —
$
30
9
607
5,130
1,223
326
316
141
159
100
25
118
$
30
9
607
5,130
1,223
326
316
141
159
100
25
118
$8,184
$ —
$8,184
$ —
55
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)
2018
Commercial
Income producing - real estate . . . . . . . . .
Land, land development and construction
- real estate . . . . . . . . . . . . . . . . . . . . . . .
Commercial and industrial . . . . . . . . . . . . .
Mortgage
1-4 family . . . . . . . . . . . . . . . . . . . . . . . . . .
Resort lending. . . . . . . . . . . . . . . . . . . . . . .
Home equity - 1st lien . . . . . . . . . . . . . . . .
Home equity - 2nd lien. . . . . . . . . . . . . . . .
Installment
Home equity - 1st lien . . . . . . . . . . . . . . . .
Home equity - 2nd lien. . . . . . . . . . . . . . . .
Boat lending . . . . . . . . . . . . . . . . . . . . . . . .
Recreational vehicle lending . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
44
$ — $ — $
44 $ 388,729 $ 388,773
—
1,538
1,608
252
176
446
200
111
316
28
241
—
—
194
—
—
100
55
24
295
21
131
—
—
— 1,538
84,458
673,123
84,458
674,661
4,882
755
159
419
197
226
166
7
204
6,684
1,007
335
965
452
361
777
56
576
833,760
80,774
38,909
84,553
6,985
6,683
169,117
125,780
85,392
840,444
81,781
39,244
85,518
7,437
7,044
169,894
125,836
85,968
Total recorded investment . . . . . . . . . . .
$4,960
$ 820
$7,015 $12,795 $2,578,263 $2,591,058
Accrued interest included in recorded
investment. . . . . . . . . . . . . . . . . . . . . . . . . .
$
44
$
11
$ — $
55 $
8,483 $
8,538
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. . . . . . . . . . . . . . . .
Installment
Home equity - 1st lien . . . . . . . . . . . . . . . .
Home equity - 2nd lien. . . . . . . . . . . . . . . .
Boat lending . . . . . . . . . . . . . . . . . . . . . . . .
Recreational vehicle lending . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ — $ — $
30 $
30 $ 290,466 $ 290,496
9
60
1,559
713
308
353
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
7,491
1,936
672
824
242
470
195
73
508
659,742
88,620
34,689
58,834
9,213
9,001
129,777
92,737
74,734
667,233
90,556
35,361
59,658
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
56
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Impaired loans are as follows :
December 31,
2018
2017
(In thousands)
Impaired loans with no allocated allowance for loan losses
TDR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non - TDR. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ —
—
$
349
175
Impaired loans with an allocated allowance for loan losses
TDR - allowance based on collateral . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
TDR - allowance based on present value cash flow . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non - TDR - allowance based on collateral . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,787
53,258
2,145
2,482
62,113
148
Total impaired loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$58,190
$65,267
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
769
4,849
692
$
684
6,089
66
Total amount of allowance for loan losses allocated . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 6,310
$ 6,839
Impaired loans by class as of December 31 are as follows:
With no related allowance for loan losses
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018
Unpaid
Principal
Balance
Recorded
Investment
Related
Allowance for
Loan Losses
Recorded
Investment
(In thousands)
2017
Unpaid
Principal
Balance
Related
Allowance for
Loan Losses
$—
$ —
$—
$ — $ —
$—
—
—
474
—
—
—
122
—
5
—
15
616
—
—
—
—
—
—
—
—
—
—
—
—
—
524
2
—
—
—
1
—
—
—
—
—
549
469
—
—
—
69
—
—
—
—
527
1,087
—
—
—
—
—
—
—
—
—
—
—
—
—
—
3
—
—
—
1
—
—
—
—
4
57
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
2018
Unpaid
Principal
Balance
Recorded
Investment
Related
Allowance for
Loan Losses
Recorded
Investment
(In thousands)
2017
Unpaid
Principal
Balance
Related
Allowance for
Loan Losses
With an allowance for loan losses recorded:
Commercial
Income producing - real estate . . . . . . . . .
Land, land development & construction-
real estate . . . . . . . . . . . . . . . . . . . . . . . .
Commercial and industrial . . . . . . . . . . . . .
4,770
4,758
290
3,637
289
3,735
Mortgage
1-4 family . . . . . . . . . . . . . . . . . . . . . . . . . .
Resort lending. . . . . . . . . . . . . . . . . . . . . . .
Home equity - 1st lien . . . . . . . . . . . . . . . .
Home equity - 2nd lien. . . . . . . . . . . . . . . .
32,842
13,328
65
156
34,427
13,354
64
155
Installment
Home equity - 1st lien . . . . . . . . . . . . . . . .
Home equity - 2nd lien. . . . . . . . . . . . . . . .
Boat lending . . . . . . . . . . . . . . . . . . . . . . . .
Recreational vehicle lending . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,440
1,471
—
79
379
1,524
1,491
—
79
406
303
35
967
2,859
1,927
4
9
89
92
—
4
21
5,195
5,347
166
2,535
194
2,651
36,848
15,978
173
178
38,480
16,046
236
213
1,667
1,793
1
90
393
1,804
1,805
5
90
418
347
9
481
3,454
2,210
43
18
108
140
1
5
23
58,457
60,282
6,310
65,017
67,289
6,839
Total
Commercial
Income producing - real estate . . . . . . . . .
Land, land development & construction-
real estate . . . . . . . . . . . . . . . . . . . . . . . .
Commercial and industrial . . . . . . . . . . . . .
4,770
4,758
290
3,637
289
3,735
Mortgage
1-4 family . . . . . . . . . . . . . . . . . . . . . . . . . .
Resort lending. . . . . . . . . . . . . . . . . . . . . . .
Home equity - 1st lien . . . . . . . . . . . . . . . .
Home equity - 2nd lien. . . . . . . . . . . . . . . .
32,845
13,328
65
156
34,901
13,354
64
155
Installment
Home equity - 1st lien . . . . . . . . . . . . . . . .
Home equity - 2nd lien. . . . . . . . . . . . . . . .
Boat lending . . . . . . . . . . . . . . . . . . . . . . . .
Recreational vehicle lending . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,441
1,471
—
79
379
1,646
1,491
5
79
421
303
35
967
2,859
1,927
4
9
89
92
—
4
21
5,195
5,347
166
3,059
194
3,200
36,850
15,978
173
178
38,949
16,046
236
213
1,668
1,793
1
90
393
1,873
1,805
5
90
418
347
9
481
3,454
2,210
43
18
108
140
1
5
23
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . $58,461 $60,898
$6,310
$65,544 $68,376
$6,839
Accrued interest included in recorded
investment. . . . . . . . . . . . . . . . . . . . . . . . . . . . $
271
$
277
58
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:
With no related allowance for loan losses
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
With an allowance for loan losses 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018
2017
2016
Average
Recorded
Investment
Interest
Income
Recognized
Average
Recorded
Investment
Interest
Income
Recognized
Average
Recorded
Investment
Interest
Income
Recognized
(In thousands)
$ — $ — $
177
$ — $
609
$
2
961
378
56
—
—
—
1
—
—
—
—
1,396
5,016
184
2,640
35,007
14,687
105
165
1,564
1,676
1
84
400
—
20
27
—
—
—
10
—
—
—
1
58
277
11
127
1,791
606
5
7
105
95
—
4
24
6
751
52
—
—
—
1
—
—
—
—
987
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
8,069
1,129
5,723
44,923
17,544
226
248
2,185
2,661
2
115
433
7
54
16
—
—
—
5
—
—
—
—
84
427
31
189
1,918
619
10
14
147
162
1
6
28
61,529
3,052
70,920
3,182
83,258
3,552
59
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
2018
2017
2016
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5,016
1,145
3,018
35,063
14,687
105
165
1,565
1,676
1
84
400
277
11
147
1,818
606
5
7
115
95
—
4
25
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
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$62,925
$3,110
$71,907
$3,231
$85,171
$3,636
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
2018
Retail (1)
(In thousands)
Total
$6,460
74
$6,534
$46,627
2,884(3)
$49,511
$53,087
2,958
$56,045
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
(3) Also includes loans on non-accrual at the time of modification until six payments are received on a timely basis.
We have allocated $6.3 million and $6.8 million of specific reserves to customers whose loan terms have been
modified in troubled debt restructurings as of December 31, 2018 and 2017, respectively. We have committed to lend
additional amounts totaling up to $0.04 million at both December 31, 2018 and 2017, respectively, to customers with
outstanding loans that are classified as troubled debt restructurings.
60
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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:
Number of
Contracts
Pre-modification
Recorded
Balance
Post-modification
Recorded
Balance
(Dollars in thousands)
2018
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. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1
1
7
10
1
—
—
8
3
—
—
3
34
—
—
15
6
1
—
—
3
10
—
—
2
37
$
67
137
652
1,410
115
—
—
413
113
—
—
182
$
67
137
652
1,413
114
—
—
415
114
—
—
180
$3,089
$3,092
$ —
—
925
$ —
—
925
456
189
—
—
86
391
—
—
74
462
189
—
—
90
394
—
—
75
$2,121
$2,135
61
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Number of
Contracts
Pre-modification
Recorded
Balance
Post-modification
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. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4
—
9
9
1
1
2
6
6
—
—
2
40
$ 290
—
2,044
927
116
107
77
141
154
—
—
46
$ 290
—
2,027
1,004
117
78
78
145
157
—
—
46
$3,902
$3,942
The troubled debt restructurings described above increased (decreased) the AFLL by $(0.2) million, $0.1 million
and $(0.1) million during the years ended December 31, 2018, 2017 and 2016, respectively and resulted in charge
offs of zero, zero and $0.53 million during the years ended December 31, 2018, 2017 and 2016, 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)
2018
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
$—
—
—
—
—
—
—
13
—
—
—
—
$13
62
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
—
6
—
—
—
—
1
—
—
—
—
7
—
—
1
—
—
—
—
—
—
—
—
—
1
$ —
—
164
—
—
—
—
13
—
—
—
—
$ 177
$ —
—
1,767
—
—
—
—
—
—
—
—
—
$1,767
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 zero, $0.04 million and $(0.17) million during the years ended December 31, 2018, 2017 and 2016, respectively
and resulted in charge offs of zero, $0.05 million and $0.51 million during the years ended December 31, 2018, 2017
and 2016, respectively.
63
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The terms of certain other loans were modified during the years ending December 31, 2018, 2017 and 2016 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-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
2018
Income producing - real estate . . . . . . . . . . . . . . . .
Land, land development and construction - real
estate. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial and industrial. . . . . . . . . . . . . . . . . . . .
$ 375,142
$13,387
$ 200
$
44
$ 388,773
76,120
631,248
8,328
35,469
—
5,577
10
2,367
84,458
674,661
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,082,510
$57,184
$5,777
$2,421
$1,147,892
Accrued interest included in total . . . . . . . . . . . . . .
$
3,107
$
174
$ 130
$ — $
3,411
64
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Non-watch
1-6
Watch
7-8
Commercial
Substandard
Accrual
9
(In thousands)
Non-
Accrual
10-11
Total
2017
Income producing - real estate . . . . . . . . . . . . . . . .
Land, land development and construction - real
estate. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial and industrial. . . . . . . . . . . . . . . . . . . .
$288,869
$ 1,293
$ 304
$ 30
$290,496
70,122
463,570
60
28,351
—
2,345
9
607
70,191
494,873
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$822,561
$29,704
$2,649
$646
$855,560
Accrued interest included in total . . . . . . . . . . . . . .
$
2,198
$
94
$
8
$ — $
2,300
For each of our mortgage and installment segment classes we generally monitor credit quality based on the credit
scores of the borrowers. These credit scores are generally updated semi-annually. The following tables summarize
credit scores by loan class for our mortgage and installment loan segments at December 31:
1-4
Family
Resort
Lending
Mortgage (1)
Home
Equity
1st Lien
(In thousands)
2018
800 and above . . . . . . . . . . . . . . . . . . . . . . . .
750-799 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
700-749 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
650-699 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
600-649 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
550-599 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
500-549 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Under 500 . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unknown. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 94,492
384,344
202,440
91,847
34,342
13,771
8,439
2,533
8,236
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$840,444
$10,898
36,542
17,282
9,945
3,088
1,867
106
143
1,910
$81,781
$ 6,784
17,303
9,155
3,987
959
427
418
98
113
$39,244
Home
Equity
2nd Lien
$ 8,838
38,295
23,249
8,681
3,359
1,236
826
381
653
$85,518
Total
$ 121,012
476,484
252,126
114,460
41,748
17,301
9,789
3,155
10,912
$1,046,987
Accrued interest included in total . . . . . . . . . . .
$
3,079
$
363
$
199
$
456
$
4,097
2017
800 and above . . . . . . . . . . . . . . . . . . . . . . . .
750-799 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
700-749 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
650-699 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
600-649 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
550-599 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
500-549 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Under 500 . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unknown. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 78,523
283,558
154,239
84,121
25,087
15,136
9,548
2,549
14,472
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$667,233
$11,625
36,015
22,099
12,145
3,025
2,710
1,009
269
1,659
$90,556
$ 6,169
16,561
7,317
2,793
1,189
518
397
260
157
$35,361
$ 7,842
24,126
15,012
7,420
2,512
1,118
1,156
385
87
$59,658
$ 104,159
360,260
198,667
106,479
31,813
19,482
12,110
3,463
16,375
$ 852,808
Accrued interest included in total . . . . . . . . . . .
$
2,456
$
371
$
157
$
294
$
3,278
(1) Credit scores have been updated within the last twelve months.
65
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)
2018
800 and above. . . . . . . . . . . . . . . . . . . .
750-799 . . . . . . . . . . . . . . . . . . . . . . . . .
700-749 . . . . . . . . . . . . . . . . . . . . . . . . .
650-699 . . . . . . . . . . . . . . . . . . . . . . . . .
600-649 . . . . . . . . . . . . . . . . . . . . . . . . .
550-599 . . . . . . . . . . . . . . . . . . . . . . . . .
500-549 . . . . . . . . . . . . . . . . . . . . . . . . .
Under 500 . . . . . . . . . . . . . . . . . . . . . . .
Unknown . . . . . . . . . . . . . . . . . . . . . . . .
$ 555
1,502
1,582
1,606
996
759
384
51
2
Total. . . . . . . . . . . . . . . . . . . . . . . . . .
$7,437
$ 235
1,642
1,682
1,217
1,272
658
229
6
103
$7,044
$ 20,767
100,191
35,455
10,581
1,657
652
286
266
39
$169,894
$ 20,197
74,154
24,890
4,918
992
453
225
7
—
$ 6,272
31,483
24,369
9,840
2,751
838
651
218
9,546
$ 48,026
208,972
87,978
28,162
7,668
3,360
1,775
548
9,690
$125,836
$85,968
$396,179
Accrued interest included in total . . . . . .
$
28
$
25
$
403
$
311
$
263
$
1,030
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
Total. . . . . . . . . . . . . . . . . . . . . . . . . .
$9,455
$ 825
1,952
2,142
2,036
1,065
1,028
303
88
32
$9,471
$ 15,531
73,251
28,922
9,179
2,052
640
281
57
59
$129,972
$ 16,754
52,610
17,993
4,270
754
305
83
6
35
$ 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
$ 92,810
$75,242
$316,950
Accrued interest included in total . . . . . .
$
39
$
43
$
346
$
254
$
241
$
923
(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:
2018
2017
(In thousands)
Mortgage loans serviced for:
Fannie Mae. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Freddie Mac . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ginnie Mae. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
FHLB . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,350,703
712,740
165,467
78,687
26,148
$1,001,388
637,204
130,284
47,527
34
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$2,333,745
$1,816,437
Custodial deposit accounts maintained in connection with mortgage loans serviced for others totaled
$22.0 million and $20.7 million, at December 31, 2018 and 2017, 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
66
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
service loans to these investors. This could impact our ability to generate net gains on mortgage 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. . . . . . . . . . . . . . . . . . . . . . . . .
Servicing rights acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018
2017
(In thousands)
2016
$
$
$
$
15,699
—
15,699
4,977
3,047
—
—
191
(2,514)
13,671
542
14,213
4,230
—
—
—
(718)
(2,026)
12,436
—
12,436
3,119
—
(2,850)
966
—
—
21,400
$
15,699
$
13,671
— $
— $
2,306
$
$
$
$
Loans sold and serviced that have had servicing rights capitalized. . . .
$2,333,081
$1,815,668
$1,657,996
Fair value of capitalized mortgage loan servicing rights was determined using an average coupon rate of 4.23%,
average servicing fee of 0.258%, average discount rate of 10.15% and an average Public Securities Association
(‘‘PSA’’) prepayment rate of 182 for December 31, 2018; and an average coupon rate of 4.17%, average servicing
fee of 0.258%, average discount rate of 10.11% and an average PSA prepayment rate of 169 for December 31, 2017.
Purchase Credit Impaired (‘‘PCI’’) Loans
Loans acquired in a business combination are recorded at estimated fair value on their purchase date with no
carryover of the related allowance for loan losses. In determining the estimated fair value of purchased loans,
management considers a number of factors including, among others, the remaining life of the acquired loans,
estimated prepayments, estimated loss ratios, estimated value of the underlying collateral, and net present value of
cash flows expected to be received. Purchased loans are accounted for in accordance with guidance for certain loans
acquired in a transfer (ASC 310-30), when the loans have evidence of credit deterioration since origination and it is
probable at the date of acquisition that the acquirer will not collect all contractually required principal and interest
payments. The difference between contractually required payments and the cash flows expected to be collected at
acquisition is referred to as the non-accretable difference. Subsequent decreases to the expected cash flows will
generally result in a provision for loan losses. Subsequent increases in expected cash flows will result in a reversal
of the provision for loan losses to the extent of prior charges and then an adjustment to accretable yield, which would
have a positive impact on interest income.
67
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
As a result of our acquisition of TCSB Bancorp, Inc. (‘‘TCSB’’) (see note #26) we purchased loans for which
there was, at acquisition, evidence of deterioration of credit quality since origination and it was probable, at
acquisition, that all contractually required payments would not be collected. For these loans that meet the criteria of
ASC 310-30 treatment, the carrying amount was as follows:
December 31,
2018
2017
(In thousands)
Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mortgage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Installment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total carrying amount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Allowance for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Carrying amount, net of allowance for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,609
555
349
2,513
—
$2,513
$—
—
—
—
—
$—
The accretable difference on PCI loans is the difference between the expected cash flows and the net present
value of expected cash flows with such difference accreted into earnings using the effective yield method over the
income totaled $0.11 million during the year ended
term of the loans. Accretion recorded as loan interest
December 31, 2018. Accretable yield of PCI loans, or income expected to be collected follows:
Year ended December 31,
2018
2017
(In thousands)
Balance at beginning of period. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
New loans purchased. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accretion of income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reclassification from (to) nonaccretable difference. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Disposals/other adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ —
568
(106)
—
—
$ 462
$—
—
—
—
—
$—
PCI loans purchased during 2018 (all relating to the TCSB acquisition) for which it was probable at acquisition
that all contractually required payments would not be collected follows:
Contractually required payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non accretable difference. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash flows expected to be collected at acquisition. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accretable yield . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(In thousands)
$4,213
(742)
3,471
(568)
Fair value of acquired loans at acquisition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$2,903
Income would not be recognized on certain purchased loans if we could not reasonably estimate cash flows to
be collected. We did not have any purchased loans for which we could not reasonably estimate cash flows to be
collected.
68
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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 . . . . . . . . . . . . . . . .
2018
2017
(In thousands)
2016
$ 1,628
1,510
(1,822)
(138)
$ 1,178
$ 4,956
1,735
(4,737)
(326)
$ 1,628
$ 7,070
2,355
(3,596)
(873)
$ 4,956
(1) Table excludes other repossessed assets totaling $0.12 million and $0.02 million at December 31, 2018 and
2017, respectively.
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:
Balance at beginning of year. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additions charged to expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Direct write-downs upon sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance at end of year. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018
2017
(In thousands)
2016
$ 123
138
(117)
$ 144
$ 793
326
(996)
$ 123
$ 1,692
873
(1,772)
$
793
At December 31, 2018 and 2017, the balance of other real estate includes $1.2 million and $1.6 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 $0.3 million and
$0.8 million at December 31, 2018 and 2017, respectively.
Other real estate and repossessed assets totaling $1.3 million and $1.6 million at December 31, 2018 and 2017,
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:
2018
2017
(In thousands)
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 16,843
56,385
70,039
$ 16,199
55,434
69,604
Accumulated depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
143,267
(104,490)
141,237
(102,088)
Property and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 38,777
$ 39,149
Depreciation expense was $5.1 million, $5.3 million and $5.8 million in 2018, 2017 and 2016, respectively.
69
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTE 7 – GOODWILL AND OTHER INTANGIBLES
Intangible assets, net of amortization, at December 31 follows:
2018
2017
Gross
Carrying
Amount
Accumulated
Amortization
Gross
Carrying
Amount
Accumulated
Amortization
(In thousands)
Amortized intangible assets - core deposits. . . . . . . . . . . . . . . . . .
$11,916
$5,501
Unamortized intangible assets - goodwill . . . . . . . . . . . . . . . . . . .
$28,300
$6,118
$ —
$4,532
The $5.8 million and $28.3 million increases in the gross carrying amount of core deposit intangibles and
goodwill, respectively are the result of our acquisition of TCSB (see note #26). There is no expected residual value
relating to the core deposit intangible asset which is expected to be amortized over a period of 10 years (weighted
average amortization period of 5.2 years). In the third quarter of 2018, goodwill was reduced by $0.7 million (to
$28.3 million) related to the collection of a TCSB acquired loan that had been charged off in full prior to the Merger.
Because of the status of the collection activities related to this loan at the time of the Merger, we determined that this
transaction was a measurement period adjustment and reduced goodwill accordingly.
At December 31, 2018, the Bank (our reporting unit) had positive equity and we elected to perform a qualitative
assessment to determine if it was more likely than not that the fair value of the Bank exceeds its carrying value,
including goodwill. The qualitative assessment indicated that it was more likely than not that the fair value of the
Bank exceeded its carrying value, resulting in no impairment.
Intangible amortization expense was $1.0 million, $0.3 million and $0.3 million during the years ended 2018,
2017 and 2016, respectively.
A summary of estimated core deposit intangible amortization at December 31, 2018, follows:
2019. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2020. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2021. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2022. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2023. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2024 and thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,089
1,020
970
785
547
2,004
$6,415
(In thousands)
Changes in the carrying amount of goodwill for the year ended December 31, 2018 follows:
Balance at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquired during the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance at end of the period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ —
28,300
$28,300
(In thousands)
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 4,146
7,415
2,917
$14,478
$1,530
2,777
2,468
$6,775
$1,115
1,628
2,198
$4,941
2018
2017
(In thousands)
2016
70
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Aggregate time deposits in denominations of $0.25 million or more amounted to $74.0 million and $92.2 million
at December 31, 2018 and 2017, respectively.
A summary of the maturity of time deposits at December 31, 2018, follows:
2019. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2020. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2021. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2022. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2023. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2024 and thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$555,436
110,637
21,287
12,179
15,531
864
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$715,934
(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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$114,503
8,577
58,992
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$182,072
$10,146
2,846
37,987
$50,979
2018
2017
(In thousands)
NOTE 9 – OTHER BORROWINGS
A summary of other borrowings at December 31 follows:
Advances from the FHLB. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal funds purchased . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018
2017
(In thousands)
$25,696
—
4
$25,700
$47,841
6,750
9
$54,600
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 $8.6 million at December 31, 2018. Unused borrowing capacity with the
FHLB (subject to the FHLB’s credit requirements and policies) was $445.7 million at December 31, 2018. Interest
expense on advances amounted to $1.0 million, $0.9 million and $0.8 million for the years ended December 31, 2018,
2017 and 2016, respectively. No FHLB advances were terminated during 2018, 2017 or 2016.
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, 2018, we were in
compliance with the FHLB stock ownership requirements.
71
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The maturity dates and weighted average interest rates of FHLB advances at December 31 follow:
2018
2017
Amount
Rate
Amount
(Dollars in thousands)
Rate
Fixed-rate advances
2018. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2019. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2020. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2022. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$10,000
10,762
4,934
1.60%
3.18
1.69
Total fixed-rate advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
25,696
2.28
Variable-rate advances - 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
$19,910
10,000
7,931
—
37,841
10,000
2.43%
1.60
3.80
2.50
1.67
Total advances. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$25,696
2.28% $47,841
2.33%
A summary of contractually required repayments of FHLB advances at December 31, 2018 follow:
2019. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2020. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2022. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(In thousands)
$10,143
10,619
4,934
$25,696
Borrowings with the FRB at December 31, 2018 and 2017 were zero. Average borrowings with the FRB during
the years ended December 31, 2018, 2017 and 2016 totaled $0.003 million, $0.047 million and zero. We had unused
borrowing capacity with the FRB (subject to the FRB’s credit requirements and policies) of $288.9 million at
December 31, 2018. Collateral for FRB borrowings are certain commercial and installment loans.
Interest expense on federal funds purchased totaled $0.1 million, $0.1 million and zero for the years ended
December 31, 2018, 2017 and 2016.
Assets, consisting of FHLB stock and loans, pledged to secure other borrowings and unused borrowing capacity
totaled $1.2 billion at December 31, 2018.
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
$38.2 million and $34.5 million at December 31, 2018 and 2017, 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.
As a result of our acquisition of TCSB (see note #26) we acquired TCSB Statutory Trust I as summarized in the
tables below at a discount. The discount at acquisition totaled $1.4 million and is being amortized through its maturity
date and is included in interest expense – other borrowings and subordinated debentures in the Consolidated
Statements of Operations.
72
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Summary information regarding subordinated debentures as of December 31 follows:
Entity Name
Issue
Date
Subordinated
Debentures
2018
Trust
Preferred
Securities
Issued
IBC Capital Finance III. . . . . . . . . . . . . . . . . . . . . . . . . . . . . May 2007
IBC Capital Finance IV . . . . . . . . . . . . . . . . . . . . . . . . . . . .
September 2007
Midwest Guaranty Trust I . . . . . . . . . . . . . . . . . . . . . . . . . . . November 2002
TCSB Statutory Trust I . . . . . . . . . . . . . . . . . . . . . . . . . . . . . March 2005
Discount on TCSB Statutory Trust I . . . . . . . . . . . . . . . . . .
(In thousands)
$12,372
15,465
7,732
5,155
(1,336)
$12,000
15,000
7,500
5,000
(1,336)
$39,388
$38,164
Entity Name
Issue
Date
Subordinated
Debentures
2017
Trust
Preferred
Securities
Issued
IBC Capital Finance III. . . . . . . . . . . . . . . . . . . . . . . . . . . . . May 2007
September 2007
IBC Capital Finance IV . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Midwest Guaranty Trust I . . . . . . . . . . . . . . . . . . . . . . . . . . . November 2002
(In thousands)
$12,372
15,465
7,732
$35,569
$12,000
15,000
7,500
$34,500
Common
Stock
Issued
$ 372
465
232
155
—
$1,224
Common
Stock
Issued
$ 372
465
232
$1,069
Other key terms for the subordinated debentures and trust preferred securities that were outstanding at
December 31, 2018 and 2017 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
TCSB Statutory Trust I . . . . . March 17, 2035
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
3 month LIBOR plus 2.20% March 17, 2010
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, 2018 and 2017.
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.
Distributions (payment of interest) on the trust preferred securities are 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.
73
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
A summary of financial instruments with off-balance sheet risk at December 31 follows:
2018
2017
(In thousands)
Financial instruments whose risk is represented by contract amounts
Commitments to extend credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Standby letters of credit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$505,421
4,998
$439,663
4,596
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 8.50% and are on-demand with no
stated maturity date.
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 to be also responsible for class notification costs and certain other expenses which
were 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 Finance Corporation (‘‘Mepco’’) (see note #27), 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, 2018 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
74
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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, 2018 these receivables balances had declined to $0.8 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 of $0.01 million, $0.17 million and $0.03 million for the years ended
December 31, 2018, 2017 and 2016, respectively. In addition, as a result of the TCSB acquisition (see note #26), we
made a purchase accounting adjustment of $0.11 million to record a reserve for loss reimbursement on sold mortgage
loans acquired from TCSB. The reserve for loss reimbursements on sold mortgage loans totaled $0.8 million and
$0.7 million at December 31, 2018 and 2017, 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, 2018, 2017 and 2016, 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 2018, 2017 and 2016
repurchases were made through open market transactions and totaled 587,969, zero and 1,153,136 shares of common
stock, respectively for an aggregate purchase price of $12.7 million, zero and $16.9 million, respectively.
A reconciliation of basic and diluted net income per common share for the years ended December 31 follows:
2018
2017
(In thousands, except per share amounts)
2016
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$39,839
$20,475
$22,766
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
23,412
176
128
53
—
21,327
142
121
60
—
21,378
151
115
48
35
Weighted average shares outstanding for calculation of diluted
earnings per share. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
23,769
21,650
21,727
Net income per common share
Basic (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
1.70
1.68
$
$
0.96
0.95
$
1.06
$ 1.05
(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 were zero for each year ended 2018, 2017 and 2016, respectively.
75
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTE 13 – INCOME TAX
The composition of income tax expense for the years ended December 31 follows:
2018
2017
(In thousands)
2016
Current expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in statutory rate. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Valuation allowance - change in estimate. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ — $ 1,927
10,071
5,965
—
9,294
—
—
$
362
9,756
—
17
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$9,294
$17,963
$10,135
The deferred income tax expense of $9.3 million in 2018 can be primarily attributed to the utilization of our net
operating loss (‘‘NOL’’) carryfoward and alternative minimum tax credit carryforward while the deferred income tax
expense of $10.1 million during 2017 can be primarily attributed to the utilization of our NOL carryfoward and the
deferred income tax expense of $9.8 million during 2016 can be primarily attributed to the utilization of our NOL
carryfoward and decrease in our AFLL.
On December 22, 2017, ‘‘H.R. 1’’, also known as the ‘‘Tax Cuts and Jobs Act’’, was signed into law. H.R.1,
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 21% for 2018 and 35% for 2017 and 2016 to the income before income tax for the years ended December
31 follows:
Statutory rate applied to income before income tax . . . . . . . . . . . . . . . . . . . . . . . . .
Tax-exempt income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Share-based compensation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Bank owned life insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unrecognized tax benefit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-deductible meals, entertainment and memberships . . . . . . . . . . . . . . . . . . . . . .
Change in statutory rate. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net change in valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018
2017
(In thousands)
2016
$10,318
(383)
(367)
(229)
(162)
85
—
—
32
$13,453
(777)
(287)
(372)
(123)
64
5,965
—
40
$11,515
(534)
(348)
(477)
(155)
46
—
17
71
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 9,294
$17,963
$10,135
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and
deferred tax liabilities at December 31 follow:
Deferred tax assets
Allowance for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Alternative minimum tax credit carry forward . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unrealized loss on securities available for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Share-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$5,052
1,686
1,569
1,113
900
$4,743
6,113
1,686
125
677
2018
2017
(In thousands)
76
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Unrealized loss on equity 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. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchase premiums, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vehicle service contract counterparty contingency reserve . . . . . . . . . . . . . . . . . . . . . . .
Loss carryforwards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Litigation settlement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unrealized loss on trading securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018
2017
(In thousands)
295
272
253
187
179
165
71
70
—
—
—
194
—
236
229
210
176
140
699
117
3,752
477
283
149
Gross deferred tax assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
12,006
19,812
Deferred tax liabilities
Capitalized mortgage loan servicing rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred loan fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal Home Loan Bank stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unrealized gain on derivative financial instruments . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4,494
1,706
27
—
6,227
3,297
1,327
27
72
4,723
Deferred tax assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 5,779
$15,089
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, 2018 and 2017, that the
realization of substantially all of our deferred tax assets continues to be more likely than not.
At December 31, 2018, we had $1.7 million of alternative minimum tax credit carryforwards that we expect to
utilize or be refunded within the next twelve months.
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. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018
2017
(In thousands)
2016
$ 724
26
(162)
—
$ 588
$ 840
7
(123)
—
$ 724
$ 976
19
(155)
—
$ 840
If recognized, the entire amount of unrecognized tax benefits, net of $0.1 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, 2018, 2017 and 2016. No amounts were accrued for interest and penalties at December 31, 2018,
2017 and 2016. At December 31, 2018, U.S. Federal tax years 2015 through the present remain open to examination.
NOTE 14 – SHARE BASED COMPENSATION AND BENEFIT PLANS
We maintain share based payment plans that include a non-employee director stock purchase plan and a
long-term incentive plan that permits the issuance of share based compensation, including stock options and
non-vested share awards. The long-term incentive plan, which is shareholder approved, permits the grant of
additional share based awards for up to 0.5 million shares of common stock as of December 31, 2018. The
77
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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, 2018. 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 2018, 2017 and 2016 pursuant to our long-term incentive plan, we granted 0.05 million, 0.05 million and
0.10 million shares, respectively of restricted stock and 0.02 million, 0.02 million and 0.05 million performance stock
units (‘‘PSUs’’), respectively to certain officers. Except for 0.002 million shares of restricted stock issued in 2018 that
vest ratably over three years, shares of restricted stock issued during 2018 and 2017 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 2018 and 2017 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 2018, 2017 and 2016 and expensed their value during those same periods.
As noted in the table below, we issued 0.19 million stock options pursuant to the Agreement and Plan of Merger
with TCSB (the ‘‘Merger Agreement’’) (see note #26) to replace outstanding TCSB stock options. As these
replacement stock options were fully vested at the date of acquisition, the fair value of these stock options is
considered a component of the purchase price and does not result in any share based compensation expense.
Total compensation expense recognized for grants pursuant to our long-term incentive plan was $1.5 million,
$1.6 million and $1.5 million in 2018, 2017 and 2016, respectively. The corresponding tax benefit relating to this
expense was $0.3 million, $0.6 million and $0.5 million in 2018, 2017 and 2016, respectively. Total expense
recognized for non-employee director share based payments was $0.2 million, $0.2 million and $0.1 million in 2018,
2017 and 2016, respectively. The corresponding tax benefit relating to this expense was $0.04 million, $0.06 million
and $0.04 million in 2018, 2017 and 2016, respectively.
At December 31, 2018, the total expected compensation cost related to non-vested restricted stock and PSUs not
yet recognized was $2.0 million. The weighted-average period over which this amount will be recognized is
1.8 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, 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . .
Issued for acquistion of TCSB (see note #26). . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
176,055
187,915
(152,549)
—
—
$5.24
9.94
9.31
Outstanding at December 31, 2018 . . . . . . . . . . . . . . . . . . . . . . . .
211,421
$6.48
4.70
$3,076
Vested and expected to vest at
December 31, 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
211,421
$6.48
Exercisable at December 31, 2018. . . . . . . . . . . . . . . . . . . . . . . . .
211,421
$6.48
4.70
4.70
$3,076
$3,076
78
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
A summary of outstanding non-vested stock and related transactions follows:
Outstanding at January 1, 2018. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Outstanding at December 31, 2018. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Number
of Shares
290,527
73,406
(96,255)
(9,259)
258,419
Weighted-
Average
Grant Date
Fair Value
$15.88
23.62
13.17
18.33
$19.00
A summary of weighted-average assumptions used in the Black-Scholes option pricing model for the issue of
stock options relating to the acquisition of TCSB (see note #26) during the second quarter of 2018 follows:
Expected dividend yield . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Risk-free interest rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected life (in years) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected volatility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Per share weighted-average grant date fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018
2.72%
2.40
3.14
45.99%
$13.25
Pursuant to the terms of the Merger Agreement, these stock options were issued at an exercise price consistent
with the terms of the stock options they replaced resulting in the issuance of stock options with an exercise price less
than the current value of our common stock which increases the issue date fair value of the stock options.
The risk-free interest rate for the expected term of the option is based on the U.S. Treasury yield curve in effect
at the time of the grant. The expected life was obtained using a simplified method that, in general, averaged the
vesting term and original contractual term of the stock option. This method was used as relevant historical data of
actual exercise activity was very limited. The expected volatility was based on historical volatility of our common
stock.
Certain information regarding options exercised during the periods ending December 31 follows:
Intrinsic value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash proceeds received . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax benefit realized . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018
$2,333
$1,420
$ 490
2017
(In thousands)
$623
$142
$218
2016
$254
$ 85
$ 89
We maintain 401(k) and employee stock ownership plans covering substantially all of our full-time employees.
During 2018, 2017 and 2016, we matched 50% of employee contributions to the 401(k) plan up to a maximum of
8%, 6% and 6% 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 2018, 2017
and 2016. Amounts expensed for these retirement plans were $2.3 million, $1.6 million, and $1.4 million in 2018,
2017 and 2016, respectively.
Our employees participate in various performance-based compensation plans. Amounts expensed for all
incentive plans totaled $9.8 million, $8.0 million and $6.2 million, in 2018, 2017 and 2016, respectively.
We also provide certain health care and life insurance programs to substantially all full-time employees.
Amounts expensed for these programs totaled $5.2 million, $4.0 million and $3.5 million in 2018, 2017 and 2016
respectively. These insurance programs are also available to retired employees at their own expense.
79
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018
$1,971
1,457
970
4,362
$8,760
2017
(In thousands)
$1,968
1,446
1,061
3,693
$8,168
2016
$1,647
1,496
1,124
4,336
$8,603
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:
Notional
Amount
2018
Average
Maturity
(years)
(Dollars in thousands)
Cash flow hedge designation
Pay-fixed interest rate swap agreements . . . . . . . . . . . . . . . . . . . . . . .
Interest rate cap agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 25,000
150,000
$175,000
No hedge designation
Rate-lock mortgage loan commitments . . . . . . . . . . . . . . . . . . . . . . . .
Mandatory commitments to sell mortgage loans. . . . . . . . . . . . . . . . .
Pay-fixed interest rate swap agreements - commercial. . . . . . . . . . . .
Pay-variable interest rate swap agreements - commercial . . . . . . . . .
Purchased options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Written options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 32,473
57,583
94,451
94,451
3,095
3,095
$285,148
Notional
Amount
2.6
3.6
3.5
0.1
0.1
5.5
5.5
2.5
2.5
3.7
2017
Average
Maturity
(years)
(Dollars in thousands)
Cash flow hedge designation
Pay-fixed interest rate swap agreements . . . . . . . . . . . . . . . . . . . . . . .
Interest rate cap agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 15,000
45,000
$ 60,000
No hedge designation
Rate-lock mortgage loan commitments . . . . . . . . . . . . . . . . . . . . . . . .
Mandatory commitments to sell mortgage loans. . . . . . . . . . . . . . . . .
Pay-fixed interest rate swap agreements - commercial. . . . . . . . . . . .
Pay-variable interest rate swap agreements - commercial . . . . . . . . .
Purchased options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Written options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 25,032
56,127
75,990
75,990
3,119
3,119
$239,377
3.7
3.5
3.6
0.1
0.1
6.2
6.2
3.5
3.5
4.1
Fair
Value
$ 280
2,245
$2,525
$ 687
(383)
405
(405)
116
(116)
$ 304
Fair
Value
$ 245
976
$1,221
$ 530
37
292
(292)
322
(322)
$ 567
80
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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
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 $2.7 million and $0.9 million at December 31, 2018 and 2017,
respectively.
It is anticipated that $0.5 million, net of tax, of unrealized gains on Cash Flow Hedges at December 31, 2018,
will be reclassified into earnings over the next twelve months. The maximum term of any Cash Flow Hedge at
December 31, 2018 is 4.8 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.
In prior periods we offered to our deposit customers an equity linked time deposit product (‘‘Altitude CD’’). The
Altitude CD was a time deposit that provided 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,
2018
Balance
Sheet
Location
Fair
Value
2017
Balance
Sheet
Location
Fair
Value
2018
Balance
Sheet
Location
Fair
Value
2017
Balance
Sheet
Location
Fair
Value
(In thousands)
Derivatives designated as
hedging instruments
Pay-fixed interest rate
swap agreements . . . . . . Other assets $ 280 Other assets $ 245 Other liabilities $ — Other liabilities $ —
Interest rate cap
agreements . . . . . . . . . . Other assets
2,245 Other assets
$2,525
976 Other liabilities
— Other liabilities
$1,221
$ —
—
$ —
Derivatives not designated
as hedging instruments
Rate-lock mortgage
loan commitments . . . . . Other assets $ 687 Other assets $ 530 Other liabilities $ — Other liabilities $ —
Mandatory commitments
to sell mortgage loans . . . Other assets
Pay-fixed interest rate
swap agreements -
commercial . . . . . . . . . . Other assets
Pay-variable interest rate
swap agreements -
commercial . . . . . . . . . . Other assets
Purchased options. . . . . . . . Other assets
Written options . . . . . . . . . Other assets
— Other assets
37 Other liabilities
383 Other liabilities
—
1,116 Other assets
631 Other liabilities
711 Other liabilities
339
711 Other assets
116 Other assets
— Other assets
339 Other liabilities
322 Other liabilities
— Other liabilities
1,116 Other liabilities
— Other liabilities
116 Other liabilities
Total derivatives. . . . . . .
2,630
$5,155
1,859
$3,080
2,326
$2,326
The effect of derivative financial instruments on the Consolidated Statements of Operations follows:
Year Ended December 31,
Location of
Gain (Loss)
Reclassified
from
Accumulated
Other
Comprehensive
Loss
into Income
(Effective
Portion)
Gain (Loss) Recognized
in Other
Comprehensive
Income (Loss)
(Effective Portion)
2017
2018
2016
Gain (Loss)
Reclassified from
Accumulated Other
Comprehensive
Loss into Income
(Effective Portion)
2017
2016
2018
Location of
Gain (Loss)
Recognized
in Income (1)
Gain (Loss)
Recognized
in Income (1)
2017
2016
2018
Cash Flow Hedges
Interest rate cap
agreements . . . . . . . .
$(340)
$108
Pay-fixed interest rate
swap agreements . . . .
Total . . . . . . . . . . . . . .
78
$(262)
216
$324
$—
—
$—
No hedge designation
Interest
expense
Interest
expense
(In thousands)
$206
$ — $—
31
$237
(18)
$(18)
—
$—
Interest
expense
Interest
expense
Rate-lock mortgage loan commitments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mandatory commitments to sell mortgage loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pay-fixed interest rate swap agreements-commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pay-variable interest rate swap agreements-commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchased options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Written options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net gains on
mortgage
loans
Net gains on
mortgage
loans
Interest
income
Interest
income
Interest
expense
Interest
expense
(1) For cash flow hedges, this location and amount refers to the ineffective portion.
82
$ — $ — $ —
(12)
—
$ (12) $ (12) $ —
(12)
$ 157
$(116) $ 96
(420)
(593)
113
43
561
746
(113)
(43)
(746)
(206)
84
116
206
(116)
$(263) $(709) $ 657
(84)
631
—
322
1,292
$1,292
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 2018 and 2017.
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018
2017
(In thousands)
$ 2,569
13,484
(1,894)
$14,159
$ 415
2,945
(791)
$2,569
Deposits held by us for directors and executive officers totaled $1.5 million and $1.4 million at December 31,
2018 and 2017, 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, 2018,
follows:
2019. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2020. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2021. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2022. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2023. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2024 and thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,805
1,650
1,261
975
938
1,652
$8,281
(In thousands)
Rental expense on operating leases totaled $1.7 million, $1.4 million and $1.2 million in 2018, 2017 and 2016,
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, 2018, include $989.3 million of loans secured by residential real estate and
$180.3 million of construction and development loans.
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, 2018: Lessors of Nonresidential
Real Estate ($340.4 million); Lessors of Residential Real Estate ($139.8 million); Construction ($100.0 million);
83
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Manufacturing ($72.0 million); Health Care and Social Assistance ($71.1 million) and Accommodation and Food
Services ($70.1 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, 2018, the Bank had positive undivided profits of $25.6 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, 2018 and 2017, 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 1.875% and 1.25% added to the minimum
ratio for adequately capitalized institutions for 2018 and 2017, respectively and 2.5% will be added in 2019 when
fully phased in. 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
2018
Total capital to risk-weighted assets
Consolidated . . . . . . . . . . . . . . . . . . . . . . . .
Independent Bank. . . . . . . . . . . . . . . . . . . .
$371,603
337,227
14.25% $208,572
208,456
12.94
8.00%
8.00
NA
$260,569
NA
10.00%
Tier 1 capital to risk-weighted assets
Consolidated . . . . . . . . . . . . . . . . . . . . . . . .
Independent Bank. . . . . . . . . . . . . . . . . . . .
$345,419
311,043
13.25% $156,429
156,342
11.94
6.00%
6.00
NA
$208,456
NA
8.00%
Common equity tier 1 capital to
risk-weighted assets
Consolidated . . . . . . . . . . . . . . . . . . . . . . . .
Independent Bank. . . . . . . . . . . . . . . . . . . .
Tier 1 capital to average assets
$307,255
311,043
11.79% $117,322
117,256
11.94
4.50%
4.50
NA
$169,370
NA
6.50%
Consolidated . . . . . . . . . . . . . . . . . . . . . . . .
Independent Bank. . . . . . . . . . . . . . . . . . . .
$345,419
311,043
10.47% $131,930
131,778
9.44
4.00%
4.00
NA
$164,723
NA
5.00%
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%
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,
2018
2017
2018
2017
(In thousands)
Total shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$338,994
$264,933
$341,496
$269,481
Add (deduct)
Accumulated other comprehensive loss for regulatory
purposes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill and other intangibles . . . . . . . . . . . . . . . . . . . . . . .
Disallowed deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . .
Common equity tier 1 capital. . . . . . . . . . . . . . . . . . . . . . .
Qualifying trust preferred securities . . . . . . . . . . . . . . . . . . . .
Disallowed deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . .
Tier 1 capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Allowance for loan losses and allowance for unfunded
lending commitments limited to 1.25% of total risk-
weighted assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4,311
(34,715)
(1,335)
307,255
38,164
—
345,419
201
(1,269)
(7,931)
255,934
34,500
(1,983)
288,451
4,311
(34,715)
(49)
311,043
—
—
311,043
201
(1,269)
(1,937)
266,476
—
—
266,476
26,184
23,712
26,184
23,712
Total risk-based capital . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$371,603
$312,163
$337,227
$290,188
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 (equity securities at fair
value, trading or available for sale) are classified as Level 1 of the valuation hierarchy. Level 1 securities include
certain preferred stocks included in our equity securities at fair value (trading securities as of December 31, 2017)
for which there are quoted prices in active markets and US Treasuries (at December 31, 2017) in our securities
available for sale portfolio. If quoted market prices are not available for the specific security, then fair values are
estimated by (1) using quoted market prices of securities with similar characteristics, (2) matrix pricing, which is a
mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted
prices for specific securities but rather by relying on the securities’ relationship to other benchmark quoted prices,
or (3) a discounted cash flow analysis whose significant fair value inputs can generally be verified and do not
86
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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, carried at fair value is based on agency cash
window loan pricing for comparable assets (recurring Level 2) and the fair value of mortgage loans held for sale,
carried at the lower of cost or fair value is based on a quoted sales price (non-recurring Level 1).
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, 2018 and 2017, 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 Level 3. Management
evaluates the third party valuation for reasonableness each quarter as part of our financial reporting control processes.
Derivatives: The fair value of rate-lock mortgage loan commitments 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
87
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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
$
393
$
393
$
— $ —
December 31, 2018:
Measured at Fair Value on a Recurring Basis:
Assets
Equity securities at fair value . . . . . . . . . . . . . . . . . . . . . . . . . . .
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, carried at fair value . . . . . . . . . . . . . . . . . . .
Capitalized mortgage loan servicing rights. . . . . . . . . . . . . . . . . .
Derivatives (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
20,014
123,751
5,726
29,419
83,319
127,555
34,309
1,819
2,014
44,753
21,400
5,155
Liabilities
Derivatives (2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,326
Measured at Fair Value on a Non-recurring basis:
Assets
Loans held for sale, carried at the lower of cost or fair value . . . .
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Home equity - 2nd lien . . . . . . . . . . . . . . . . . . . . . . . . . . . .
41,471
41,471
217
106
2,243
333
572
95
59
—
—
—
—
—
—
—
(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
—
—
—
—
—
—
—
—
—
—
—
—
—
20,014
123,751
5,726
29,419
83,319
127,555
34,309
1,819
2,014
44,753
—
5,155
2,326
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
21,400
—
—
—
217
106
2,243
333
572
95
59
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
$
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.
There were no transfers between Level 1 and Level 2 during the years ended December 31, 2018 and 2017.
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
2018
Equity securities at fair value. . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capitalized mortgage loan servicing rights . . . . . . . . . . . . . . . .
$ (62)
—
—
2017
Trading securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capitalized mortgage loan servicing rights . . . . . . . . . . . . . . . .
$ 45
—
—
$ —
413
—
$ —
407
—
$ —
—
(2,323)
$
(62)
413
(2,323)
$ —
—
(2,744)
$
45
407
(2,744)
2016
Trading securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$262
—
$ —
(277)
$ —
—
$
262
(277)
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, 2018, 2017 and
2016 relating to assets measured at fair value on a non-recurring basis:
•
•
•
Certain individual strata of capitalized mortgage loan servicing rights were measured at fair value on a
non-recurring basis during 2016. A recovery of $1.0 million was included in our results of operations for
the year ending December 31, 2016.
Loans which are measured for impairment using the fair value of collateral for collateral dependent loans
had a carrying amount of $3.5 million, which is net of a valuation allowance of $1.5 million at
December 31, 2018, and had a carrying amount of $1.9 million, which is net of a valuation allowance of
$0.7 million at December 31, 2017. An additional provision for loan losses relating to these impaired loans
of $1.3 million, $0.5 million and $0.2 million was included in our results of operations for the years ending
December 31, 2018, 2017 and 2016, respectively.
Other real estate, which is measured using the fair value of the property, had a carrying amount of
$0.2 million which is net of a valuation allowance of $0.1 million at December 31, 2018, and a carrying
amount of $0.3 million which is net of a valuation allowance of $0.1 million, at December 31, 2017. An
additional charge relating to other real estate measured at fair value of $0.1 million, $0.1 million and
$0.6 million was included in our results of operations during the years ended December 31, 2018, 2017 and
2016, 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:
Capitalized Mortgage
Loan Servicing Rights
2018
2017
2016
(In thousands)
Beginning balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in accounting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$15,699
—
$ — $—
—
14,213
Beginning balance, as adjusted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
15,699
14,213
—
Total losses realized and unrealized:
Included in results of operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Included in other comprehensive income (loss) . . . . . . . . . . . . . . . . . . . . . . . . .
Purchases, issuances, settlements, maturities and calls . . . . . . . . . . . . . . . . . . . . .
Transfers in and/or out of Level 3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(2,323)
—
8,024
—
(2,744) —
—
—
—
—
4,230
—
Ending balance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$21,400
$15,699
$—
Amount of total losses for the period included in earnings attributable to the
change in unrealized losses relating to assets and liabilities still held at
December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ (2,323)
$ (2,744)
$—
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
2018
Capitalized mortgage loan
servicing rights . . . . . . .
$ 21,400
2017
Capitalized mortgage loan
servicing rights . . . . . . .
$ 15,699
Present value of
net servicing
revenue
Discount rate
Cost to service
Ancillary income
Float rate
10.00% to 13.00%
$68 to $216
20 to 36
2.57%
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%
10.15%
$ 81
23
2.57%
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
2018
Impaired loans
Commercial (1) . . . . . . . .
$2,566
Mortgage . . . . . . . . . . . .
905
Other real estate
Mortgage . . . . . . . . . . . .
154
2017
Impaired loans
Commercial . . . . . . . . . .
$1,334
Mortgage . . . . . . . . . . . .
546
Other real estate
Mortgage . . . . . . . . . . . .
251
Sales comparison
approach
Sales comparison
approach
Sales comparison
approach
Sales comparison
approach
Sales comparison
approach
Sales comparison
approach
Adjustment for
differences
between
comparable sales
Adjustment for
differences
between
comparable sales
Adjustment for
differences
between
comparable sales
Adjustment for
differences
between
comparable sales
Adjustment for
differences
between
comparable sales
Adjustment for
differences
between
comparable sales
(32.5)% to 60.0%
(1.9)%
(40.1) to 25.6
0.7
0.0 to 34.1
11.2
(32.5)% to 25.0%
(4.5)%
(21.1) to 34.1
(2.7)
(33.0) to 44.5
(1.0)
(1)
In addition to the valuation techniques and unobservable inputs discussed above, at December 31, 2018, we had
an impaired collateral dependent commercial relationship that totaled $0.7 million that was secured by collateral
other than real estate. Collateral securing this relationship primarily included accounts receivable, inventory and
cash at December 31, 2018. Valuation techniques at December 31, 2018, included discounting financial
statement values for each particular asset type. Discount rates used ranged from 20% to 80% of stated values.
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.
Loans held for sale
2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$44,753
39,436
35,946
$1,257
844
437
$43,496
38,592
35,509
Aggregate
Fair Value
Contractual
Principal
Difference
(In thousands)
92
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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.
As discussed in note #1, we adopted ASU 2016-01 as of January 1, 2018. This new ASU requires entities to use
the exit price notion when measuring the fair value of financial instruments for disclosure purposes. All of estimated
fair values of our financial instruments in the table below at December 31, 2018 have used this exit price notion. In
addition, except as discussed below in the net loans and loans held for sale section, all of our financial assets and
liabilities have historically been valued using an exit price notion. This new ASU also removes the requirement to
disclose the methods and significant assumptions used to estimate the fair value of financial instruments measured
at amortized cost. The methods and significant assumptions for those financial instruments measured at amortized
cost disclosed below are presented for fair values at December 31, 2017.
Estimated fair values have been determined using available data and methodologies that are considered suitable
for each category of financial instrument. For instruments with adjustable interest rates which reprice frequently and
without significant credit risk, it is presumed that estimated fair values approximate the recorded book balances.
Cash and due from banks and interest bearing deposits: The recorded book balance of cash and due from banks
and interest bearing deposits approximate fair value and are classified as Level 1.
Interest bearing deposits - time: Interest bearing deposits - time have been valued based on a model using a
benchmark yield curve plus a base spread and are classified as Level 2.
Securities: Financial instrument assets actively traded in a secondary market have been valued using quoted
market prices. Trading securities 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 at December 31, 2017 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 at December 31, 2017 are classified
as Level 2 as described in note #21.
Accrued interest receivable and payable: The recorded book balance of accrued interest receivable and payable
approximate fair value and are classified at the same Level as the asset and liability they are associated with.
Derivative financial instruments: The fair value of rate-lock mortgage loan commitments 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.
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.
93
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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.
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)
2018
Assets
Cash and due from banks . . . . . . . . . . . . . . . . . . . . $
Interest bearing deposits . . . . . . . . . . . . . . . . . . . . .
Interest bearing deposits - time . . . . . . . . . . . . . . . .
Equity securities at fair value. . . . . . . . . . . . . . . . . .
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 . . . . . . . . . . . . . . . .
$
23,350 $
46,894
595
393
427,926
23,350
46,894
594
393
427,926
18,359
2,643,856
10,164
5,155
NA
2,606,256
10,164
5,155
23,350
46,894
—
393
—
NA
41,471
22
—
$
— $
—
594
—
427,926
—
—
—
—
—
NA
44,753
1,789
5,155
NA
2,520,032
8,353
—
Liabilities
Deposits with no stated maturity (1). . . . . . . . . . . . . $2,197,494 $2,197,494
711,312
Deposits with stated maturity (1) . . . . . . . . . . . . . . .
25,706
Other borrowings . . . . . . . . . . . . . . . . . . . . . . . . . .
35,021
Subordinated debentures . . . . . . . . . . . . . . . . . . . . .
1,646
Accrued interest payable . . . . . . . . . . . . . . . . . . . . .
2,326
Derivative financial instruments . . . . . . . . . . . . . . . .
715,934
25,700
39,388
1,646
2,326
$2,197,494
—
—
—
114
—
$
— $
711,312
25,706
35,021
1,532
2,326
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
—
Liabilities
$
— $
—
2,740
—
522,027
NA
39,436
2,192
3,080
NA
1,923,501
6,416
—
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
—
—
—
—
—
—
(1) Deposits with no stated maturity include reciprocal deposits with a recorded book balance of $123.080 million
and $12.992 million at December 31, 2018 and 2017, respectively. Deposits with a stated maturity include
reciprocal deposits with a recorded book balance of $58.992 million and $37.987 million at December 31, 2018
and 2017, respectively.
94
—
—
—
—
—
—
—
—
—
—
—
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:
Dispropor-
tionate
Tax Effects
from
Securities
Available
for Sale
Unrealized
Losses on
Securities
Available
for Sale
Unrealized
Gains
(Losses) on
Cash Flow
Hedges
Dispropor-
tionate
Tax Effects
from
Cash Flow
Hedges
Total
2018
Balances at beginning of period . . . . . . . . . . . . . . . . . . . . . . $ (470) $(5,798)
—
—
Other comprehensive loss before reclassifications . . . . . .
Amounts reclassified from AOCL . . . . . . . . . . . . . . . . . . .
(3,671)
(44)
Net current period other comprehensive loss . . . . . . . .
(3,715)
—
$ 269
(207)
(187)
(394)
$ — $ (5,999)
(3,878)
(231)
—
—
—
(4,109)
Balances at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . $(4,185) $(5,798)
$(125)
$ — $(10,108)
2017
Balances at beginning of period . . . . . . . . . . . . . . . . . . . . . . $(3,310) $(5,798)
—
Cumulative effect of change in accounting. . . . . . . . . . . .
300
$ —
—
$ — $ (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 . . . . . . . . . . . . . . . . . . . . . . $ (238) $(5,798)
—
—
Other comprehensive loss before reclassifications . . . . . .
Amounts reclassified from AOCL . . . . . . . . . . . . . . . . . . .
(2,876)
(196)
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)
(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
95
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 inconsequential
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
2018
Unrealized losses on securities available for
sale
Reclassified
From
AOCL
(In thousands)
Affected Line Item in
Consolidated Statements of Operations
Unrealized gains (losses) on cash flow hedges
2017
Unrealized losses on securities available for
sale
$ 56
—
56
12
Net gains on securities
Net impairment loss recognized in earnings
Total reclassifications before tax
Income tax expense
$ 44
Reclassifications, net of tax
$(237)
(50)
$(187)
$ 231
$ 215
—
215
75
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
Unrealized gains (losses) on cash flow hedges
$ 140
Reclassifications, net of tax
2016
Unrealized losses on securities available for
sale
$ 18
6
$ 12
$ 128
$ 301
—
301
105
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
$ 196
Reclassifications, net of tax
96
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,
2018
2017
(In thousands)
$
7,624
25,000
343,872
2,857
$379,353
$ 39,388
530
339,435
$379,353
$ 16,454
5,000
271,315
8,375
$301,144
$ 35,569
500
265,075
$301,144
CONDENSED STATEMENTS OF OPERATIONS
2018
Year Ended December 31,
2017
(In thousands)
2016
OPERATING INCOME
Dividends from subsidiary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Operating Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$33,500
160
56
33,716
$16,000
29
41
16,070
$ 5,000
27
153
5,180
OPERATING EXPENSES
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Administrative and other expenses . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Operating Expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income Before Income Tax and Equity in Undistributed Net
Income of Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax expense (benefit) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income Before Equity in Undistributed Net Income of
Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity in undistributed net income of subsidiaries . . . . . . . . . . . . . . .
1,924
748
2,672
31,044
(515)
31,559
8,280
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
Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$39,839
$20,475
$22,766
97
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
CONDENSED STATEMENTS OF CASH FLOWS
2018
Year Ended December 31,
2017
(In thousands)
2016
Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 39,839
$ 20,475
$ 22,766
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH
FROM OPERATING ACTIVITIES
Deferred income tax expense (benefit) . . . . . . . . . . . . . . . . . . . . . . . .
Share based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accretion of discount on subordinated debentures . . . . . . . . . . . . . . .
(Increase) decrease in accrued income and other assets . . . . . . . . . . .
Increase in accrued expenses and other liabilities. . . . . . . . . . . . . . . .
Equity in undistributed net income of subsidiaries . . . . . . . . . . . . . . .
Total Adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6,620
53
51
(1,307)
21
(8,280)
(2,842)
2,146
45
—
(32)
121
(8,053)
(5,773)
Net Cash From Operating Activities . . . . . . . . . . . . . . . . . . . . . . . .
36,997
14,702
CASH FLOW FROM (USED IN) INVESTING ACTIVITIES
Purchases of interest bearing deposits - time . . . . . . . . . . . . . . . . . . .
Maturity of interest bearing deposits - time . . . . . . . . . . . . . . . . . . . .
Acquisition of business, less cash received. . . . . . . . . . . . . . . . . . . . .
Return of capital from subsidiary . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net Cash From (Used In) 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. . . . . . . . . . . . . . . . . .
(30,000)
10,000
431
—
(19,569)
(14,055)
1,945
(1,467)
(12,681)
(26,258)
(8,830)
16,454
(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
Cash and Cash Equivalents at End of Year. . . . . . . . . . . . . . . . . . .
$ 7,624
$ 16,454
$ 9,515
NOTE 25 – REVENUE FROM CONTRACTS WITH CUSTOMERS
We account for revenue in accordance with ASC Topic 606, Revenue from Contracts with Customers, which we
adopted on January 1, 2018, using the modified retrospective method (see note #1). We derive the majority of our
revenue from financial instruments and their related contractual rights and obligations which for the most part are
excluded from the scope of ASU 2014-09. These sources of revenue that are excluded from the scope of this amended
guidance include interest income, net gains on mortgage loans, net gains on securities, mortgage loan servicing, net
and bank owned life insurance and were approximately 82.9% and 80.3% of total revenues at December 31, 2018
and 2017, respectively.
Material sources of revenue that are included in the scope of ASC Topic 606 include service charges on deposits,
other deposit related income, interchange income and investment and insurance commissions and are discussed in the
following paragraphs. Generally these sources of revenue are earned at the time the service is delivered or over the
course of a monthly period and do not result in any contract asset or liability balance at any given period end. As a
result, there were no contract assets or liabilities recorded as of December 31, 2018.
Service charges on deposit accounts and other deposit related income: Revenues are earned on depository
accounts for commercial and retail customers and include fees for transaction-based, account maintenance and
98
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
overdraft services. Transaction-based fees, which includes services such as ATM use fees, stop payment charges and
ACH fees are recognized at the time the transaction is executed as that is the time we fulfill our customer’s request.
Account maintenance fees, which includes monthly maintenance services are earned over the course of a month
representing the period over which the performance obligation is satisfied. Our obligation for overdraft services is
satisfied at the time of the overdraft.
Interchange income: Interchange income primarily includes debit card interchange and network revenues. Debit
card interchange and network revenues are earned on debit card transactions conducted through payment networks
such as MasterCard and NYCE. Interchange income is recognized concurrently with the delivery of services on a
daily basis. Interchange and network revenues are presented gross of interchange expenses, which are presented
separately as a component of non-interest expense.
Investment and insurance commissions: Investment and insurance commissions include fees and commissions
from asset management, custody, recordkeeping, investment advisory and other services provided to our customers.
Revenue is recognized on an accrual basis at the time the services are performed and are generally based on either
the market value of the assets managed or the services provided. We have an agent relationship with a third party
provider of these services and net certain direct costs charged by the third party provider associated with providing
these services to our customers.
Net (gains) losses on other real estate and repossessed assets: We record a gain or loss from the sale of other
real estate when control of the property transfers to the buyer, which generally occurs at the time of an executed deed.
If we were to finance the sale of other real estate to the buyer, we would assess whether the buyer is committed to
perform their obligations under the contract and whether collectability of the transaction is probable. Once these
criteria are met, the other real estate asset would be derecognized and the gain or loss on sale would be recorded upon
the transfer of control of the property to the buyer. There were no other real estate properties sold during 2018 that
were financed by us.
Disaggregation of our revenue sources by attribute for the year ending December 31, 2018 follows:
Service
Charges
on Deposit
Accounts
Other
Deposit
Related
Income
Investment
and
Insurance
Commissions
Total
Interchange
Income
(In thousands)
Retail
Overdraft fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,285
Account service charges. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,145
ATM fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,423
941
Business
Overdraft fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Account service charges. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ATM fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interchange income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Asset management revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Transaction based revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,567
261
34
594
$9,905
$1,100
871
$ 8,285
2,145
1,423
941
1,567
261
34
594
9,905
1,100
871
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $12,258 $2,992
$9,905
$1,971
$27,126
Reconciliation to Consolidated Statement of Operations:
Non-interest income - other:
Other deposit related income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment and insurance commissions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Bank owned life insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$2,992
1,971
970
2,827
$8,760
99
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTE 26 – RECENT ACQUISITION
Effective April 1, 2018, we completed the acquisition of all of the issued and outstanding shares of common
stock of TCSB through a merger of TCSB into Independent Bank Corporation (‘‘IBCP’’), with IBCP as the surviving
corporation (the ‘‘Merger’’). On that same date we also consolidated Traverse City State Bank, TCSB’s
wholly-owned subsidiary bank, into Independent Bank (with Independent Bank as the surviving institution). Under
the terms of the merger agreement each holder of TCSB common stock received 1.1166 shares of IBCP common
stock plus cash in lieu of fractional shares totaling $0.005 million. TCSB option holders had their options converted
into IBCP stock options. As a result we issued 2.71 million shares of common stock and 0.19 million stock options
with a fair value of approximately $64.5 million to the shareholders and option holders of TCSB. The fair value of
common stock and stock options issued as the consideration paid for TCSB was determined using the closing price
of our common stock on the acquisition date. This acquisition was accounted for under the acquisition method of
accounting. Accordingly, we recognized amounts for identifiable assets acquired and liabilities assumed at their
estimated acquisition date fair values. TCSB results of operations are included in our results beginning April 1, 2018.
Non-interest expense includes $3.5 million and $0.3 million of costs incurred during the years ended December 31,
2018 and 2017, respectively related to the Merger. Any remaining Merger related costs will be expensed as incurred
in future periods.
The following table reflects our preliminary valuation of the assets acquired and liabilities assumed:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest bearing deposits - time . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Securities available for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal Home Loan Bank stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property and equipement, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capitalized mortgage loan servicing rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued income and other assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other intangibles (1). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(In thousands)
$ 23,521
4,054
6,066
778
295,799
1,067
3,047
3,362
5,798
Total assets acquired. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
343,492
Deposits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Subordinated debentures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued expenses and other liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities assumed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net assets acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
287,710
14,345
3,768
1,429
307,252
36,240
28,300
Purchase price (fair value of consideration) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 64,540
(1) Relates to core deposit intangibles (see note #7).
Management views the disclosed fair values presented above to be provisional. Prior to the end of the one-year
measurement period for finalizing acquisition-date fair values, if information becomes available which would
indicate adjustments are required to the allocation, such adjustments will be included in the allocation in the reporting
period in which the adjustment amounts are determined.
Goodwill related to this acquisition will not be deductible for tax purposes and consists largely of synergies and
cost savings resulting from the combining of the operations of TCSB into ours as well as expansion into a new
market.
100
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The estimated fair value of the core deposit intangible was $5.8 million and is being amortized over an estimated
useful life of 10 years.
The fair value of net assets acquired includes fair value adjustments to certain receivables that were not
considered impaired as of the acquisition date. The fair value adjustments were determined using discounted
contractual cash flows. However, we believe that all contractual cash flows related to these financial instruments will
be collected. As such, these receivables were not considered impaired at the acquisition date and were not subject to
the guidance relating to purchased credit impaired loans which have shown evidence of credit deterioration since
origination. Receivables acquired that are not subject to these requirements included non-impaired customer
receivables with a fair value and gross contractual amounts receivable of $292.9 million and $298.6 million,
respectively on the date of acquisition.
NOTE 27 – MEPCO 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, we sold our payment plan processing business,
payment plan receivables, and certain other assets to Seabury, who also assumed certain liabilities of Mepco.
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.
101
QUARTERLY FINANCIAL DATA (UNAUDITED)
A summary of selected quarterly results of operations for the years ended December 31 follows:
Three Months Ended
March 31,
June 30,
September 30,
December 31,
(In thousands, except per share amounts)
2018
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income before income tax . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$26,797
23,936
315
11,199
9,161
$33,103
28,980
650
10,884
8,817
$34,452
29,697
(53)
14,846
11,925
$36,421
30,669
591
12,204
9,936
Net income per common share
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
0.43
0.42
0.37
0.36
0.49
0.49
0.41
0.41
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
During the fourth quarter of 2018, we recognized a negative fair value adjustment due to price on our capitalized
mortgage loan servicing rights of $2.4 million (see note #4). 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).
QUARTERLY SUMMARY (UNAUDITED)
Reported Sales Prices of Common Shares
High
$24.50
27.10
26.65
25.13
2018
Low
$22.06
22.20
21.51
20.18
Close
High
$22.90
25.50
23.65
21.02
$22.40
23.65
22.90
23.60
2017
Low
$19.25
19.75
18.50
20.90
Cash Dividends
Declared
Close
$20.70
21.75
22.65
22.35
2018
$0.15
0.15
0.15
0.15
2017
$0.10
0.10
0.10
0.12
First quarter. . . . . . . . . . . .
Second quarter . . . . . . . . .
Third quarter . . . . . . . . . . .
Fourth quarter . . . . . . . . . .
We have approximately 1,500 holders of record of our common stock. Our common stock trades on the
NASDAQ Global Select Market System under the symbol ‘‘IBCP.’’ The prices shown above are supplied by
NASDAQ and reflect the inter-dealer prices and may not include retail markups, markdowns or commissions. There
may have been transactions or quotations at higher or lower prices of which we are not aware.
In addition to limitations imposed by the provisions of the Michigan Business Corporation Act (which, among
other things, limits us from paying dividends to the extent we are insolvent), our ability to pay dividends is limited
by our ability to obtain funds from our Bank and by regulatory capital guidelines applicable to us (see note #20).
102
INDEPENDENT BANK CORPORATION
SENIOR OFFICERS
William B. Kessel
Robert N. Shuster
James J. Twarozynski
BOARD OF DIRECTORS1
Michael M. Magee, Jr., Chairman
Michael J. Cok
William B. Kessel
Terance L. Beia
Stephen L. Gulis, Jr.
Matthew J. Missad
William J. Boer, Lead Director
Terry L. Haske
Charles C. Van Loan
Joan A. Budden
Christina L. Keller
INDEPENDENT BANK
SENIOR OFFICERS
William B. Kessel
Robert N. Shuster
Larry R. Daniel
Patrick J. Ervin
Stefanie M. Kimball
Dennis J. Mack
Cheryl A. Bartholic
Martha A. Blandford
Constance A. Deneweth
Tricia L. Raquepaw
Peter R. Graves
Susan M. Johnson
Beth J. Jungel
Keith J. Lightbody
Cheryl L. McKellar
Dean M. Morse
Joel F. Rahn
Edward W. Ryan
Raymond P. Stecko
Michael J. Stodolak
James J. Twarozynski
Joane E. VanLuven
Denise E. Wheaton
Tami E. Coates
Thomas J. Ranville
1Individuals 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 2018 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.
Calendars change,
BUT OUR HEART
REMAINS THE SAME.
Since we were founded as First National Bank
of Ionia in 1864, we’ve maintained our local
roots, while growing across Michigan and into
parts of Ohio. Many things have changed over the
years, but our investment in our customers and
communities has remained the same. We’re not just
your bankers, we’re your friends and neighbors.
1864
First National Bank of
Ionia was founded as
one of the National Bank
Act’s first charters. It had
$50,000 in deposits.
1985
Independent Bank joined
the NASDAQ stock index.
1999
Independent Bank entered
the Bay City, Saginaw, and
Mt. Pleasant markets.
2007
Independent Bank
completed its merger
of our four affiliated
Michigan banks.
1973
Independent Bank
Corporation formed, but
stayed inactive until it
acquired First Security
Bank on June 1, 1974.
1993
Independent Bank entered
the market in the Thumb
region of Michigan.
2004
Independent Bank entered
the Metro Detroit market.
2018
Independent Bank
acquired Traverse City
State Bank (TCSB).
2019
A new year to SOAR