2019
Annual Report
Our vision for
the future is clear,
2020 ACTUALLY.
Every bank will tell you they’re different,
but at Independent Bank we know that
YOU are. We help you discover what
financial independence means to you.
Then we help you get there.
Be Bold. Be You.
LETTER FROM
THE PRESIDENT & CEO
Dear Shareholders:
It is my honor and pleasure to provide you with an update on Independent
Bank Corporation (IBC). We continue to be focused on building shareholder
value and position the Company to be successful in view of the opportunities
and challenges within a marketplace with an accelerating rate of change.
This starts with creating and maintaining a high performance culture with
talented individuals who are highly engaged and work as a team to serve
and guide our customers. This focus involves maintaining disciplined lending
standards, a diversified earning asset mix, ample liquidity, continuous
emphasis on growing our core deposit base, and strong capital levels.
As a community bank, at the center of all our strategies is a focus on serving our customers and investing in
our markets and in our people. During 2019, we committed over $1.7 billion in financing in our markets, we
invested nearly $750,000 in sponsorships and donations, and our associates volunteered nearly 20,000 hours
of time. Our customer base is growing, as is our brand. During 2019, we were recognized by Forbes for the
second consecutive year as having the highest customer satisfaction for banks in Michigan.
FINANCIAL RESULTS FOR 2019 – CONTINUED STRENGTH AND CONSISTENCY
In 2019, we generated excellent growth in our earnings and earnings per share. For the year ended
December 31, 2019, the Company reported net income of $46.4 million, or $2.00 per diluted share
compared to net income of $39.8 million, or $1.68 per diluted share, in 2018. This represents increases of
$6.6 million, or 17%, and 32 cents, or 19%, in net income and diluted earnings per share, respectively. For all
of 2019, our pre-tax, pre-provision earnings increased by $7.9 million or 16% to $58.6 million, from $50.6
million in 2018. Over this same period, our tangible book value per share increased by 9%, to $14.08 per
share from $12.90 per share at the end of 2018.
As reflected in our balance sheet, our fundamentals continue to be strong. The growth in our earnings was
fueled by strong loan growth and increased operating leverage. Loans, excluding loans held for sale, totaled
$2.73 billion at December 31, 2019, an increase of 6% from $2.58 billion at December 31, 2018. For the year, our
commercial loan portfolio increased by 2%, our consumer installment loan portfolio by 16% and our mortgage
loan portfolio by 5%. We have now put together a string of 23 consecutive quarters of loan growth. I am also
pleased to report that our investments in the mortgage banking business over the last few years continue to
pay off for us with mortgage gains of almost $20 million and total originations in excess of $1 billion for the
second time in our Company’s history.
On the funding side, deposits totaled $3.04 billion at December 31, 2019, compared to $2.91 billion at
December 31, 2018. The $123.3 million increase in total deposits during 2019 reflects growth in reciprocal
deposits. At year-end 2019, our loan to deposit ratio was a healthy 90%, primarily unchanged from 89% at the
prior year end, allowing capacity for additional growth. Our balance sheet is slightly asset sensitive, where
generally we 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. Non-performing loans at December 31, 2019, increased slightly to $9.5 million from $8.6 million
at the prior year end. Other real estate and repossessed assets totaled just $1.9 million at December 31,
2
compared to $1.3 million at December 31, 2018. Our ratio of our non-performing assets to total assets
increased slightly to 32 basis points at year-end 2019 compared to 29 basis points at year-end 2018. We
recorded loan net recoveries of $0.4 million (0.02% of average loans) in 2019 as compared to loan net
recoveries of $0.8 million (0.03% of average loans) in 2018. This represents the third consecutive year of net
recoveries for our Company.
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 $350.2 million
at December 31, 2019, from $339.0 million at December 31, 2018, due primarily to our net income that was
partially offset by share repurchases and dividends. Our ratio of tangible common equity to tangible assets was
8.96% as of the end of 2019 compared to 9.17% at the end of 2018. In 2019, we increased our total annual cash
dividends by 20%, from $0.60 per share to $0.72 cents per share. In January of 2020, your Board of Directors
increased the quarterly cash dividend by 11%, from $0.18 per share to $0.20 per share. Also in 2019, we
repurchased 1,204,688 shares of our common stock at average cost of $21.82 per share. During 2019, through a
combination of dividends and share repurchases we returned 92% of our 2019 earnings to our shareholders.
MARKETPLACE – ACCELERATING RATE OF CHANGE
We are in a period of rapid change with innovations in new technology; this creates opportunities to
improve the customer experience and become more efficient. I would characterize our market as highly-
competitive, as it includes traditional players and increasing new entrant Fintech players who can either
compete (at various points in the financial service purchasing cycle) or partner with traditional players. Also,
the industry continues its consolidation with similar numbers of sellers each year but on an overall shrinking
population base of financial institutions. This includes mergers of equals, as well as non-profit credit unions
acquiring for profit community banks.
This time last year, the US economy, as measured by GDP, was growing at a respectable 2.9% annual rate,
inflation was low, the unemployment rate was low, and consumer confidence was high. The overnight target
Federal Funds rate was 2.25% to 2.50% and the futures market had little probability of rate hikes in 2019,
although the bias was for some tightening. During 2019, the Federal Reserve did not tighten, but rather eased
monetary policy with three successive rate reductions during the year, bringing us to the current targeted
range of 1.5% to 1.75%. At the present time, we are nearing the eleventh anniversary of this economic expansion.
For all of 2019, GDP grew a modest 2.3%, and the unemployment rate continues to be low, both nationally and
in Michigan. Presently, the future market indicates at least one quarter point rate reduction in 2020. 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,
the 2020 national elections, trade tariffs, and most recently, the impact of a spread of the coronavirus on the
global economy.
On the regulatory front, we continue to invest additional resources, both in people and in technology to
meet the ever changing requirements and expectations of the banking industry. As previously shared, 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, yet the regulatory operating environment continues to
require an extraordinarily high level of attention. While not a new regulation during 2019, we shared publicly
an estimated range of the impact of the Current Expected Credit Loss (CECL) accounting standard on our
Company’s allowance for loan losses. We anticipate greater volatility in our quarterly provision for loan losses
as a result of this new life of loan loss estimate and believe the more material drivers to this estimate to be
loan growth levels and the unemployment rate.
There continues to be a place for larger community banks, like Independent Bank, with scale, a deep
understanding of our local markets and the ability to serve individuals and businesses in the community with
relationship banking. Yet, as banks work to avoid net interest margin compression, cover more normalized
loan loss provisions and meet the industry’s high regulatory expectations, to compete we also see a need to
continue to invest in new technology and expand our product offering.
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2020 VISION – BLENDING PEOPLE WITH TECHNOLOGY
The opportunity, winning in our markets with relationship banking – At Independent Bank we know that our
customers want to be independent, with personalized, convenient, and safe financial solutions from someone
they can trust. Many feel that picking a financial partner can feel overwhelming when there are so many
choices, yet we understand our customers’ time is valuable. We believe banking just shouldn’t be that hard. At
Independent, we simplify the experience. First, we collaborate with each customer defining their needs and
expectations for the future. Next, we help customize a plan that meets their goals. And finally, we empower
each of them to Be Independent. This is relationship banking defined.
As we look to 2020 and beyond, the key to our success is our ability to continue to execute on our operating
plan, which is built around relationship banking. During 2019, we achieved our previously shared performance
targets of 1.30% or better return on average assets and a 13.0% or better return on average equity.
Prospectively, our operating plan continues to have four primary objectives.
Grow our Customer Base – The first objective of our operating plan is organic growth. We will work to
grow 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 also will continue to 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
continued addition of talented sales professionals.
In addition to these organic growth strategies, we intend to supplement our organic growth through selective
and opportunistic bank and branch acquisitions with disciplined pricing. One example of this is our acquisition of
Traverse City State Bank in 2018. We liked the market, the customer base, and the culture, and we were able to
make a compelling case to sell to Independent with financial metrics that made sense. Since then, we have had
multiple opportunities to acquire other financial institutions in our markets. However, in all of these instances,
we believed it more important to stay disciplined and not simply acquire to acquire. I think the important point
here is your Board and management team is very conscious of protecting and creating shareholder value.
Enhance Productivity and the Customer Experience – Our second objective is continuing to increase
productivity while continuously improving the customer experience. For six consecutive years we have
continued to improve upon our efficiency ratio, currently at 64.9 percent. During this timeframe, while not
all inclusive, we have invested in new technologies, including a new mortgage origination platform and new
consumer origination platform. We have implemented numerous risk management and fraud prevention
tools and replaced almost 100% of our ATM network. We also moved our network to a private cloud. Over
this same period we have made tremendous strides in improving the customer experience. A few of the
more recent enhancements include: person to person payments via Zelle®; an online chat service; personal
financial management tools within our mobile app that include expense categorization, budgeting and
account aggregation; and electronic signatures within our branch channels. Also in 2019, we initiated a Private
Banking offering with intentions to roll out to all our markets in the future. As we move forward, we have
several initiatives we are executing on that we believe will materially improve productivity and/or enhance
the customer experience. The first initiative is the change-over to a new core banking partner and new digital
banking platform. We have signed a new core agreement with a new partner and will be converting at the end
of our current agreement in early 2021. This will allow Independent to move to an open banking environment,
providing enhanced speed to market, greater flexibility, and lower overall costs. We will have faster integration
with new technology such as digital banking solutions; real-time processing; and more efficient data access
and management capabilities. This change will also serve as the foundation to create a unified customer
experience through all channels, from remote digital access through to the branch and into back office
support. The second initiative is our on-going branch optimization efforts that include: assessing existing
locations; exploring new locations; reviewing service hours, staffing levels, etc. We are optimistic that our
successful execution of these initiatives will enable us to materially improve our productivity and the overall
customer experience.
Enterprise-wide 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
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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 Engagement and Development – Our fourth objective is to continue to attract, retain and develop
our service team. We recognize the path to our organization’s success is through the success of each and
every one of our team members. Over the last few years, we have been very successful in attracting many
new talented team members, often as a result of the market disruptions caused by M&A activity. At the
same time, we continue to execute on several key initiatives aimed at raising the engagement level of our
entire workforce. In 2019, our turnover level was at the lowest level in many years and the engagement rate
of our associates was at the highest level (90%) since we began formally measuring it. 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.
BOARD UPDATE
We are very pleased to have Ronia Kruse join the Independent Bank Corporation Board in October of 2019.
Ronia is the founder and CEO of OpTech, LLC and Optech Solutions. These firms provide solutions for clients
in areas of analytics, cybersecurity, application development and connected vehicles. Prior to founding this
business, Ms. Kruse served as a senior tax consultant for a big 4 CPA firm. She is a certified public accountant,
and her role as the CEO of a technology consulting firm, her background in public accounting and her leadership
skills provide an important resource for the IBC Board and management team.
I would like to acknowledge and thank Chuck Van Loan for his service to the Independent Bank Corporation
Board from 1992 through April 2019, and Chairman of the Board from 2007 to 2008. Chuck served as President
and CEO of IBC from 1993 until 2004 and as Executive Chairman during 2005. He retired from the Company in
2005. Chuck provided strong leadership for the Company over the years as well as in the communities we serve.
He will be missed.
I would like to acknowledge and thank Terry Haske who served as member of the Independent Bank
Corporation Board from March 1996 through December of 2019, and Chairman of the Board from 2002 to 2004.
Terry was a CPA and retired Principal with Anderson, Tuckey, Bernhardt & Doran, and PC. Terry’s contributions
were many and he too will be missed.
CLOSING
In closing, I encourage you to attend the 2020 Annual Meeting of Shareholders of Independent Bank
Corporation at 3:00 p.m. Eastern Time, on Tuesday, April 21, 2020. This meeting will be held at our corporate
headquarters, 4200 East Beltline Avenue, Grand Rapids, Michigan.
I would like 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
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FINANCIAL HIGHLIGHTS
Dollars in thousands, except per share data
FOR THE YEAR
Interest income
Interest expense
2019
2018
CHANGE
AMOUNT
CHANGE
PERCENT
$ 148,928
$ 130,773
$ 1 8,1 5 5
1 3.88 %
26,347
1 7,491
Net interest income
122,58 1
1 1 3,282
Provision for loan losses
Net gains on securities
Other non-interest income
824
307
47,429
1 ,503
1 38
44,677
Non-interest expense
1 1 1 ,733
107,461
8,856
9,299
(679)
1 69
2,752
4,272
8,627
50.63
8.2 1
(45. 1 8 )
122.46
6. 1 6
3.98
1 7.56
2,031
21 .85
57,760
1 1 ,325
49,1 33
9,294
$ 46,435
$ 39,839
$
6,596
1 6.56 %
$ 2.03
$ 1.70
$
0.3 3
1 9.41 %
2.00
0. 72
1.6 8
0.60
0.32
0. 1 2
1 9.05
20.00
$ 3,564,694
$ 3,353,281
$ 2 1 1 ,413
6.30 %
2,725,023
2,582,520
1 4 2,503
3,036,727
2,913,428
1 2 3,299
3,343,941
3,162,9 1 1
1 8 1,030
350,1 69
15.58
338,994
14.38
1 1 ,1 75
1.20
5.52
4.23
5.72
3.30
8.34
Income before income tax
Income tax expense
Net income
PER COMMON SHARE DATA
Net income per common share
Basic
Diluted
Cash dividends declared and paid
AT YEAR END
Assets
Loans
Deposits
Interest-earning assets
Shareholders' equity
Book value per common share
RATIOS
Net income to
Average common equity
13.63 %
12.38 %
1.25 % 1 0. 1 0 %
Average assets
1.35
1.27
0.08
6.30
As a percent of average
interest-earning assets
Interest income
Interest expense
Net interest income
4.6 1 %
4.48 %
0. 1 3 %
2.90 %
0.81
3.80
0.60
3.88
0. 21
35.00
(0.08)
(2.06)
6
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Performance Graph . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Selected Consolidated Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Management’s Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . .
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
100
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, 2014, 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
NASDAQ Bank
$250
$200
$150
l
e
u
a
V
x
e
d
n
I
$100
12/31/14
12/31/15
12/31/16
12/31/17
12/31/18
12/31/19
Index
12/31/14
12/31/15
12/31/16
12/31/17
12/31/18
12/31/19
118.93 173.20 181.85 175.46 195.41
Independent Bank Corporation. . . . . . . . . . . . . . . . 100.00
NASDAQ Composite . . . . . . . . . . . . . . . . . . . . . . . 100.00 106.96
116.45 153.23 147.35 200.49
NASDAQ Bank. . . . . . . . . . . . . . . . . . . . . . . . . . . . 100.00 102.21 129.34 154.02 130.28 175.61
Period Ending
8
SELECTED CONSOLIDATED FINANCIAL DATA
SUMMARY OF OPERATIONS
2019
Year Ended December 31,
2017
(Dollars in thousands, except per share amounts)
2018
2016
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 148,928 $ 130,773 $
Interest expense. . . . . . . . . . . . . . . . . . . . . . . . . . .
Net interest income . . . . . . . . . . . . . . . . . . . . . .
Provision for loan losses. . . . . . . . . . . . . . . . . . . .
Net gains on securities . . . . . . . . . . . . . . . . . . . . .
Net gain on branch sale . . . . . . . . . . . . . . . . . . . .
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 $
26,347
122,581
824
307
—
47,429
111,733
57,760
11,325
46,435 $
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 $
2015
80,842
5,856
74,986
(2,714)
20
1,193
38,917
88,450
29,380
9,363
20,017
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash dividends declared and paid . . . . . . . . . . . .
Book value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2.03 $
2.00
0.72
15.58
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
SELECTED BALANCES
Assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,564,694 $3,353,281 $2,789,355 $2,548,950 $2,409,066
1,515,050
2,725,023
Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Allowance for loan losses. . . . . . . . . . . . . . . . . . .
22,570
26,148
2,085,963
3,036,727
Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
251,092
350,169
Shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . .
11,954
88,646
Other borrowings . . . . . . . . . . . . . . . . . . . . . . . . .
35,569
39,456
Subordinated debentures . . . . . . . . . . . . . . . . . . . .
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
2,582,520
24,888
2,913,428
338,994
25,700
39,388
SELECTED RATIOS
Net interest income to average interest earning
assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3.80%
3.88%
3.65%
3.52%
3.58%
Net income to
Average shareholders’ equity . . . . . . . . . . . . . .
Average assets . . . . . . . . . . . . . . . . . . . . . . . . . .
Average shareholders’ equity to average assets . .
Tier 1 capital to average assets . . . . . . . . . . . . . .
Non-performing loans to Portfolio Loans . . . . . .
13.63
1.35
9.90
10.11
0.35
12.38
1.27
10.27
10.47
0.33
7.82
0.77
9.88
10.57
0.39
9.21
0.92
9.98
10.50
0.75
7.89
0.86
10.93
10.91
0.70
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, 2019, 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 the 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
also opened two loan production offices in Ohio (Columbus and Fairlawn). A third Ohio loan production office is
being opened in Toledo in March 2020. As a result, our success depends to a great extent upon the economic
conditions in Michigan’s Lower Peninsula.
10
Significant 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). See note #26.
It is against this backdrop that we discuss our results of operations and financial condition in 2019 as compared
to earlier periods.
11
RESULTS OF OPERATIONS
Summary. We recorded net income of $46.4 million, or $2.00 per diluted share, in 2019, net income of
$39.8 million, or $1.68 per diluted share, in 2018, and net income of $20.5 million, or $0.95 per diluted share, in
2017. The 2019 and 2018 results include the benefit of a reduced federal income tax rate pursuant to H.R. 1 and the
impact of the Merger 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 ‘‘Significant Developments.’’
KEY PERFORMANCE RATIOS
Year Ended December 31,
2018
2019
2017
Net income to
Average shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Average assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
13.63% 12.38% 7.82%
1.27
1.35
0.77
Net income per common share
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 2.03
2.00
$ 1.70
1.68
$0.96
0.95
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 $122.6 million during 2019, compared to $113.3 million and $89.2 million during
2018 and 2017, respectively. The increase in net interest income in 2019 compared to 2018 primarily reflects a
$302.1 million increase in average interest-earning assets that was partially offset by an eight basis point decrease
in our tax equivalent net interest income as a percent of average interest-earning assets (the ‘‘net interest margin’’).
The increase in net interest income in 2018 compared to 2017 reflects a $462.0 million increase in average
interest-earning assets and a 23 basis point increase in our net interest margin.
The increase in average interest-earning assets during 2019 and 2018 primarily reflects the impact of the Merger
as well as loan growth utilizing funds from increases in deposits. The decrease in the net interest margin during 2019
as compared to 2018 primarily reflects reductions in short-term interest rates during that year as well as a flattening
of the yield curve. The increase in the net interest margin during 2018 as compared to 2017 primarily reflects
increases in short-term interest rates during that year as well as the impact of the Merger.
2019 and 2018 interest income on loans includes $1.5 million and $1.7 million, respectively, of accretion of the
discount recorded on the TCSB loans acquired in the Merger.
Our net interest income is also impacted by our level of non-accrual loans. Average non-accrual loans totaled
$8.1 million, $8.4 million and $9.5 million in 2019, 2018 and 2017, respectively.
12
AVERAGE BALANCES AND RATES
2019
2018
2017
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 . . . . . . .
$2,713,690
7,937
397,598
52,324
48,023
18,359
$133,574
391
11,842
1,683
818
1,043
4.92% $2,418,421
6,118
4.93
394,160
2.98
67,574
3.22
32,593
1.70
16,936
5.68
$116,634
292
10,874
2,192
371
920
4.82% $1,845,661
4.77
3,199
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%
5.38
2.25
3.52
0.71
5.38
Interest earning assets . .
3,237,931
149,351
4.61
2,935,802
131,283
4.48
2,473,767
99,432
4.02
Cash and due from banks . .
Other assets, net . . . . . . . .
37,575
164,726
Total assets . . . . . . . . . .
$3,440,232
33,384
162,750
$3,131,936
31,980
144,442
$2,650,189
LIABILITIES
Savings and interest-
bearing checking . . . . . .
Time deposits . . . . . . . . . .
Other borrowings . . . . . . .
$1,453,061
655,718
77,254
10,228
13,197
2,922
0.70
2.01
3.78
$1,218,243
632,330
79,519
4,696
9,782
3,013
0.39
1.55
3.79
$1,052,215
502,284
74,876
1,530
5,245
2,348
0.15
1.04
3.14
Interest bearing
liabilities . . . . . . . . .
2,186,033
26,347
1.21
1,930,092
17,491
0.91
1,629,375
9,123
0.56
Non-interest bearing
deposits . . . . . . . . . . . .
Other liabilities . . . . . . . . .
Shareholders’ equity. . . . . .
867,314
46,153
340,732
Total liabilities and
shareholders’ equity . .
$3,440,232
846,718
33,354
321,772
728,208
30,838
261,768
$3,131,936
$2,650,189
Net interest income . . . .
$123,004
$113,792
$90,309
Net interest income as a
percent of average
interest earning
assets . . . . . . . . . . . .
3.80%
3.88%
3.65%
(1)
Interest on tax-exempt loans and securities is presented on a fully tax equivalent basis assuming a marginal tax rate of 21% in 2019 and
2018 and 35% in 2017.
RECONCILIATION OF NET INTEREST MARGIN, FULLY TAXABLE EQUIVALENT (‘‘FTE’’)
2019
Year Ended December 31,
2018
(Dollars in thousands)
2017
Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $122,581 $113,282 $89,186
1,123
Add: taxable equivalent adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
423
510
Net interest income - taxable equivalent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $123,004 $113,792 $90,309
Net interest margin (GAAP) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net interest margin (FTE) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3.79%
3.80%
3.85% 3.61%
3.88% 3.65%
13
CHANGE IN NET INTEREST INCOME
2019 compared to 2018
Rate
Volume
2018 compared to 2017
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 . . . . . . . . . . . . . . . . . . . . . . . . . .
$14,491
89
96
(491)
218
80
$ 2,449
10
872
(18)
229
43
$16,940
99
968
(509)
447
123
$27,388
141
(2,263)
(641)
(35)
76
$5,077
(21)
2,209
(230)
142
8
$32,465
120
(54)
(871)
107
84
Total interest income . . . . . . . . . . . . . . . . . . . . . .
14,483
3,585
18,068
24,666
7,185
31,851
Increase (decrease) in interest expense(1)
Savings and interest bearing checking . . . . . . . . . .
Time deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total interest expense . . . . . . . . . . . . . . . . . . . . .
1,047
374
(86)
1,335
4,485
3,041
(5)
7,521
5,532
3,415
(91)
8,856
276
1,587
153
2,016
2,890
2,950
512
6,352
3,166
4,537
665
8,368
Net interest income . . . . . . . . . . . . . . . . . . . . .
$13,148
$(3,936) $ 9,212
$22,650
$ 833
$23,483
(1)
(2)
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.
Interest on tax-exempt loans and securities is presented on a fully tax equivalent basis assuming a marginal tax rate of 21% in 2019 and
2018 and 35% in 2017.
COMPOSITION OF AVERAGE INTEREST EARNING ASSETS AND INTEREST BEARING
LIABILITIES
Year Ended December 31,
2017
2018
2019
As a percent of average interest earning assets
Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other interest earning assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
84.1% 82.6% 74.7%
17.4
15.9
25.3
Average interest earning assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
100.0% 100.0% 100.0%
Savings and interest-bearing checking. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Time deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
44.9% 41.5% 42.5%
21.5
20.3
2.7
2.3
20.3
3.1
Average interest bearing liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
67.5% 65.7% 65.9%
Earning asset ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Free-funds ratio(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
94.1% 93.7% 93.3%
34.3
32.5
34.1
(1) Average interest earning assets less average interest bearing liabilities divided by average interest earning assets.
Provision for loan losses. The provision for loan losses was an expense of $0.8 million, $1.5 million and
$1.2 million in 2019, 2018 and 2017, respectively. The provision reflects our assessment of the allowance for loan
losses taking into consideration factors such as loan mix, levels of non-performing and classified loans and loan net
charge-offs. While we use relevant information to recognize losses on loans, additional provisions for related losses
may be necessary based on changes in economic conditions, customer circumstances and other credit risk factors. See
‘‘Portfolio Loans and asset quality’’ for a discussion of the various components of the allowance for loan losses and
their impact on the provision for loan losses.
Non-interest income. Non-interest income is a significant element in assessing our results of operations.
Non-interest income totaled $47.7 million during 2019 compared to $44.8 million and $42.5 million during 2018 and
14
2017, 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 2019 or 2018 net income, it did result in a classification change in non-interest income and non-interest expense
as compared to 2017. Specifically, in 2019, interchange income and interchange expense each increased by
$1.9 million and in 2018, interchange income and interchange expense each increased by $1.5 million, due to
classification changes under ASU 2014-09 (also see note #25 to our Consolidated Financial Statements).
NON-INTEREST INCOME
2019
Year Ended December 31,
2018
(In thousands)
2017
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. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$11,208
10,297
$12,258
9,905
$12,673
8,023
19,978
307
(3,336)
1,658
1,111
6,513
10,597
138
3,157
1,971
970
5,819
11,762
260
1,647
1,968
1,061
5,139
Total non-interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$47,736
$44,815
$42,533
Service charges on deposit accounts totaled $11.2 million in 2019, as compared to $12.3 million in 2018 and
$12.7 million during 2017. These yearly variations primarily reflect declines in non-sufficient funds fees.
Interchange income totaled $10.3 million in 2019 compared to $9.9 million in 2018 and $8.0 million in 2017.
The increases in 2019 and 2018 as compared to 2017, are primarily due to the aforementioned impact of
ASU 2014-09 as well as increased transaction volume.
We realized net gains of $20.0 million on mortgage loans during 2019, compared to $10.6 million and
$11.8 million during 2018 and 2017 respectively. Mortgage loan activity is summarized as follows:
MORTGAGE LOAN ACTIVITY
2019
Year Ended December 31,
2018
(Dollars in thousands)
2017
Mortgage loans originated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,011,141 $807,408 $871,222
Mortgage loans sold(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
423,327
Net gains on mortgage loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
11,762
Net gains as a percent of mortgage loans sold (‘‘Loan Sales Margin’’) . . . . . . .
Fair value adjustments included in the Loan Sales Margin . . . . . . . . . . . . . . . . .
491,798
10,597
738,910
19,978
2.15%
(0.02)
2.70%
0.22
2.78%
(0.07)
(1)
2019 includes the sale of $50.5 million of portfolio residential fixed and adjustable mortgage loans to other institutions and securitization
of $65.1 million of portfolio residential fixed rate loans. 2018 includes the sale of $27.6 million of portfolio residential fixed and adjustable
rate portfolio mortgage loans to another financial institution and securitization of $10.9 million of portfolio residential fixed rate loans.
The increase in mortgage loan originations, sales and net gains in 2019 as compared to 2018 and 2017 is due
primarily to lower interest rates that resulted in increased mortgage loan refinance activity. In addition, a solid
housing market has resulted in strong purchase money mortgage origination volume. However, higher interest rates
during 2018, reduced mortgage loan refinance volume during that year on an industry-wide basis.
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
15
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 2.48% in 2019, 2.17% in 2018 and 2.85% in 2017. The higher Loan Sales Margin in 2019
and 2017, as compared to 2018, was principally due to more favorable competitive conditions including wider
primary-to-secondary market pricing spreads for much of each of those years. In 2018, 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, in 2018, we
recorded a loss on mortgage loans of $0.25 million in the fourth quarter 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 $0.31 million, $0.14 million and $0.26 million in 2019, 2018 and 2017,
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 2019, 2018 or 2017 for other than
temporary impairment of securities available for sale.
GAINS AND LOSSES ON SECURITIES
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$68,716
48,736
17,308
$415
336
263
$108
198
3
Proceeds
Year Ended December 31,
Losses(2)
Gains(1)
(In thousands)
Net
$307
138
260
(1) Gains in 2019 and 2017 include $0.166 million and $0.045 million, respectively related to equity securities at fair value. Gains in 2018
include $0.144 million related to the sale of 1,000 VISA Class B shares.
(2)
Losses in 2018 include $0.062 million related to equity securities at fair value.
Mortgage loan servicing, net, generated a loss of $3.3 million and earnings of $3.2 million and $1.6 million in
2019, 2018 and 2017, respectively. This activity is summarized in the following table:
MORTGAGE LOAN SERVICING ACTIVITY
Mortgage loan sevicing:
Revenue, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fair value change due to price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fair value change due to pay-downs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 6,196
(6,408)
(3,124)
$ 5,480
191
(2,514)
$ 4,391
(718)
(2,026)
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$(3,336) $ 3,157
$ 1,647
2019
2018
(In thousands)
2017
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
2019
2018
(In thousands)
2017
Balance at January 1,
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in accounting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$21,400
—
$15,699
—
$13,671
542
Balance at January 1, as adjusted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Originated servicing rights capitalized . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Servicing rights acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
21,400
7,303
—
(9,532)
15,699
4,977
3,047
(2,323)
14,213
4,230
—
(2,744)
Balance at December 31,
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$19,171
$21,400
$15,699
At December 31, 2019, we were servicing approximately $2.58 billion in mortgage loans for others on which
servicing rights have been capitalized. This servicing portfolio had a weighted average coupon rate of 4.22% and a
weighted average service fee of approximately 25.8 basis points. Remaining capitalized mortgage loan servicing
rights at December 31, 2019 totaled $19.2 million, representing approximately 74.3 basis points on the related
amount of mortgage loans serviced for others.
Investment and insurance commissions totaled $1.7 million in 2019 as compared to $2.0 million in both 2018
and 2017. The lower level of revenue in 2019 as compared to the prior two years was due primarily to lower sales
volumes reflecting, in part, changes in and newer personnel in certain markets.
We earned $1.1 million, $1.0 million and $1.1 million in 2019, 2018 and 2017, 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 $55.7 million and $55.1 million at
December 31, 2019 and 2018, respectively.
Other non-interest income totaled $6.5 million, $5.8 million and $5.1 million in 2019, 2018 and 2017,
respectively. The increase in 2019 as compared to 2018 is due primarily to growth in fees related to interest rate swaps
for commercial loan customers. 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, and income
from a small business investment company.
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 $111.7 million in 2019, $107.5 million in 2018, and $92.1 million in 2017. Many of
our components of non-interest expense increased in 2019 and 2018 as compared to 2017 due to the Merger.
The components of non-interest expense are as follows:
NON-INTEREST EXPENSE
2019
Year ended December 31,
2018
(In thousands)
2017
Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Performance-based compensation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payroll taxes and employee benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 41,719
12,066
13,716
$ 37,878
11,942
12,258
$35,397
9,874
9,818
Compensation and employee benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Occupancy, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Data processing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Furniture, fixtures and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interchange expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Communications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loan and collection. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Advertising . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Legal and professional . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
FDIC deposit insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Supplies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Credit card and bank service fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Costs related to unfunded lending commitments. . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for loss reimbursement on sold loans . . . . . . . . . . . . . . . . . . . . . . . . . .
Net gains on other real estate and repossessed assets . . . . . . . . . . . . . . . . . . . . . .
Merger related expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
67,501
9,013
8,905
4,113
3,215
2,947
2,685
2,450
1,814
1,089
685
638
411
246
229
(90)
—
5,882
62,078
8,912
8,262
4,080
2,702
2,848
2,682
2,155
1,839
969
1,081
689
414
171
10
(672)
3,465
5,776
55,089
8,102
7,657
3,870
1,156
2,684
2,230
1,905
1,892
346
894
666
529
475
171
(606)
284
4,738
Total non-interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$111,733
$107,461
$92,082
Compensation expense, which is primarily salaries, totaled $41.7 million, $37.9 million and $35.4 million in
2019, 2018 and 2017, respectively. The increases in 2019 and 2018 as compared to 2017 were primarily due to annual
merit based salary increases, the Merger and additional staffing particularly in commercial lending and information
technology (including data analytics).
Performance-based compensation expense totaled $12.1 million, $11.9 million and $9.9 million in 2019, 2018
and 2017, respectively. The increase in 2019 as compared to 2018 was primarily due to an increase in the employee
stock ownership plan (‘‘ESOP’’) contribution accrual reflecting the aforementioned higher salaries. The increase in
2018 as compared to 2017 primarily related to the level of compensation under our Management Incentive
Compensation Plan (‘‘MICP’’) based on our performance relative to plan targets and increased ESOP contributions.
We maintain performance-based compensation plans. In addition to commissions and cash incentive awards,
such plans include an ESOP and a long-term equity based incentive plan. The amount of expense recognized in 2019,
2018 and 2017 for share-based awards under our long-term equity based incentive plan was $1.6 million, $1.5 million
and $1.6 million, respectively. In each of those three years, the Board and Compensation Committee of the Board
authorized the grant of restricted stock and performance share awards under the plan.
Payroll taxes and employee benefits expense totaled $13.7 million, $12.3 million and $9.8 million in 2019, 2018
and 2017, respectively. The increase in 2019 as compared to 2018 was primarily due to a $0.3 million increase in
payroll taxes, a $0.5 million increase in health care insurance, a $0.2 million increase in 401(k) plan employer
contributions and a $0.4 million increase in employee education and employee relations costs. The increase in 2018
as compared to 2017 was 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 2019
and 2018 was due to the Merger. However, we maintain a self-insured health care plan (with an individual claim stop
18
loss limit) and we experienced a significant rise in claims in 2019 and 2018 as compared to 2017. In 2018, we also
increased the 401(k) employer match to 4% (from 3%) of an employee’s eligible compensation.
Occupancy expenses, net, totaled $9.0 million, $8.9 million and $8.1 million in 2019, 2018 and 2017,
respectively. The increases in 2019 and 2018 as compared to 2017 were primarily due to additional locations acquired
in the Merger and a few additional loan production offices that were opened during 2017.
Data processing expenses totaled $8.9 million, $8.3 million, and $7.7 million in 2019, 2018 and 2017,
respectively. The increase in 2019 as compared to 2018 was primarily due to higher mobile banking activity and
software costs for new applications in several departments. The increase in 2018 as compared to 2017 was primarily
due to the Merger as well as higher mobile banking activity and software costs for new applications in several
departments.
Furniture, fixtures and equipment expense totaled $4.1 million, $4.1 million, and $3.9 million in 2019, 2018 and
2017, respectively. The increases in 2019 and 2018 as compared to 2017 were primarily due to the Merger.
Interchange expense, which totaled $3.2 million, $2.7 million, and $1.2 million in 2019, 2018 and 2017,
respectively, primarily represents fees paid to our core information systems processor and debit card licensor related
to debit card and ATM transactions. The increases in 2019 and 2018 as compared to 2017 were 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. Increased debit card
transaction volumes in 2019 and 2018 also contributed to the rise in this expense as well as the addition of a fraud
detection service in early 2019.
Communications expense totaled $2.9 million, $2.8 million and $2.7 million in 2019, 2018 and 2017,
respectively. The increases in 2019 and 2018 as compared to 2017 were primarily due to the Merger.
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, $2.7 million and
$2.2 million in 2019, 2018 and 2017, 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 $2.5 million, $2.2 million, and $1.9 million in 2019, 2018 and 2017, respectively.
The increase in 2019 as compared to 2018 was primarily due to increased outdoor advertising (billboards).
The increase in 2018 as compared to 2017 was primarily due to increased outdoor advertising (billboards) as well
as the Merger.
Legal and professional fees totaled $1.8 million, $1.8 million, and $1.9 million in 2019, 2018 and 2017,
respectively. The decreases in 2019 and 2018 as compared to 2017 were primarily due to lower consulting costs for
certain deposit account programs.
The amortization of intangible assets primarily relates to the Merger (for 2019 and 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 $5.3 million and
$6.4 million at December 31, 2019 and 2018 respectively. See note #7 to the Consolidated Financial Statements for
a schedule of future amortization of intangible assets.
FDIC deposit insurance expense totaled $0.7 million, $1.1 million, and $0.9 million in 2019, 2018 and 2017,
respectively. The decrease in 2019 as compared to 2018 was primarily due to the use of our FDIC Small Bank
Assessment Credit (the ‘‘Assessment Credit’’) of approximately $0.7 million. We do not have any remaining
Assessment Credit to apply against our 2020 FDIC deposit insurance expense. The increase in 2018 as compared to
2017 was primarily due to the Merger and growth in total assets.
Supplies expenses were relatively unchanged for all periods presented.
Credit card and bank service fees totaled $0.4 million, $0.4 million, and $0.5 million in 2019, 2018 and 2017,
respectively. The declines in 2019 and 2018 compared to 2017 were primarily due to the sale of our payment plan
processing business in May 2017.
19
The changes in costs 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 $0.23 million, $0.01 million and
$0.17 million in 2019, 2018 and 2017, 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 $0.88 million and $0.78 million
at December 31, 2019 and 2018, 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 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 gains of $0.1 million in 2019 and
$0.7 million in 2018 were 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.
Merger related expenses totaled $3.5 million and $0.3 million in 2018 and 2017, respectively. These expenses
included 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.
Other non-interest expenses totaled $5.9 million, $5.8 million, and $4.7 million in 2019, 2018 and 2017,
respectively. The increases in 2019 and 2018 as compared to 2017 was due to increases in several expense categories,
including: directors’ fees (a new director was added in 2018), 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 $11.3 million, $9.3 million and $18.0 million in
2019, 2018 and 2017, respectively. 2019 and 2018 reflect 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 ‘‘Significant Developments.’’
Our actual federal income tax expense is different than the amount computed by applying our statutory federal
income tax rate to our pre-tax income primarily due to tax-exempt interest income, 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, 2019 and 2018 that the realization of substantially all
of our DTA continues to be more likely than not.
20
FINANCIAL CONDITION
Summary. Our total assets increased to $3.56 billion at December 31, 2019, compared to $3.35 billion at
December 31, 2018, primarily due to growth in securities available for sale and loans.
Loans, excluding loans held for sale (‘‘Portfolio Loans’’), totaled $2.73 billion at December 31, 2019, an
increase of 5.5% from $2.58 billion at December 31, 2018. (See ‘‘Portfolio Loans and asset quality’’). The increase
in Portfolio Loans during the last few years is part of our overall strategy to grow revenues, earnings and improve
our operating leverage by increasing our loans to deposits ratio. The expansion of our mortgage banking operations
is part of this strategy along with continuing to increase our commercial and consumer installment lending.
Deposits totaled $3.04 billion at December 31, 2019, compared to $2.91 billion at December 31, 2018.
The $123.3 million increase in total deposits during the period reflects growth in reciprocal 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 increased by $90.5 million during 2019, reflecting the deployment of a portion of the funds
generated from the growth in deposits and borrowings.
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 (loss). We recorded no net impairment losses related to other than temporary impairment on securities
available for sale in 2019, 2018 or 2017.
SECURITIES
Securities available for sale
Amortized
Cost
Unrealized
Gains
(In thousands)
Losses
Fair
Value
December 31, 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $513,668 $5,782 $1,050 $518,400
427,926
December 31, 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
433,224
1,520
6,818
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
21
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 continue to sell certain fixed rate and adjustable rate
jumbo or other mortgage loans in the future. In 2019, we sold or securitized $75.0 million (excludes the $41.7 million
discussed below) of fixed and adjustable rate portfolio mortgage loans. In 2018, we sold $27.6 million of fixed and
adjustable rate portfolio mortgage loans. In addition, in the fourth quarter of 2018 we reclassified $41.7 million (fair
value of $41.5 million) of adjustable rate portfolio mortgage loans to held for sale. These loans (which totaled
$40.6 million at the time of sale) were sold to another financial institution on a servicing released basis on January 30,
2019. All of these loan sales/securitizations were non-recourse (other than standard representations and warranties)
and were executed primarily for asset/liability management purposes.
LOAN PORTFOLIO COMPOSITION
December 31,
2019
2018
(In thousands)
Real estate(1)
Residential first mortgages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Residential home equity and other junior mortgages . . . . . . . . . . . . . . . . . . . . . . . . .
Construction and land development. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Agricultural . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 843,746
166,735
249,747
693,580
448,297
318,504
4,414
$2,725,023
$ 811,719
177,574
180,286
707,347
379,607
319,058
6,929
$2,582,520
(1)
(2)
Includes both residential and non-residential commercial loans secured by real estate.
Includes loans secured by multi-family residential and non-farm, non-residential property.
NON-PERFORMING ASSETS(1)
2019
Non-accrual loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans 90 days or more past due and still accruing interest. . . . . . . . . . . . . . .
Sub total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Government guaranteed loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total non-performing loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other real estate and repossessed assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total non-performing assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31,
2018
(Dollars in thousands)
$ 9,029
5
9,034
460
8,574
1,299
$ 9,873
2017
$ 8,184
—
8,184
255
7,929
1,643
$ 9,572
$10,178
—
10,178
646
9,532
1,865
$11,397
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
0.32
274.32
0.33%
0.96
0.29
290.27
0.39%
1.12
0.34
284.87
(1)
Excludes loans classified as ‘‘troubled debt restructured’’ that are performing and vehicle service contract counterparty receivables, net.
22
TROUBLED DEBT RESTRUCTURINGS
Performing TDR’s. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-performing TDR’s(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$7,974
540
$8,514
$39,601
2,607(3)
$47,575
3,147
$42,208
$50,722
December 31, 2019
Commercial
Retail(1)
Total
(In thousands)
December 31, 2018
Commercial
Retail(1)
Total
(In thousands)
Performing TDR’s. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-performing TDR’s(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$6,460
74
$6,534
$46,627
2,884(3)
$53,087
2,958
$49,511
$56,045
(1)
(2)
Retail loans include mortgage and installment loan portfolio segments.
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 $9.5 million, $8.6 million and $7.9 million at December 31, 2019, 2018 and 2017,
respectively. The increase in 2019 as compared to 2018 was primarily in the residential mortgage loan portfolio
segment that was partially offset by the pay-off or liquidation of non-performing commercial loans. The increase in
2018 as compared to 2017 is primarily due to an increase in 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 $47.6 million, or 1.7% of total Portfolio Loans, and $53.1 million, or 2.1% of total Portfolio
Loans, at December 31, 2019 and 2018, respectively. The decrease in the amount of performing TDRs during 2019
reflects a decline in mortgage loan TDRs due primarily to payoffs and amortization.
ORE and repossessed assets totaled $1.9 million at December 31, 2019, compared to $1.3 million at
December 31, 2018. The increase in ORE during 2019 primarily reflects the addition of a $0.6 million commercial
office building located in Grand Rapids, Michigan in the second quarter.
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 . . . . . . . . . . . . . . . . . . . . . . . .
2019
$ 6,155
2,502
8,764
8,727
December 31,
2018
(In thousands)
$ 6,310
1,861
7,792
8,925
2017
$ 6,839
1,228
7,125
7,395
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$26,148
$24,888
$22,587
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
23
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 is being 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. 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 $1.26 million to $26.15 million at December 31, 2019 from $24.89 million at December 31,
2018 and was equal to 0.96% of total Portfolio Loans at both December 31, 2019 and 2018.
During the first quarter of 2019, we deployed a third-party software solution (we previously used spreadsheet
software) to assist in the determination of our AFLL. This new third-party software has also assisted us in moving
to the expected loss framework that we implemented on January 1, 2020. Although the use of this new third-party
software did not have any material impact on our overall AFLL, it did result in some classification shifts from the
AFLL related to subjective factors into the AFLL related to historical losses as the new software model allowed us
to capture longer historical look-back periods (previously this was being captured in the subjective portion of the
AFLL).
Two of the four components of the AFLL outlined above increased during 2019. The AFLL related to specific
loans decreased $0.2 million during 2019 due primarily to a $2.6 million decline in the amount of such loans. The
AFLL related to other adversely rated commercial loans increased $0.6 million during 2019, primarily due to an
increase in the balance of such loans included in this component to $54.4 million at December 31, 2019 from
$44.7 million at December 31, 2018. The increase in other adversely rated commercial loans was primarily in early
watch credit categories and these loans are largely performing. We do not believe that we will experience any
24
significant loan losses as a result of this rise in other adversely rated commercial loans. The AFLL related to historical
losses increased $1.0 million during 2019, and the AFLL related to subjective factors decreased $0.2 million during
2019, due in part to the classification shifts discussed above, as well as loan growth, for the AFLL related to historical
losses.
By comparison, 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.
ALLOWANCE FOR LOSSES ON LOANS AND UNFUNDED COMMITMENTS
2019
2018
2017
Loan
Losses
Unfunded
Commitments
Loan
Losses
(Dollars in thousands)
Unfunded
Commitments
Loan
Losses
Unfunded
Commitments
Balance at beginning of year . . . . . . . . . . . $24,888
Additions (deductions)
Provision for loan losses . . . . . . . . . . . .
Recoveries credited to allowance. . . . . .
Loans charged against the allowance. . .
824
3,961
(3,525)
Additions included in non-interest
$1,296
$22,587
$1,125
$20,234
$ 650
—
—
—
1,503
4,622
(3,824)
—
—
—
1,199
4,205
(3,051)
—
—
—
expense . . . . . . . . . . . . . . . . . . . . . . . . . .
—
246
—
171
—
475
Balance at end of year . . . . . . . . . . . . . . . . $26,148
$1,542
$24,888
$1,296
$22,587
$1,125
Net loans charged against the allowance
to average Portfolio Loans . . . . . . . . . . .
(0.02)%
(0.03)%
(0.06)%
In 2019, 2018 and 2017, we recorded loan net recoveries of $0.4 million, $0.8 million and $1.2 million,
respectively. These net recoveries primarily reflect reduced levels of non-performing loans, improvement in collateral
liquidation values and on-going collection efforts on previously charged-off loans.
Deposits and borrowings. Historically, the loyalty of our customer base has allowed us to price deposits
competitively, contributing to a net interest margin that compares favorably to our peers. However, we still face a
significant amount of competition for deposits within many of the markets served by our branch network, which
limits our ability to materially increase deposits without adversely impacting the weighted-average cost of core
deposits.
To attract new core deposits, we have implemented various account acquisition strategies as well as branch staff
sales training. Account acquisition initiatives have historically generated increases in customer relationships. Over the
past several years, we have also expanded our treasury management products and services for commercial businesses
and municipalities or other governmental units and have also increased our sales calling efforts in order to attract
additional deposit relationships from these sectors. We view long-term core deposit growth as an important objective.
Core deposits generally provide a more stable and lower cost source of funds than alternative sources such as
short-term borrowings. (See ‘‘Liquidity and capital resources.’’)
Deposits
respectively.
totaled $3.04 billion and $2.91 billion at December 31, 2019 and 2018,
The $123.3 million increase in deposits during 2019 is due to growth in reciprocal deposits. Reciprocal deposits
totaled $431.0 million and $182.1 million at December 31, 2019 and 2018, 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 capability we introduced in mid-2018 as well as the marketing and sales efforts of our treasury management
team.
25
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, 2019, we had an estimated $532.9 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 $88.6 million
and $25.7 million at December 31, 2019 and 2018, 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, 2019, our use of such
wholesale funding sources (including reciprocal deposits) amounted to approximately $709.7 million, or 22.7% 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 2019, 2018 and 2017, we entered into $74.5 million, $23.9 million and $39.1 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 $0.94 million, $0.46 million and
$0.41 million of fee income related to these transactions during 2019, 2018 and 2017, 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
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, 2019, we had $501.6 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, $2.43 billion of our deposits
at December 31, 2019, 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.
26
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, and our ability to issue
Brokered CDs.
We also believe that
the parent company (including time deposits) of
approximately $20.5 million as of December 31, 2019, 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, 2019.
CONTRACTUAL COMMITMENTS(1)
Time deposit maturities . . . . . . . . . . . . . . . . . . . . . . . . . .
FHLB advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Subordinated debentures. . . . . . . . . . . . . . . . . . . . . . . . . .
Operating lease obligations . . . . . . . . . . . . . . . . . . . . . . .
Purchase obligations(2) . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1 Year or Less
1-3 Years
3-5 Years After 5 Years
Total
(In thousands)
$501,609
28,645
—
1,681
3,088
$ 87,327 $20,156
4,995
—
2,740
8,872
445
$
— 30,000
— 39,456
2,792
21,060
1,988
9,720
$609,537
63,640
39,456
9,201
42,740
$535,023
$103,934 $31,864
$93,753
$764,574
(1)
Excludes approximately $0.4 million of accrued tax and interest relative to uncertain tax benefits due to the high degree of uncertainty as
to when, or if, those amounts would be paid.
(2)
Includes contracts with a minimum annual payment of $1.0 million and are not cancellable within one year.
Effective management of capital resources is critical to our mission to create value for our shareholders. In
addition to common stock, our capital structure also currently includes cumulative trust preferred securities.
CAPITALIZATION
December 31,
2019
2018
(In thousands)
Subordinated debentures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amount not qualifying as regulatory capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 39,456
(1,224)
$ 39,388
(1,224)
Amount qualifying as regulatory capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
38,232
38,164
Shareholders’ equity
Common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retained earnings (accumulated deficit) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total shareholders’ equity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
352,344
1,611
(3,786)
350,169
377,372
(28,270)
(10,108)
338,994
Total capitalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$388,401
$377,158
We currently have four special purpose entities with $39.5 million of outstanding cumulative trust preferred
securities. These special purpose entities issued common securities and provided cash to our parent company that in
turn issued subordinated debentures to these special purpose entities equal to the trust preferred securities and
common securities. The subordinated debentures represent the sole asset of the special purpose entities. The common
securities and subordinated debentures are included in our Consolidated Statements of Financial Condition.
The FRB has issued rules regarding trust preferred securities as a component of the Tier 1 capital of bank
holding companies. The aggregate amount of trust preferred securities (and certain other capital elements) is limited
to 25 percent of Tier 1 capital elements, net of goodwill (net of any associated deferred tax liability). The amount of
27
trust preferred securities and certain other elements in excess of the limit can be included in Tier 2 capital, subject
to restrictions. 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 $350.2 million at December 31, 2019 from $339.0 million at
December 31, 2018, due primarily to our net income and a decline in our accumulated other comprehensive loss that
were partially offset by share repurchases and by dividends that we paid. Our tangible common equity (‘‘TCE’’)
totaled $316.5 million and $304.3 million, respectively, at those same dates. Our ratio of TCE to tangible assets was
8.96% and 9.17% at December 31, 2019 and 2018, respectively. TCE and the ratio of TCE to tangible assets are
non-GAAP measures. TCE represents total common equity less intangible assets.
In December and January 2018, our Board of Directors authorized the 2019 and 2018 share repurchase plans,
respectively. Under the original terms of these share repurchase plans, we were authorized to buy back up to 5% of
our outstanding common stock. In June 2019, our Board of Directors supplemented the 2019 share repurchase plan
and authorized the repurchase of up to 300,000 additional common shares. These share repurchase plans expired on
December 31, 2019 and 2018, respectively. We repurchased 1,204,688 shares during 2019 at an average cost of
$21.82 per share. We repurchased 587,969 shares during 2018 (all in the fourth quarter) at an average cost of
$21.57 per share.
In December 2019, our Board of Directors authorized the 2020 share repurchase plan. Under the terms of the
2020 share repurchase plan, we are authorized to buy back up to 1,120,000 shares, or approximately 5%, of our
outstanding common stock. This repurchase plan commenced on January 1, 2020, and is expected to last through
December 31, 2020.
We pay a quarterly cash dividend on our common stock. The annual total dividends paid were $0.72, $0.60 and
$0.42 per share for 2019, 2018 and 2017, respectively. We generally favor a dividend payout ratio between 30% and
50% of net income.
As of December 31, 2019 and 2018, 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.
28
CHANGES IN MARKET VALUE OF PORTFOLIO EQUITY AND NET INTEREST INCOME
Change in Interest Rates
Market
Value of
Portfolio
Equity(1)
Net
Interest
Income(2)
Percent
Change
(Dollars in thousands)
Percent
Change
December 31, 2019
200 basis point rise . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
100 basis point rise . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Base-rate scenario . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
100 basis point decline . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$472,500
478,800
467,200
412,100
1.13% $123,900
123,300
2.48
122,400
—
118,100
(11.79)
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)
1.23%
0.74
—
(3.51)
3.27%
2.13
—
(2.13)
(1)
(2)
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.
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
We are involved in various litigation matters in the ordinary course of business. At the present time, we do not
believe any of these matters will have a significant impact on our consolidated financial position or results of
operations. The aggregate amount we have accrued for losses we consider probable as a result of these litigation
matters is immaterial. However, because of the inherent uncertainty of outcomes from any litigation matter, we
believe it is reasonably possible we may incur losses in addition to the amounts we have accrued. At this time, we
estimate the maximum amount of additional losses that are reasonably possible is 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, however 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.
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.
Our methodology for determining the allowance and related provision for loan losses is described above in
‘‘Portfolio Loans and asset quality.’’ In particular, this area of accounting requires a significant amount of judgment
because a multitude of factors can influence the ultimate collection of a loan or other type of credit. It is extremely
difficult to precisely measure the amount of probable incurred losses in our loan portfolio. We use a rigorous process
to attempt to accurately quantify the necessary allowance and related provision for loan losses, but there can be no
assurance that our modeling process will successfully identify all of the probable incurred losses in our loan portfolio.
As a result, we could record future provisions for loan losses that may be significantly different than the levels that
we recorded in prior periods. In June 2016, the FASB issued ASU No. 2016-13 ‘‘Financial Instruments – Credit
Losses (Topic 326), Measurement of Credit Losses on Financial Instruments’’ (‘‘ASU 2016-13’’). See note #1 to the
Consolidated Financial Statements for a description of our implementation of ASU 2016-13. In particular, since
ASU 2016-13 requires a current expected (rather than incurred) credit loss model, our provision for loan losses may
be more volatile in future periods.
30
At December 31, 2019 and 2018, we had approximately $19.2 million and $21.4 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.
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, 2019.
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, 2019, 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, 2019,
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, 2019. Their report immediately follows our report.
William B. Kessel
President and
Chief Executive Officer
Independent Bank Corporation
March 6, 2020
Stephen A. Erickson
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, 2019 and 2018, 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, 2019, 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, 2019, 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, 2019 and 2018, and the results of its operations and its cash flows
for each of the years in the three-year period ended December 31, 2019 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, 2019, 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 6, 2020
34
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
December 31,
2019
2018
(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. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
53,295
12,009
65,304
350
—
518,400
18,359
69,800
—
1,166,695
1,098,911
459,417
2,725,023
(26,148)
2,698,875
1,865
38,411
55,710
2,072
19,171
5,326
28,300
42,751
$3,564,694
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 852,076
1,186,745
431,027
376,877
190,002
3,036,727
88,646
39,456
49,696
3,214,525
$
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
$ 879,549
1,194,865
182,072
385,981
270,961
2,913,428
25,700
39,388
35,771
3,014,287
Commitments and contingent liabilities
Shareholders’ Equity
Preferred stock, no par value, 200,000 shares authorized; none issued or
outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
—
Common stock, no par value, 500,000,000 shares authorized; issued and
outstanding: 22,481,643 shares at December 31, 2019 and
23,579,725 shares at December 31, 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retained earnings (accumulated deficit) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Shareholders’ Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Liabilities and Shareholders’ Equity . . . . . . . . . . . . . . . . . . . . . . . . . . .
352,344
1,611
(3,786)
350,169
$3,564,694
377,372
(28,270)
(10,108)
338,994
$3,353,281
See accompanying notes to consolidated financial statements
35
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31,
2018
(In thousands, except per share amounts)
2017
2019
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interchange expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Communications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loan and collection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Advertising . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Legal and professional . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
FDIC deposit insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net gains on other real estate and repossessed assets . . . . . . . . . . . . . . . . .
Merger related expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Non-interest Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income Before Income Tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income per common share
$133,883
$116,865
$84,281
11,842
1,342
1,861
148,928
23,425
2,922
26,347
122,581
824
121,757
11,208
10,297
19,978
307
(3,336)
9,282
47,736
67,501
9,013
8,905
4,113
3,215
2,947
2,685
2,450
1,814
685
(90)
—
8,495
111,733
57,760
11,325
$ 46,435
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
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
62,078
8,912
8,262
4,080
2,702
2,848
2,682
2,155
1,839
1,081
(672)
3,465
8,029
107,461
49,133
9,294
$ 39,839
55,089
8,102
7,657
3,870
1,156
2,684
2,230
1,905
1,892
894
(606)
284
6,925
92,082
38,438
17,963
$20,475
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
2.03
2.00
$
$
1.70
1.68
$
$
0.96
0.95
See accompanying notes to consolidated financial statements
36
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
2019
Year Ended December 31,
2018
(In thousands)
2017
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive income (loss)
$46,435
$39,839
$20,475
Securities available for sale
Unrealized gain (loss) arising during period . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in unrealized gains and losses for which a portion of other than
10,235
(4,594)
4,065
temporary impairment has been recognized in earnings . . . . . . . . . . . . . . . .
Reclassification adjustments for gains included in earnings . . . . . . . . . . . . . . .
(65)
(140)
(53)
(56)
186
(215)
Unrealized gains (losses) recognized in other comprehensive income
(loss) on securities available for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax expense (benefit) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
10,030
2,106
(4,703)
(988)
4,036
1,413
Unrealized gains (losses) recognized in other comprehensive income
(loss) on securities available for sale, net of tax . . . . . . . . . . . . . . . . . . . .
7,924
(3,715)
2,623
Derivative instruments
Unrealized gains (losses) arising during period . . . . . . . . . . . . . . . . . . . . . . . . .
Reclassification adjustment for (income) expense recognized in earnings . . . .
(1,603)
(425)
Unrealized gains (losses) recognized in other comprehensive income
(loss) on derivative instruments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax expense (benefit) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(2,028)
(426)
(262)
(237)
(499)
(105)
324
18
342
120
Unrealized gains (losses) recognized in other comprehensive income
(loss) on derivative instruments, net of tax . . . . . . . . . . . . . . . . . . . . . . . .
(1,602)
(394)
222
Other comprehensive income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6,322
(4,109)
2,845
Comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$52,757
$35,730
$23,320
See accompanying notes to consolidated financial statements
37
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
Balances at January 1, 2017 . . . . . . . . . . . . . . . . . . . . . . . . .
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
Retained
Earnings
(Accumulated
Deficit)
Accumulated
Other
Comprehensive
Loss
Total
Shareholders’
Equity
Common
Stock
(Dollars in thousands, except per share amounts)
$323,745
—
—
72
$(65,605)
20,475
(8,960)
—
$ (8,808)
—
—
—
$249,332
20,475
(8,960)
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) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,731
Share based compensation withholding obligation
(withholding of 108,185 shares of common stock) . . . . .
Other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balances at December 31, 2018 . . . . . . . . . . . . . . . . . . . . . .
Net income for 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash dividends declared, $.72 per share . . . . . . . . . . . . . . .
Repurchase of 1,204,688 shares of common stock . . . . . . .
Issuance of 71,799 shares of common stock . . . . . . . . . . . .
Share based compensation (issuance of 92,275 shares of
(1,467)
—
377,372
—
—
(26,284)
284
common stock) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,854
Share based compensation withholding obligation
(withholding of 57,468 shares of common stock) . . . . . .
Other comprehensive income . . . . . . . . . . . . . . . . . . . . . . . .
(882)
—
—
—
36
—
(54,054)
39,839
(14,055)
—
—
—
—
—
—
(28,270)
46,435
(16,554)
—
—
—
—
—
—
1,748
—
(36)
2,845
(5,999)
—
—
—
—
—
(579)
—
2,845
264,933
39,839
(14,055)
(12,681)
64,536
267
—
1,731
—
(4,109)
(10,108)
—
—
—
—
(1,467)
(4,109)
338,994
46,435
(16,554)
(26,284)
284
—
1,854
—
6,322
(882)
6,322
Balances at December 31, 2019 . . . . . . . . . . . . . . . . . . . . . .
$352,344
$ 1,611
$ (3,786)
$350,169
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 the sale of equity securities at fair value . . . . . . . . . . . . . . . . . . . . . . .
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 on other real estate and repossessed assets . . . . . . . . . . . . . . . . . . . . . . . . .
Share based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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 . . . . . . . . . . . . . . . . . . .
Purchase of Federal Reserve Bank stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net increase in portfolio loans (loans originated, net of principal payments) . . . . . . . . .
Proceeds from the sale 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
CASH FLOW FROM FINANCING ACTIVITIES
Net increase in total deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net increase (decrease) in other borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from Federal Home Loan Bank advances. . . . . . . . . . . . . . . . . . . . . . . . . . .
Payments of Federal Home Loan Bank advances . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from issuance of common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repurchase of common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Share based compensation withholding obligation. . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net Cash From Financing Activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net Increase (Decrease) in Cash and Cash Equivalents . . . . . . . . . . . . . . . . . . . . . .
Cash and Cash Equivalents at Beginning of Year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash and Cash Equivalents at End of Year . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash paid during the year for
Interest. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Transfers to other real estate and repossessed assets . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Transfer of mortgage loans to held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Securitization of portfolio loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Right of use assets obtained in exchange for lease obligations . . . . . . . . . . . . . . . . . . . . .
Purchase of securities available for sale and interest bearing deposits - time not yet
settled. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Common stock and stock options issued in TCSB Bancorp, Inc. acquisition . . . . . . . . . . .
2019
Year Ended December 31,
2018
(In thousands)
39,839
$
2017
$ 20,475
$ 46,435
560
642,537
(647,606)
824
1,088
(2,936)
6,059
(19,978)
(307)
(90)
1,854
(6,573)
12,113
(12,455)
33,980
68,716
153,938
(237,672)
—
250
—
(215,276)
50,516
—
—
512
1,766
470
74
(4,936)
(181,642)
123,299
25,002
111,000
(73,143)
(16,554)
284
(26,284)
(882)
142,722
(4,940)
70,244
$ 65,304
$ 26,697
9,534
2,201
2,242
36,622
65,070
9,906
—
—
—
463,699
(457,077)
1,503
9,294
(4,044)
—
434,682
(426,410)
1,199
16,009
(5,159)
6,033
(10,597)
(138)
(672)
1,731
(4,890)
240
5,082
44,921
48,736
160,627
(103,493)
2,474
3,728
(2,038)
(344,330)
27,658
23,516
—
511
2,526
474
106
(3,862)
(183,367)
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)
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
174,815
6,754
622,000
(583,587)
(8,960)
72
—
(579)
210,515
(28,456)
83,194
$ 54,738
$
16,737
120
—
1,510
41,471
10,869
—
—
64,536
9,163
1,970
—
1,735
—
—
—
1,000
—
$
$
See accompanying notes to consolidated financial statements
39
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, 2019, 71.7% 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. All of these deposits are FDIC insured.
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, were carried at the lower of cost
or fair value on an aggregate loan basis and were sold during the first quarter of 2019.
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.
40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
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 of capitalized mortgage loan servicing rights, totaled
$6.2 million, $5.5 million and $4.4 million for the years ended December 31, 2019, 2018 and 2017, 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
did not have any trading securities at December 31, 2019 and 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, 2019 and 2018. 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.
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
41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
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.
loan segment
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
include (i) commercial and industrial and
(ii) commercial real estate. Classes within the mortgage loan segment include (i) 1-4 family owner occupied - jumbo,
(ii) 1-4 family owner occupied - non-jumbo, (iii) 1-4 family non-owner occupied (iv) 1-4 family - 2nd lien and
(v) resort lending. Classes within the installment loan segment include (i) boat lending, (ii) recreational vehicle
lending, and (iii) other. Commercial loans are subject to adverse market conditions which may impact the borrower’s
ability to make repayment on the loan or could cause a decline in the value of the collateral that secures the loan.
Mortgage and installment loans 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
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.
42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
During the first quarter of 2019, we deployed a third-party software solution (we previously used spreadsheet
software) to assist in the determination of our AFLL. This new third-party software also has assisted us in moving
to the expected loss framework that was required to be implemented on January 1, 2020. Although the use of this
new third-party software did not have any material impact on our overall AFLL, it did result in some classification
shifts from the AFLL related to subjective factors into the AFLL related to historical losses as the new software model
allowed us to capture longer historical look-back periods (previously this was being captured in the subjective portion
of the AFLL).
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 a
new loan with similar credit risk characteristics, and other terms no less favorable to us than those we would offer
for a similar new loan.
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 265 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 non-interest expense 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 in the Consolidated
Statements of Operations.
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 non-interest income – other in our Consolidated
Statements of Operations. 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. For instruments with no hedging designation, the gain or loss on the derivative is
reported in earnings. These free standing instruments currently consist of (i) mortgage banking related derivatives and
include rate-lock loan commitments to fund mortgage loans (interest rate locks) to be sold into the secondary market
and mandatory forward commitments for the future delivery of these mortgage loans, (ii) certain pay-fixed and
44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
pay-variable interest rate swap agreements related to commercial loan customers and (iii) certain purchased and
written options related to a time deposit product. The fair value of rate-lock mortgage loan commitments is based on
agency cash window loan pricing for comparable assets and the fair value of mandatory commitments to sell
mortgage loans is based on mortgage backed security pricing for comparable assets. We enter into mandatory forward
commitments for the future delivery of mortgage loans generally when interest rate locks are entered into in order
to hedge the change in interest rates resulting from our commitments to fund the loans. Changes in the fair values
of these derivatives are included in net gains on mortgage loans in the Consolidated Statements of Operations. Fair
values of the pay-fixed and pay-variable interest rate swap agreements are derived from proprietary models which
utilize current market data and are included in net interest income in the Consolidated Statements of Operations. Fair
values of the purchased and written options are based on prices of financial instruments with similar characteristics
and are included in net interest income in the Consolidated Statements of Operations.
Net cash settlements on derivatives that qualify for hedge accounting are recorded in interest expense in the
Consolidated Statements of Operations. Net cash settlements on derivatives that do not qualify for hedge accounting
are reported in non-interest income (mortgage banking related derivatives) or net interest income (interest rate swap
agreements and options) in the Consolidated Statements of Operations. Cash flows on hedges are classified in the
cash flow statement the same as the cash flows of the items being hedged.
We formally document the relationship between derivatives and hedged items, as well as the risk- management
objective and the strategy for undertaking hedge transactions, at the inception of the hedging relationship. This
documentation includes linking Fair Value or Cash Flow Hedges to specific assets and liabilities on the Consolidated
Statements of Financial Condition or to specific firm commitments or forecasted transactions. We 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.
COMMON STOCK — At December 31, 2019, 0.1 million shares of common stock were reserved for issuance
under the dividend reinvestment plan and 0.7 million shares of common stock were reserved for issuance under our
long-term incentive plans.
45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
RECLASSIFICATION — Certain amounts in the 2018 and 2017 consolidated financial statements have been
reclassified to conform to the 2019 presentation.
ADOPTION OF NEW ACCOUNTING STANDARDS — In February 2016, the Financial Accounting Standards
Board (‘‘FASB’’) issued Accounting Standards Update (‘‘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 our operating leases that we had in place
at the date of adoption we did not have a material change in the recognition, measurement and presentation of lease
expense or impact on cash flow. The primary impact was the recognition of certain operating leases on our
Consolidated Statements of Financial Condition which resulted in the recording of right of use (‘‘ROU’’) assets and
offsetting lease liabilities each totaling approximately $7.7 million at January 1, 2019. See note #18.
In August 2017, the FASB issued ASU 2017-12, ‘‘Derivatives and Hedging (Topic 815), Targeted Improvements
to Accounting for Hedging Activities’’. This new ASU amends the hedge accounting model in Topic 815 to enable
entities to better portray the economics of their risk management activities in the financial statements and enhance
the transparency and understandability of hedge results. The amendments expand an entity’s ability to hedge
nonfinancial and financial risk components and reduce complexity in fair value hedges of interest rate risk. The
guidance eliminates the requirement to separately measure and report hedge ineffectiveness and generally requires
the entire change in the fair value of a hedging instrument to be presented in the same income statement line as the
hedged item. The guidance also eases certain documentation and assessment requirements and modifies the
accounting for components excluded from the assessment of hedge effectiveness. This amended guidance was
effective for us on January 1, 2019, and did not have a material impact on our consolidated operating results or
financial condition.
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:
•
•
•
•
•
Replaces the existing incurred loss impairment guidance and establishes a single allowance framework for
financial assets carried at amortized cost, which will reflect our estimate of credit losses over the full
remaining expected life of the financial assets and will consider expected future changes in macroeconomic
conditions.
Eliminates existing guidance for purchase credit impaired (‘‘PCI’’) loans, and requires recognition of the
nonaccretable difference as an increase to the allowance for expected credit losses on financial assets
purchased with more than insignificant credit deterioration since origination, which will be offset by an
increase in the recorded investment of the related loans.
Requires inclusion of expected recoveries, limited to the cumulative amount of prior write-offs, when
estimating the allowance for credit losses for in scope financial assets (including collateral dependent
assets).
Amends existing impairment guidance for securities available for sale to incorporate an allowance, which
will allow for reversals of credit impairments in the event that the credit of an issuer improves. Credit losses
on securities available for sale are limited to the amount of the decline in fair value regardless of what the
credit loss model would show for impairment.
Generally requires a cumulative-effect adjustment to retained earnings as of the beginning of the reporting
period of adoption.
We began evaluating this ASU in 2016 and established a company-wide, cross-discipline governance structure,
which provides implementation oversight. We continued to test and refine our current expected credit loss models that
satisfied the requirements of this ASU. Oversight and testing, as well as efforts to meet expanded disclosure
requirements, extended through the end of 2019. We currently estimate losses over approximately a two year forecast
46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
period using the Federal Open Market Committee median economic projections as well as considering other
economic forecast sources, and then revert to longer term historical loss experience to estimate losses over more
extended periods. This amended guidance was effective for us on January 1, 2020. We have not completed finalizing
the results of our current expected credit loss (‘‘CECL’’) estimate as of year-end. The required financial reporting
disclosures are being further refined and internally validated. We are in the process of finalizing the review of our
model and assumptions including qualitative adjustments and economic forecasts. During the first quarter of 2020,
we expect to finalize our model and all assumptions as well as obtain formal approval from all internal committees
and governance processes related to CECL.
We expect to recognize a one-time cumulative effect adjustment increasing the allowance for loan losses.
Because we do not have final approval from our oversight and governance committees, we are estimating an increase
to the allowance for loan losses to be in the range of $8.0 million to $10.0 million primarily driven by the longer
contractual maturities of our mortgage and consumer installment loan segments. In addition, we currently expect this
ASU to increase the allowance for losses related to unfunded loan commitments between $1.0 million and
$2.0 million. The ultimate impact of adopting this ASU, and at each subsequent reporting period, is highly dependent
on credit quality, economic forecasts and conditions, composition of our loan portfolios and securities available for
sale, along with other management judgements. The transition adjustment to record the allowance for credit losses
may fall outside of our estimated increase based on the finalization of assumptions including qualitative adjustments
and the economic forecast used in calculating the allowance for credit losses upon the adoption of CECL.
We do not expect a material allowance for credit losses to be recorded on securities available for sale upon
adoption of this ASU.
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 was effective for us on January 1, 2020, and
did not 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 balances with the FRB. The
average reserve balances to be maintained during 2019 and 2018 were $26.6 million and $9.6 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 $0.01 million and $0.13 million
at December 31, 2019 and 2018, respectively.
47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
NOTE 3 – SECURITIES
Securities available for sale consist of the following at December 31:
2019
Amortized
Cost
Unrealized
Gains
(In thousands)
Losses
Fair Value
U.S. agency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 14,591 $
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. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
226,130
10,671
39,248
94,158
94,499
31,904
1,968
499
1,910
113
544
103
1,724
1,296
—
3
89 $
19 $ 14,661
227,762
278
10,756
28
39,693
99
93,886
375
96,102
121
33,195
5
1,843
125
502
—
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $513,668 $5,782 $1,050 $518,400
2018
U.S. agency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 20,198 $
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. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
124,777
5,909
29,735
83,481
130,244
34,866
1,964
2,050
9 $ 193 $ 20,014
123,751
5,726
29,419
83,319
127,555
34,309
1,819
2,014
1,843
184
637
248
2,946
586
145
36
817
1
321
86
257
29
—
—
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $433,224 $1,520 $6,818 $427,926
Total OTTI recognized in accumulated other comprehensive loss for securities available for sale was zero at both
December 31, 2019 and 2018, 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)
2019
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 . . . . . . . . . . . . . . . . . . . . . . . .
2,782
56,377
3,284
16,387
34,027
15,666
2,125
—
8
$
126
24
55
233
84
5
—
$ 2,712
13,551
659
343
13,839
5,396
—
1,843
$ 11
152
4
44
142
37
—
125
$
5,494
69,928
3,943
16,730
47,866
21,062
2,125
1,843
$
19
278
28
99
375
121
5
125
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $130,648
$535
$38,343
$515
$168,991
$1,050
48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
Less Than Twelve Months Twelve Months or More
Unrealized
Losses
Unrealized
Losses
Fair Value
Fair Value
Total
Fair Value
Unrealized
Losses
(In thousands)
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
Our portfolio of securities available for sale is reviewed quarterly for impairment in value. In performing this
review, management considers (1) the length of time and extent that fair value has been less than cost, (2) the
financial condition and near term prospects of the issuer, (3) the impact of changes in market interest rates on the
market value of the security and (4) an assessment of whether we intend to sell, or it is more likely than not that we
will be required to sell a security in an unrealized loss position before recovery of its amortized cost basis. For
securities that do not meet the aforementioned recovery criteria, the amount of impairment recognized in earnings is
limited to the amount related to credit losses, while impairment related to other factors is recognized in other
comprehensive income (loss).
U.S. agency, U.S. agency residential mortgage-backed securities and U.S. agency commercial mortgage backed
securities — at December 31, 2019, we had 29 U.S. agency, 111 U.S. agency residential mortgage-backed and 9 U.S.
agency commercial mortgage-backed securities whose fair 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.
Private label mortgage backed, other asset backed and corporate securities — at December 31, 2019, we had
22 private label mortgage backed, 58 other asset backed and two corporate securities 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.
Two private label mortgage-backed 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.
Obligations of states and political subdivisions — at December 31, 2019, we had 42 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.
Trust preferred securities — at December 31, 2019, 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 $0.91 million as of December 31, 2019, continues to have
satisfactory credit metrics and make interest payments.
As management does not intend to liquidate any of the securities discussed above 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 discussed
above (other than certain declines related to the two private label mortgage-backed securities currently being
reviewed for OTTI) are deemed to be other than temporary.
49
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 2019, 2018, and 2017.
At December 31, 2019,
two private label mortgage-backed securities had credit related OTTI and are
summarized as follows:
Senior
Security
Super
Senior
Security
(In thousands)
As of December 31, 2019
Fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortized cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-credit unrealized loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unrealized gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cumulative credit related OTTI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$601
511
—
90
757
$603
442
—
161
457
Total
$1,204
953
—
251
1,214
Both of these securities are receiving principal and interest payments similar to principal reductions in the
underlying collateral and have unrealized gains at December 31, 2019. 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. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,594
$1,594
$1,594
2019
2018
(In thousands)
2017
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reduction(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
(380)
—
—
—
—
—
—
$1,214
$1,594
$1,594
(1) During 2019 one security with previously recorded OTTI was settled and balance is now zero.
The amortized cost and fair value of securities available for sale at December 31, 2019, 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)
$ 10,737
50,035
47,634
35,055
143,461
226,130
10,671
39,248
94,158
$ 10,761
50,839
49,070
35,633
146,303
227,762
10,756
39,693
93,886
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$513,668
$518,400
50
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:
Realized
Proceeds
Gains(1)
Losses
(In thousands)
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$68,716
48,736
17,308
$248
192
218
$108
136
3
(1)
2018 excludes a $0.144 million gain on the sale of 1,000 VISA Class B shares.
Certain preferred stocks which were all sold during the first quarter of 2019 had been classified as equity
securities at fair value in our Consolidated Statement of Financial Condition. During 2019, 2018 and 2017, we
recognized gains (losses) on these preferred stocks of $0.17 million, $(0.06) million and $0.05 million, respectively,
that are included in net gains on securities in the Consolidated Statements of Operations. Zero, $(0.06) million and
$0.05 million of these amounts relate to gains (losses) recognized on preferred stock still held at each respective year
end.
Securities available for sale with a book value of $8.7 million and zero at December 31, 2019 and 2018,
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 total shareholders’ equity at
December 31, 2019 or 2018.
NOTE 4 – LOANS AND PAYMENT PLAN RECEIVABLES
Our loan portfolios at December 31 follow:
2019
2018
(In thousands)
Real estate(1)
Residential first mortgages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 843,746 $ 811,719
177,574
Residential home equity and other junior mortgages . . . . . . . . . . . . . . . . . . . . . . . . . . .
180,286
Construction and land development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other(2). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
707,347
379,607
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
319,058
Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6,929
Agricultural . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,725,023 $2,582,520
166,735
249,747
693,580
448,297
318,504
4,414
(1)
(2)
Includes both residential and non-residential commercial loans secured by real estate.
Includes loans secured by multi-family residential and non-farm, non-residential property.
Loans include net deferred loan costs of $16.3 million and $13.3 million at December 31, 2019 and 2018,
respectively.
During the first quarter of 2019, we sold $40.6 million, of residential adjustable rate mortgage loans servicing
released (classified on the Consolidated Statements of Financial Condition as held for sale, carried at the lower of
cost or fair value at December 31, 2018) to another financial institution and recognized a gain on sale of
$0.01 million. During the first quarter of 2019 we also securitized $29.8 million, of portfolio residential fixed rate
mortgage loans servicing retained with Freddie Mac and recognized a gain on sale of $0.53 million. During the third
quarter of 2019, we sold $9.9 million of residential fixed and adjustable rate portfolio mortgage loans servicing
retained to another financial institution and recognized a gain on sale of $0.07 million. During the third quarter of
2019 we also transferred $36.6 million, of portfolio residential fixed rate mortgage loans to loans held for sale, carried
51
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
at the lower of cost or fair value of which $35.3 million were subsequently securitized in the fourth quarter of 2019
servicing retained with Freddie Mac recognizing a gain on sale of approximately $1.2 million. These transactions
were done primarily for asset/liability management purposes.
During the first and third quarters of 2018, we sold $16.5 million and $11.1 million, respectively, of residential
fixed and adjustable rate portfolio mortgage loans servicing retained to another financial institution and recognized
a gain (loss) on sale of $0.05 million and ($0.01) million, respectively. During the fourth quarter of 2018 we
securitized $10.9 million of portfolio residential fixed rate mortgage loans servicing retained with Freddie Mac
recognizing a loss on sale of approximately $0.1 million. These transactions were done primarily for asset/liability
management purposes.
An analysis of the allowance for loan losses by portfolio segment for the years ended December 31 follows:
2019
Balance at beginning of period . . . . . . . . . . . . . . . . . .
Additions (deductions)
Commercial Mortgage
Installment
(In thousands)
Subjective
Allocation
Total
$7,090
$ 7,978
$
895
$8,925
$24,888
Provision for loan losses . . . . . . . . . . . . . . . . . . . . .
Recoveries credited to allowance . . . . . . . . . . . . . .
Loans charged against the allowance . . . . . . . . . . .
(651)
2,165
(682)
526
933
(1,221)
1,147
863
(1,622)
(198)
—
—
824
3,961
(3,525)
Balance at end of period . . . . . . . . . . . . . . . . . . . . . . .
$7,922
$ 8,216
$ 1,283
$8,727
$26,148
2018
Balance at beginning of period . . . . . . . . . . . . . . . . . .
Additions (deductions)
$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)
1,733
—
—
1,199
4,205
(3,051)
Balance at end of period . . . . . . . . . . . . . . . . . . . . . . .
$5,595
$ 8,733
$
864
$7,395
$22,587
52
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
2019
Allowance for loan losses:
Individually evaluated for impairment. . . . . . . . . . . $
Collectively evaluated for impairment. . . . . . . . . . .
Loans acquired with deteriorated credit quality . . .
1,031 $
6,891
—
4,863 $
3,353
—
261
1,022
—
$ — $
8,727
—
6,155
19,993
—
Total ending allowance for loan losses balance . . . . . $
7,922 $
8,216 $
1,283
$8,727
$
26,148
Loans
Individually evaluated for impairment. . . . . . . . . . . $
Collectively evaluated for impairment. . . . . . . . . . .
Loans acquired with deteriorated credit quality . . .
1,158,906
1,394
Total loans recorded investment. . . . . . . . . . . . . . . . . .
Accrued interest included in recorded investment . . .
1,169,693
2,998
9,393 $
43,574 $
1,058,917
575
1,103,066
4,155
2,925
457,370
316
460,611
1,194
Total loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,166,695 $1,098,911 $459,417
55,892
$
2,675,193
2,285
2,733,370
8,347
$2,725,023
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
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 of interest income would have been recognized in each of the
years ended 2019, 2018 and 2017. Interest income recorded on these loans was approximately zero during each of
the years ended 2019, 2018 and 2017.
53
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):
2019
Commercial
90+ and
Still
Accruing
Non-
Accrual
Total Non-
Performing
Loans
(In thousands)
Commercial and industrial(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$— $ 565
735
—
$ 565
735
Mortgage
1-4 family owner occupied - jumbo . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1-4 family owner occupied - non-jumbo(3). . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1-4 family non-owner occupied . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1-4 family - 2nd lien . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Resort lending . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Installment
Boat lending . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Recreational vehicle lending . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
—
—
—
—
—
—
—
1,179
3,540
1,039
979
690
332
3
470
1,179
3,540
1,039
979
690
332
3
470
Total recorded investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$— $9,532
$9,532
Accrued interest included in recorded investment . . . . . . . . . . . . . . . . . . . . . . . . .
$— $ — $ —
2018
Commercial
Commercial and industrial(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$— $1,345
778
—
$1,345
778
Mortgage
1-4 family owner occupied - jumbo . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1-4 family owner occupied - non-jumbo(3). . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1-4 family non-owner occupied . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1-4 family - 2nd lien . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Resort lending . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Installment
Boat lending . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Recreational vehicle lending . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
5
—
—
—
—
—
—
184
2,974
1,259
493
755
166
7
608
184
2,979
1,259
493
755
166
7
608
Total recorded investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 5
$8,569
$8,574
Accrued interest included in recorded investment . . . . . . . . . . . . . . . . . . . . . . . . .
$— $ — $ —
(1) Non-performing loans exclude purchase credit impaired loans.
(2) Non-performing commercial and industrial
loans exclude $0.077 million and $0.097 million of government guaranteed loans at
December 31, 2019 and 2018, respectively.
(3) Non-performing 1-4 family owner occupied – non jumbo loans exclude $0.569 million and $0.363 million of government guaranteed loans
at December 31, 2019 and 2018, respectively.
54
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)
2019
Commercial
Commercial and industrial . . . . . . . . . . . . .
Commercial real estate. . . . . . . . . . . . . . . .
$ — $ 289
—
177
$ 102 $
735
391 $ 564,480 $ 564,871
604,822
912
603,910
Mortgage
1-4 family owner occupied - jumbo . . . . .
1-4 family owner occupied - non-jumbo. .
1-4 family non-owner occupied. . . . . . . . .
1-4 family - 2nd lien . . . . . . . . . . . . . . . . .
Resort lending. . . . . . . . . . . . . . . . . . . . . . .
Installment
Boat lending . . . . . . . . . . . . . . . . . . . . . . . .
Recreational vehicle lending . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,757
2,672
695
909
364
337
161
377
1,037
852
136
90
53
107
97
275
— 2,794
4,911
1,454
1,385
982
1,387
623
386
565
88
3
202
532
261
854
398,759
342,349
168,083
115,157
67,192
202,750
153,184
103,030
401,553
347,260
169,537
116,542
68,174
203,282
153,445
103,884
Total recorded investment . . . . . . . . . . .
$7,449
$2,936
$4,091 $14,476 $2,718,894 $2,733,370
Accrued interest included in recorded
investment. . . . . . . . . . . . . . . . . . . . . . . . . .
$
74
$
34
$ — $
108 $
8,239 $
8,347
2018
Commercial
Commercial and industrial . . . . . . . . . . . . .
Commercial real estate. . . . . . . . . . . . . . . .
$1,582
—
Mortgage
1-4 family owner occupied - jumbo . . . . .
1-4 family owner occupied - non-jumbo. .
1-4 family non-owner occupied. . . . . . . . .
1-4 family - 2nd lien . . . . . . . . . . . . . . . . .
Resort lending. . . . . . . . . . . . . . . . . . . . . . .
Installment
Boat lending . . . . . . . . . . . . . . . . . . . . . . . .
Recreational vehicle lending . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
1,519
265
446
252
316
28
552
$ — $ — $ 1,582 $ 580,935 $ 582,517
565,375
—
565,375
—
—
—
145
49
100
—
295
21
210
184
3,524
1,259
493
755
166
7
627
184
5,188
1,573
1,039
1,007
777
56
1,389
313,154
362,767
162,673
118,628
80,774
169,117
125,780
99,060
313,338
367,955
164,246
119,667
81,781
169,894
125,836
100,449
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
55
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
Impaired loans are as follows:
December 31,
2019
2018
(In thousands)
Impaired loans with no allocated allowance for loan losses
TDR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Non - TDR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
337 $ —
—
1,550
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,587
48,798
3,365
2,787
53,258
2,145
Total impaired loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $55,637 $58,190
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
542 $
4,641
972
769
4,849
692
Total amount of allowance for loan losses allocated. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,155 $ 6,310
Impaired loans by class as of December 31 are as follows:
2019
Unpaid
Principal
Balance
Recorded
Investment
Related
Allowance for
Loan Losses
Recorded
Investment
(In thousands)
2018
Unpaid
Principal
Balance
Related
Allowance for
Loan Losses
With no related allowance for loan losses
recorded:
Commercial
Commercial and industrial . . . . . . . . . . . . .
Commercial real estate. . . . . . . . . . . . . . . .
$ 257
796
$ 257
796
$—
—
$—
—
$ —
—
$—
—
Mortgage
1-4 family owner occupied - jumbo . . . . .
1-4 family owner occupied - non-jumbo. .
1-4 family non-owner occupied. . . . . . . . .
1-4 family - 2nd lien . . . . . . . . . . . . . . . . .
Resort lending. . . . . . . . . . . . . . . . . . . . . . .
Installment
Boat lending . . . . . . . . . . . . . . . . . . . . . . . .
Recreational vehicle lending . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
212
214
407
—
—
—
1
—
217
366
438
—
—
—
41
1,887
2,115
—
—
—
—
—
—
—
—
—
—
3
—
—
—
—
—
1
4
—
474
—
—
—
5
—
137
616
—
—
—
—
—
—
—
—
—
56
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
2019
Unpaid
Principal
Balance
Recorded
Investment
Related
Allowance for
Loan Losses
Recorded
Investment
(In thousands)
2018
Unpaid
Principal
Balance
Related
Allowance for
Loan Losses
With an allowance for loan losses recorded:
Commercial
Commercial and industrial . . . . . . . . . . . . .
Commercial real estate. . . . . . . . . . . . . . . .
1,655
6,685
1,706
6,661
Mortgage
1-4 family owner occupied - jumbo . . . . .
1-4 family owner occupied - non-jumbo. .
1-4 family non-owner occupied. . . . . . . . .
1-4 family - 2nd lien . . . . . . . . . . . . . . . . .
Resort lending. . . . . . . . . . . . . . . . . . . . . . .
Installment
Boat lending . . . . . . . . . . . . . . . . . . . . . . . .
Recreational vehicle lending . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,447
10,163
4,962
14,059
12,110
—
—
2,924
1,445
10,695
5,542
15,243
12,263
—
—
3,153
453
578
91
1,031
572
1,695
1,474
—
—
261
3,637
5,060
3,735
5,047
1,348
25,877
5,565
273
13,328
—
79
3,290
1,649
26,737
5,988
272
13,354
—
79
3,421
967
338
151
2,203
507
11
1,927
—
4
202
54,005
56,708
6,155
58,457
60,282
6,310
Total
Commercial
Commercial and industrial . . . . . . . . . . . . .
Commercial real estate. . . . . . . . . . . . . . . .
1,912
7,481
1,963
7,457
Mortgage
1-4 family owner occupied - jumbo . . . . .
1-4 family owner occupied - non-jumbo. .
1-4 family non-owner occupied. . . . . . . . .
1-4 family - 2nd lien . . . . . . . . . . . . . . . . .
Resort lending. . . . . . . . . . . . . . . . . . . . . . .
Installment
Boat lending . . . . . . . . . . . . . . . . . . . . . . . .
Recreational vehicle lending . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,447
10,375
5,176
14,466
12,110
—
—
2,925
1,445
10,912
5,908
15,681
12,263
—
—
3,194
453
578
91
1,031
572
1,695
1,474
—
—
261
3,637
5,060
3,735
5,047
1,348
25,880
5,565
273
13,328
—
79
3,291
1,649
27,211
5,988
272
13,354
5
79
3,558
967
338
151
2,203
507
11
1,927
—
4
202
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . $55,892 $58,823
$6,155
$58,461 $60,898
$6,310
Accrued interest included in recorded
investment. . . . . . . . . . . . . . . . . . . . . . . . . . $
255
$
271
57
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:
2019
2018
2017
Average
Recorded
Investment
Interest
Income
Recognized
Average
Recorded
Investment
Interest
Income
Recognized
Average
Recorded
Investment
Interest
Income
Recognized
(In thousands)
With no related allowance for loan losses
recorded:
Commercial
Commercial and industrial . . . . . . . . . . . . .
Commercial real estate. . . . . . . . . . . . . . . .
$
Mortgage
1-4 family owner occupied - jumbo . . . . .
1-4 family owner occupied - non-jumbo. .
1-4 family non-owner occupied. . . . . . . . .
1-4 family - 2nd lien . . . . . . . . . . . . . . . . .
Resort lending. . . . . . . . . . . . . . . . . . . . . . .
Installment
Boat lending . . . . . . . . . . . . . . . . . . . . . . . .
Recreational vehicle lending . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
51
278
—
201
123
136
—
—
—
—
789
With an allowance for loan losses recorded:
Commercial
Commercial and industrial . . . . . . . . . . . . .
Commercial real estate. . . . . . . . . . . . . . . .
2,256
5,778
Mortgage
1-4 family owner occupied - jumbo . . . . .
1-4 family owner occupied - non-jumbo. .
1-4 family non-owner occupied. . . . . . . . .
1-4 family - 2nd lien . . . . . . . . . . . . . . . . .
Resort lending. . . . . . . . . . . . . . . . . . . . . . .
Installment
Boat lending . . . . . . . . . . . . . . . . . . . . . . . .
Recreational vehicle lending . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
995
15,183
2,874
13,383
11,697
54
22
3,186
$ — $
5
378
961
$
$
751
183
$
20
—
—
27
—
—
—
—
—
11
58
127
288
69
1,408
314
12
606
—
4
224
—
52
—
—
—
—
—
1
987
3,298
7,242
2,425
31,468
5,362
306
16,383
1
100
4,335
22
—
—
21
—
—
—
—
—
6
49
132
377
67
1,439
269
11
616
1
5
265
—
—
—
7
—
—
—
1
13
72
315
39
594
291
809
669
—
—
189
41
15
—
—
—
—
—
1
1,396
2,641
5,199
1,335
28,183
5,475
284
14,687
1
84
3,640
55,428
2,978
61,529
3,052
70,920
3,182
58
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
2019
2018
2017
Average
Recorded
Investment
Interest
Income
Recognized
Average
Recorded
Investment
Interest
Income
Recognized
Average
Recorded
Investment
Interest
Income
Recognized
(In thousands)
Total
Commercial
Commercial and industrial . . . . . . . . . . . . .
Commercial real estate. . . . . . . . . . . . . . . .
2,307
6,056
Mortgage
1-4 family owner occupied - jumbo . . . . .
1-4 family owner occupied - non-jumbo. .
1-4 family non-owner occupied. . . . . . . . .
1-4 family - 2nd lien . . . . . . . . . . . . . . . . .
Resort lending. . . . . . . . . . . . . . . . . . . . . . .
Installment
Boat lending . . . . . . . . . . . . . . . . . . . . . . . .
Recreational vehicle lending . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
995
15,384
2,997
13,519
11,697
54
22
3,186
72
320
39
594
291
816
669
—
—
190
3,019
6,160
1,376
28,198
5,475
284
14,687
1
84
3,641
147
288
69
1,435
314
12
606
—
4
235
4,049
7,425
2,425
31,520
5,362
306
16,383
1
100
4,336
154
377
67
1,460
269
11
616
1
5
271
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$56,217
$2,991
$62,925
$3,110
$71,907
$3,231
Troubled debt restructurings at December 31 follow:
Performing TDR’s. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-performing TDR’s(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$7,974
540
$8,514
$39,601
2,607(3)
$47,575
3,147
$42,208
$50,722
Commercial
2019
Retail(1)
Total
(In thousands)
Commercial
2018
Retail(1)
Total
(In thousands)
Performing TDR’s. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-performing TDR’s(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$6,460
74
$6,534
$46,627
2,884(3)
$53,087
2,958
$49,511
$56,045
(1)
(2)
Retail loans include mortgage and installment loan portfolio segments.
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.
We have allocated $5.2 million and $5.6 million of specific reserves to customers whose loan terms have been
modified in troubled debt restructurings as of December 31, 2019 and 2018, respectively. We have committed to lend
additional amounts totaling up to $0.05 million and $0.04 million at December 31, 2019 and 2018, respectively, to
customers with outstanding loans that are classified as troubled debt restructurings.
The terms of certain loans were modified as troubled debt restructurings and generally included one or a
combination of the following: a reduction of the stated interest rate of the loan; an extension of the maturity date at
a stated rate of interest lower than the current market rate for a new loan 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
59
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
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)
2019
Commercial
Commercial and industrial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mortgage
1-4 family owner occupied - jumbo . . . . . . . . . . . . . . . . . . . . . . . .
1-4 family owner occupied - non-jumbo . . . . . . . . . . . . . . . . . . . . .
1-4 family non-owner occupied . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1-4 family - 2nd lien . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Resort lending . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Installment
Boat lending . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Recreational vehicle lending . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018
Commercial
Commercial and industrial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mortgage
1-4 family owner occupied - jumbo . . . . . . . . . . . . . . . . . . . . . . . .
1-4 family owner occupied - non-jumbo . . . . . . . . . . . . . . . . . . . . .
1-4 family non-owner occupied . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1-4 family - 2nd lien . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Resort lending . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Installment
Boat lending . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Recreational vehicle lending . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
8
3
—
2
1
3
—
—
—
7
24
7
2
1
9
—
—
1
—
—
14
34
$1,609
1,479
$1,609
1,479
—
478
507
75
—
—
—
188
—
483
505
75
—
—
—
191
$4,336
$4,342
$ 652
204
$ 652
204
419
991
—
—
115
—
—
708
419
994
—
—
114
—
—
709
$3,089
$3,092
60
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
Number of
Contracts
Pre-modification
Recorded
Balance
Post-modification
Recorded
Balance
(Dollars in thousands)
2017
Commercial
Commercial and industrial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mortgage
1-4 family owner occupied - jumbo . . . . . . . . . . . . . . . . . . . . . . . .
1-4 family owner occupied - non-jumbo . . . . . . . . . . . . . . . . . . . . .
1-4 family non-owner occupied . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1-4 family - 2nd lien . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Resort lending . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Installment
Boat lending . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Recreational vehicle lending . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
15
—
—
5
1
—
1
—
—
15
37
$ 925
—
$ 925
—
—
423
33
—
189
—
—
551
—
429
33
—
189
—
—
559
$2,121
$2,135
The troubled debt restructurings described above increased (decreased) the AFLL by $0.5 million, $(0.2) million
and $0.1 million during the years ended December 31, 2019, 2018 and 2017, respectively and resulted in charge offs
of zero during each of the years ended December 31, 2019, 2018 and 2017, respectively.
Loans that have been classified as troubled debt restructured during the past twelve months and that have
subsequently defaulted during the years ended December 31 follows:
Recorded
Number of
Contracts
Balance
(Dollars in thousands)
2019
Commercial
Commercial and industrial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial real estate. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mortgage
1-4 family owner occupied - jumbo . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1-4 family owner occupied - non-jumbo. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1-4 family non-owner occupied. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1-4 family - 2nd lien . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Resort lending. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Installment
Boat lending . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Recreational vehicle lending . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1
—
—
1
—
—
—
—
—
—
2
$19
—
—
12
—
—
—
—
—
—
$31
61
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
Recorded
Number of
Balance
Contracts
(Dollars in thousands)
2018
Commercial
Commercial and industrial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial real estate. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mortgage
1-4 family owner occupied - jumbo . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1-4 family owner occupied - non-jumbo. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1-4 family non-owner occupied. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1-4 family - 2nd lien . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Resort lending. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Installment
Boat lending . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Recreational vehicle lending . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2017
Commercial
Commercial and industrial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial real estate. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mortgage
1-4 family owner occupied - jumbo . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1-4 family owner occupied - non-jumbo. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1-4 family non-owner occupied. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1-4 family - 2nd lien . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Resort lending. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Installment
Boat lending . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Recreational vehicle lending . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
—
—
—
—
—
—
—
—
1
1
6
—
—
—
—
—
—
—
—
1
7
$ —
—
—
—
—
—
—
—
—
13
$ 13
$164
—
—
—
—
—
—
—
—
13
$177
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, zero and $0.04 million during the years ended December 31, 2019, 2018 and 2017, respectively and resulted
in charge offs of zero, zero and $0.05 million during the years ended December 31, 2019, 2018 and 2017,
respectively.
The terms of certain other loans were modified during the years ending December 31, 2019, 2018 and 2017 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.
62
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
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 portfolio segment at
December 31:
2019
Non-watch
1-6
Watch
7-8
Commercial
Substandard
Accrual
9
(In thousands)
Non-
Accrual
10-11
Total
Commercial and industrial. . . . . . . . . . . . . . . . . . . .
Commercial real estate . . . . . . . . . . . . . . . . . . . . . .
$ 515,955
580,516
$44,384
23,036
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,096,471
$67,420
$3,967
535
$4,502
$ 565
735
$ 564,871
604,822
$1,300
$1,169,693
Accrued interest included in total . . . . . . . . . . . . . .
$
2,763
$
205
$
30
$ — $
2,998
2018
Commercial and industrial. . . . . . . . . . . . . . . . . . . .
Commercial real estate . . . . . . . . . . . . . . . . . . . . . .
$ 551,441
531,069
$23,910
33,274
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,082,510
$57,184
$5,577
200
$5,777
$1,589
832
$ 582,517
565,375
$2,421
$1,147,892
Accrued interest included in total . . . . . . . . . . . . . .
$
3,107
$
174
$ 130
$ — $
3,411
63
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
For each of our mortgage and installment portfolio 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 portfolio segments at December 31:
Mortgage(1)
1-4 Family
Owner
Occupied -
Jumbo
1-4 Family
Owner
Occupied -
Non-jumbo
1-4 Family
Non-owner
Occupied
1-4 Family
2nd Lien
Resort
Lending
Total
(In thousands)
2019
800 and above. . . . . . . . . . . . . . . . . . . .
750-799 . . . . . . . . . . . . . . . . . . . . . . . . .
700-749 . . . . . . . . . . . . . . . . . . . . . . . . .
650-699 . . . . . . . . . . . . . . . . . . . . . . . . .
600-649 . . . . . . . . . . . . . . . . . . . . . . . . .
550-599 . . . . . . . . . . . . . . . . . . . . . . . . .
500-549 . . . . . . . . . . . . . . . . . . . . . . . . .
Under 500 . . . . . . . . . . . . . . . . . . . . . . .
Unknown . . . . . . . . . . . . . . . . . . . . . . . .
Total. . . . . . . . . . . . . . . . . . . . . . . . . .
$ 48,486
198,491
106,609
31,553
13,230
514
1,519
641
510
$401,553
$ 43,848
111,521
95,064
51,174
21,938
12,308
7,940
2,208
1,259
$347,260
$ 24,315
84,656
34,839
13,995
5,897
1,863
1,870
533
1,569
$169,537
$ 13,905
50,012
30,697
14,267
4,097
1,703
1,281
511
69
$116,542
$11,076
29,364
14,626
8,063
2,074
673
889
79
1,330
$68,174
$ 141,630
474,044
281,835
119,052
47,236
17,061
13,499
3,972
4,737
$1,103,066
Accrued interest included in total . . . . . .
$
1,139
$
1,662
$
586
$
502
$
266
$
4,155
2018
800 and above. . . . . . . . . . . . . . . . . . . .
750-799 . . . . . . . . . . . . . . . . . . . . . . . . .
700-749 . . . . . . . . . . . . . . . . . . . . . . . . .
650-699 . . . . . . . . . . . . . . . . . . . . . . . . .
600-649 . . . . . . . . . . . . . . . . . . . . . . . . .
550-599 . . . . . . . . . . . . . . . . . . . . . . . . .
500-549 . . . . . . . . . . . . . . . . . . . . . . . . .
Under 500 . . . . . . . . . . . . . . . . . . . . . . .
Unknown . . . . . . . . . . . . . . . . . . . . . . . .
Total. . . . . . . . . . . . . . . . . . . . . . . . . .
$ 33,337
167,992
69,018
28,637
9,911
2,034
—
647
1,762
$313,338
$ 46,509
136,105
96,378
48,663
19,139
9,619
7,463
1,181
2,898
$367,955
$ 19,191
79,837
36,103
15,854
5,533
2,396
1,338
802
3,192
$164,246
$ 11,077
56,008
33,345
11,361
4,077
1,385
882
382
1,150
$119,667
$10,898
36,542
17,282
9,945
3,088
1,867
106
143
1,910
$81,781
$ 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 . . . . . .
$
851
$
1,789
$
550
$
544
$
363
$
4,097
(1)
Credit scores have been updated within the last twelve months.
Installment(1)
Boat Lending
Recreational
Vehicle
Lending
Other
Total
(In thousands)
2019
800 and above . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
750-799 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
700-749 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
650-699 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
600-649 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
550-599 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
500-549 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Under 500 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unknown . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 28,041
118,380
41,490
11,485
2,254
946
377
309
—
$203,282
$ 24,470
88,164
31,055
7,267
1,411
592
464
22
—
$153,445
$
7,611 $ 60,122
244,127
99,749
41,269
8,135
3,422
1,968
615
1,204
$103,884 $460,611
37,583
27,204
22,517
4,470
1,884
1,127
284
1,204
Accrued interest included in total . . . . . . . . . . . . . . . . . . . . . . . . .
$
490
$
378
$
326 $
1,194
64
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
Installment(1)
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 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
—
$125,836
$
7,062 $ 48,026
208,972
87,978
28,162
7,668
3,360
1,775
548
9,690
$100,449 $396,179
34,627
27,633
12,663
5,019
2,255
1,264
275
9,651
Accrued interest included in total . . . . . . . . . . . . . . . . . . . . . . . . .
$
403
$
311
$
316 $
1,030
(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:
2019
2018
(In thousands)
Mortgage loans serviced for :
Fannie Mae . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Freddie Mac . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ginnie Mae . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
FHLB . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,449,935
852,123
180,941
69,149
29,018
$1,350,703
712,740
165,467
78,687
26,148
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$2,581,166
$2,333,745
Custodial deposit accounts maintained in connection with mortgage loans serviced for others totaled
$29.9 million and $22.0 million, at December 31, 2019 and 2018, respectively.
If we do not remain well capitalized for regulatory purposes (see note #20), meet certain minimum capital levels
or certain profitability requirements or if we incur a rapid decline in net worth, we could lose our ability to sell and/or
service loans to these investors. This could impact our ability to generate 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.
65
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
An analysis of capitalized mortgage loan servicing rights for the years ended December 31 follows:
2019
2018
(In thousands)
2017
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in fair value due to price . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in fair value due to pay downs. . . . . . . . . . . . . . . . . . . . . . . .
$
$
$
$
$
$
21,400
—
21,400
7,303
—
(6,408)
(3,124)
15,699
—
15,699
4,977
3,047
191
(2,514)
13,671
542
14,213
4,230
—
(718)
(2,026)
Balance at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
19,171
$
21,400
$
15,699
Loans sold and serviced that have had servicing rights capitalized. . . .
$2,580,705
$2,333,081
$1,815,668
Fair value of capitalized mortgage loan servicing rights was determined using an average coupon rate of 4.22%,
average servicing fee of 0.258%, average discount rate of 10.14% and an average Public Securities Association
(‘‘PSA’’) prepayment rate of 250 for December 31, 2019; and average coupon rate of 4.23%, average servicing fee
of 0.258%, average discount rate of 10.15% and an average PSA prepayment rate of 182 for December 31, 2018.
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.
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:
Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mortgage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Installment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total carrying amount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Allowance for loan losses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31,
2019
2018
(In thousands)
$1,394
575
316
2,285
—
$1,609
555
349
2,513
—
Carrying amount, net of allowance for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$2,285
$2,513
66
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
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
term of the loans. Accretion recorded as loan interest income is included in the table below. Accretable yield of
PCI loans, or income expected to be collected follows:
Year ended December 31,
2019
2018
(In thousands)
Balance at beginning of period. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
New loans purchased. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accretion of income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reclassification from (to) nonaccretable difference. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Displosals/other adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 462
—
(187)
365
—
$ 640
$ —
568
(106)
—
—
$ 462
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 . . . . . . . . . . . . . . . . . . . . . .
$ 1,178
2,242
(1,438)
(267)
$ 1,628
1,510
(1,822)
(138)
$ 4,956
1,735
(4,737)
(326)
Balance at end of year, net of valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 1,715
$ 1,178
$ 1,628
2019
2018
(In thousands)
2017
(1)
Table excludes other repossessed assets totaling $0.15 million and $0.12 million at December 31, 2019 and 2018, 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. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2019
2018
(In thousands)
2017
$ 144
267
(319)
$ 92
$ 123
138
(117)
$ 144
$ 793
326
(996)
$ 123
At both December 31, 2019 and 2018, the balance of other real estate includes $1.2 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 $0.7 million and $0.3 million at
December 31, 2019 and 2018, respectively.
Other real estate and repossessed assets totaling $1.9 million and $1.3 million at December 31, 2019 and 2018,
respectively, are presented net of the valuation allowance on the Consolidated Statements of Financial Condition.
67
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
NOTE 6 – PROPERTY AND EQUIPMENT
A summary of property and equipment at December 31 follows:
Land and land improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2019
2018
(In thousands)
$ 17,478
57,363
71,194
146,035
(107,624)
$ 38,411
$ 16,843
56,385
70,039
143,267
(104,490)
$ 38,777
Depreciation expense was $5.2 million, $5.1 million and $5.3 million in 2019, 2018 and 2017, respectively.
NOTE 7 – GOODWILL AND OTHER INTANGIBLES
Intangible assets, net of amortization, at December 31 follows:
2019
2018
Gross
Carrying
Amount
Accumulated
Amortization
Gross
Carrying
Amount
Accumulated
Amortization
(In thousands)
Amortized intangible assets - core deposits. . . . . . . . . . . . . . . . . .
$11,916
$6,590
$11,916
$5,501
Unamortized intangible assets - goodwill . . . . . . . . . . . . . . . . . . .
$28,300
$28,300
At December 31, 2019, 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 $1.1 million, $1.0 million and $0.3 million during the years ended 2019,
2018 and 2017, respectively.
A summary of estimated core deposit intangible amortization at December 31, 2019, follows:
(In thousands)
2020. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2021. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2022. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2023. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2024. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2025 and thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,020
970
785
547
516
1,488
$5,326
NOTE 8 – DEPOSITS
A summary of interest expense on deposits for the years ended December 31 follows:
Savings and interest-bearing checking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reciprocal. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Time . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Brokered time. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 5,371
6,024
7,148
4,882
$23,425
$ 4,146
1,292
5,343
3,697
$14,478
$1,530
342
4,288
615
$6,775
2019
2018
(In thousands)
2017
68
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
Aggregate time deposits in denominations of $0.25 million or more amounted to $71.5 million and $74.0 million
at December 31, 2019 and 2018, respectively.
A summary of the maturity of time deposits at December 31, 2019, follows:
2020. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2021. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2022. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2023. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2024. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2025 and thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$501,609
73,398
13,929
15,136
5,020
445
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$609,537
(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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$383,953
4,416
42,658
$114,503
8,577
58,992
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$431,027
$182,072
2019
2018
(In thousands)
NOTE 9 – OTHER BORROWINGS
A summary of other borrowings at December 31 follows:
Advances from the FHLB. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal funds purchased . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2019
2018
(In thousands)
$63,640
25,000
6
$88,646
$25,696
—
4
$25,700
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, 2019. Unused borrowing capacity with the
FHLB (subject to the FHLB’s credit requirements and policies) was $836.5 million at December 31, 2019. Interest
expense on advances amounted to $0.7 million, $1.0 million and $0.9 million for the years ended December 31, 2019,
2018 and 2017, respectively. No FHLB advances were terminated during 2019, 2018 or 2017.
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 assets or 4.5% of our outstanding advances. At December 31, 2019, we were in
compliance with the FHLB stock ownership requirements.
69
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
The maturity dates, weighted average interest rates and contractually required repayments of FHLB advances
at December 31 follow:
Fixed-rate advances
2019
2018
Amount
Rate
Amount
(Dollars in thousands)
Rate
2019. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2020. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2022. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2025 and thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total advances. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$28,645
4,995
30,000
$63,640
$10,000
10,762
4,934
1.60%
3.18
1.69
2.19%
1.69
0.74
1.47% $25,696
2.28%
Borrowings with the FRB at December 31, 2019 and 2018 were zero. Average borrowings with the FRB during
the years ended December 31, 2019, 2018 and 2017 totaled $0.305 million, $0.003 million and $0.047 million. We
had unused borrowing capacity with the FRB (subject
to the FRB’s credit requirements and policies) of
$348.6 million at December 31, 2019. Collateral for FRB borrowings are certain commercial and installment loans.
Interest expense on federal funds purchased totaled $0.1 million for each of the years ended December 31, 2019,
2018 and 2017.
Assets, consisting of FHLB stock and loans, pledged to secure other borrowings and unused borrowing capacity
totaled $1.9 billion at December 31, 2019.
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 at both December 31, 2019 and 2018, 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.
Summary information regarding subordinated debentures as of December 31 follows:
Entity Name
2019
Issue
Date
Subordinated
Debentures
Trust
Preferred
Securities
Issued
Common
Stock
Issued
IBC Capital Finance III. . . . . . . . . . . . . . . . . . . . . . . . . . . . . May 2007
IBC Capital Finance IV . . . . . . . . . . . . . . . . . . . . . . . . . . . .
September 2007
Midwest Guaranty Trust I . . . . . . . . . . . . . . . . . . . . . . . . . . . November 2002
TCSB Statutory Trust I . . . . . . . . . . . . . . . . . . . . . . . . . . . . . March 2005
Discount on TCSB Statutory Trust I . . . . . . . . . . . . . . . . . .
(In thousands)
$12,372
15,465
7,732
5,155
(1,268)
$12,000
15,000
7,500
5,000
(1,268)
$39,456
$38,232
$ 372
465
232
155
—
$1,224
70
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
Entity Name
2018
Issue
Date
Subordinated
Debentures
(In thousands)
Trust
Preferred
Securities
Issued
Common
Stock
Issued
IBC Capital Finance III. . . . . . . . . . . . . . . . . . . . . . . . . . . . . May 2007
IBC Capital Finance IV . . . . . . . . . . . . . . . . . . . . . . . . . . . .
September 2007
Midwest Guaranty Trust I . . . . . . . . . . . . . . . . . . . . . . . . . . . November 2002
TCSB Statutory Trust I . . . . . . . . . . . . . . . . . . . . . . . . . . . . . March 2005
Discount on TCSB Statutory Trust I . . . . . . . . . . . . . . . . . .
$12,372
15,465
7,732
5,155
(1,336)
$12,000
15,000
7,500
5,000
(1,336)
$39,388
$38,164
$ 372
465
232
155
—
$1,224
Other key terms for the subordinated debentures and trust preferred securities that were outstanding at
December 31, 2019 and 2018 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, 2019 and 2018.
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.
A summary of financial instruments with off-balance sheet risk at December 31 follows:
Financial instruments whose risk is represented by contract amounts
Commitments to extend credit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Standby letters of credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$582,457
7,207
$505,421
4,998
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
2019
2018
(In thousands)
71
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
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 on-demand with no stated maturity date and have variable rates that range from 3.75% to 10.75%.
We are also involved in various litigation matters in the ordinary course of business. At the present time, we do
not believe any of these matters will have a significant impact on our consolidated financial position or results of
operations. The aggregate amount we have accrued for losses we consider probable as a result of these litigation
matters is immaterial. However, because of the inherent uncertainty of outcomes from any litigation matter, we
believe it is reasonably possible we may incur losses in addition to the amounts we have accrued. At this time, we
estimate the maximum amount of additional losses that are reasonably possible is 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, however, 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.
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 $0.23 million, $0.01 million and $0.17 million for the years ended
December 31, 2019, 2018 and 2017, respectively. The reserve for loss reimbursements on sold mortgage loans totaled
$0.9 million and $0.8 million at December 31, 2019 and 2018, 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.
We own 12,566 shares of VISA Class B common stock. At the present time, these shares can only be sold to
other Class B shareholders. As a result, there has generally been limited transfer activity in private transactions
between buyers and sellers. Given the limited activity that we have become aware of and the continuing uncertainty
regarding the likelihood, ultimate timing and eventual exchange rate for Class B shares into Class A shares, we
continue to carry these shares at zero, representing cost basis less impairment. However, given the current conversion
ratio of 1.6228 to Class A shares and the closing price of VISA Class A shares on February 27, 2020 of $180.01 per
share, our 12,566 Class B shares would have a current ‘‘value’’ of approximately $3.7 million. We continue to
monitor Class B trading activity and the status of the resolution of certain litigation matters at VISA that would trigger
the conversion of Class B common shares into Class A common shares that would have no trading restrictions.
NOTE 12 – SHAREHOLDERS’ EQUITY AND INCOME PER COMMON SHARE
In January, 2019, 2018 and 2017, 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, in June, 2019 our Board
of Directors authorized a 300,000 share expansion of the 2019 repurchase plan. During 2019, 2018 and 2017
repurchases were made through open market and negotiated transactions and totaled 1,204,688, 587,969 and zero
shares of common stock, respectively for an aggregate purchase price of $26.3 million, $12.7 million and zero,
respectively.
72
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
A reconciliation of basic and diluted net income per common share for the years ended December 31 follows:
2019
2018
(In thousands, except per share amounts)
2017
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$46,435
$39,839
$20,475
Weighted average shares outstanding(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock units for deferred compensation plan for non-employee directors . .
Effect of stock options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Performance share units . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
22,894
132
115
42
23,412
128
176
53
21,327
121
142
60
Weighted average shares outstanding for calculation of diluted
earnings per share. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
23,183
23,769
21,650
Net income per common share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Basic(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
2.03
2.00
$
$
1.70
1.68
$ 0.96
$
0.95
(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 2019, 2018 and 2017, respectively.
NOTE 13 – INCOME TAX
The composition of income tax expense for the years ended December 31 follows:
Current expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in statutory rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2019
2018
(In thousands)
2017
$10,237
1,088
—
$11,325
$ —
9,294
—
$9,294
$ 1,927
10,071
5,965
$17,963
The deferred income tax expense of $1.1 million in 2019 can be primarily attributed to the utilization of our
alternative minimum tax credit carryforward while the deferred income tax expense of $9.3 million during 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.
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.
73
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
A reconciliation of income tax expense to the amount computed by applying the statutory federal income tax
rate of 21% for 2019 and 2018 and 35% for 2017 to the income before income tax for the years ended December
31 follows:
Statutory rate applied to income before income tax. . . . . . . . . . . . . . . . . . . . .
Tax-exempt income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Bank owned life insurance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Share-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unrecognized tax benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-deductible meals, entertainment and memberships. . . . . . . . . . . . . . . . . .
Change in statutory rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2019
2018
(In thousands)
2017
$12,130
(375)
(233)
(204)
(134)
86
—
55
$10,318
(383)
(229)
(367)
(162)
85
—
32
$13,453
(777)
(372)
(287)
(123)
64
5,965
40
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$11,325
$ 9,294
$17,963
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:
2019
2018
(In thousands)
Deferred tax assets
Allowance for loan losses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,355 $ 5,052
—
Lease liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,744
1,569
Property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,528
900
Share-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
808
33
Unrealized loss on derivative financial instruments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
459
272
Reserve for unfunded lending commitments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
324
253
Deferred compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
285
165
Loss reimbursement on sold loans reserve . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
185
179
Non accrual loan interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
173
187
Other than temporary impairment charge on securities available for sale . . . . . . . . . . . . . . . .
147
38
Vehicle service contract counterparty contingency reserve . . . . . . . . . . . . . . . . . . . . . . . . . . . .
70
— 1,686
Alternative minimum tax credit carry forward . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,113
—
Unrealized loss on securities available for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
295
—
Unrealized loss on equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
71
—
Purchase premiums, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
161
—
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
11,046
12,006
Deferred tax liabilities
Capitalized mortgage loan servicing rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred loan fees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Lease right of use asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unrealized gain on securities available for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchase premiums, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal Home Loan Bank stock. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross deferred tax liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4,026
1,852
1,739
994
293
27
43
8,974
4,494
1,706
—
—
—
27
—
6,227
Deferred tax assets, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,072 $ 5,779
74
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
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, 2019 and 2018, that the
realization of substantially all of our deferred tax assets continues to be more likely than not.
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. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2019
2018
(In thousands)
2017
$ 588
20
(170)
—
$ 438
$ 724
26
(162)
—
$ 588
$ 840
7
(123)
—
$ 724
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, 2019, 2018 and 2017. No amounts were accrued for interest and penalties at December 31, 2019,
2018 and 2017. At December 31, 2019, U.S. Federal tax years 2016 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, 2019. The
non-employee director stock purchase plan permits the grant of additional share based payments for up to 0.2 million
shares of common stock as of December 31, 2019. 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 2019, 2018 and 2017 pursuant to our long-term incentive plan, we granted 0.06 million, 0.05 million and
0.05 million shares, respectively of restricted stock and 0.02 million, 0.02 million and 0.02 million performance stock
units (‘‘PSUs’’), respectively to certain officers. Except for 0.010 million shares and 0.002 million shares of restricted
stock issued in 2019 and 2018, respectively that vest ratably over three years, all shares of restricted stock and PSUs
cliff vest after a period of three years. The performance feature of the PSUs is based on a comparison of our total
shareholder return over the vesting period starting on the grant date to the total shareholder return over that period
for a banking index of our peers. We have not issued stock options since 2013, other than in connection with the
Merger (see note #26).
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 on a current basis are issued each quarter and vest immediately. Shares issued on a deferred basis are credited
at the rate of 90% of the current value and vest immediately. We issued 0.01 million shares to directors during each
of the years ending 2019, 2018 and 2017 and expensed their value during those same periods.
Total compensation expense recognized for grants pursuant to our long-term incentive plan was $1.6 million,
$1.5 million and $1.6 million in 2019, 2018 and 2017, respectively. The corresponding tax benefit relating to this
expense was $0.3 million, $0.3 million and $0.6 million in 2019, 2018 and 2017, respectively. Total expense
recognized for non-employee director share based payments was $0.3 million, $0.2 million and $0.2 million in 2019,
2018 and 2017, respectively. The corresponding tax benefit relating to this expense was $0.05 million, $0.04 million
and $0.06 million in 2019, 2018 and 2017, respectively.
75
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
At December 31, 2019, the total expected compensation cost related to non-vested restricted stock and PSUs not
yet recognized was $2.1 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
Outstanding at January 1, 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
211,421
—
(71,799)
—
(1,116)
Weighted-
Average
Remaining
Contractual
Term (Years)
Aggregated
Intrinsic
Value
(In thousands)
Average
Exercise
Price
$ 6.48
9.84
22.35
Outstanding at December 31, 2019 . . . . . . . . . . . . . . . . . . . . . . . .
138,506
$ 4.62
3.01
$2,498
Vested and expected to vest at
December 31, 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
138,506
$ 4.62
Exercisable at December 31, 2019. . . . . . . . . . . . . . . . . . . . . . . . .
138,506
$ 4.62
3.01
3.01
$2,498
$2,498
A summary of outstanding non-vested stock and related transactions follows:
Outstanding at January 1, 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Granted. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Number
of Shares
258,419
86,283
(85,978)
(12,998)
Outstanding at December 31, 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
245,726
Certain information regarding options exercised during the periods ending December 31 follows:
Weighted-
Average
Grant Date
Fair Value
$19.00
22.87
14.57
22.85
$21.72
Intrinsic value. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash proceeds received . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax benefit realized . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2019
$897
$706
$188
2018
(In thousands)
$2,333
$1,420
$ 490
2017
$623
$142
$218
We maintain 401(k) and employee stock ownership plans covering substantially all of our full-time employees.
During 2019, 2018 and 2017, we matched 50% of employee contributions to the 401(k) plan up to a maximum of
8%, 8% 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 2019, 2018
and 2017. Amounts expensed for these retirement plans were $2.6 million, $2.3 million and $1.6 million in 2019,
2018 and 2017, respectively.
Our employees participate in various performance-based compensation plans. Amounts expensed for all
incentive plans totaled $9.5 million, $9.8 million and $8.0 million in 2019, 2018 and 2017, respectively.
76
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
We also provide certain health care and life insurance programs to substantially all full-time employees.
Amounts expensed for these programs totaled $5.7 million, $5.2 million and $4.0 million in 2019, 2018 and 2017
respectively. These insurance programs are also available to retired employees at their own expense.
NOTE 15 – OTHER NON-INTEREST INCOME
Other non-interest income for the years ended December 31 follows:
Investment and insurance commissions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ATM fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Bank owned life insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total other non-interest income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2019
2018
(In thousands)
2017
$1,658
1,403
1,111
5,110
$9,282
$1,971
1,457
970
4,362
$8,760
$1,968
1,446
1,061
3,693
$8,168
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:
2019
Average
Maturity
(years)
(Dollars in thousands)
Notional
Amount
Fair
Value
Fair value hedge designation - Pay-fixed interest rate swap agreements . . . . . . . . .
$
7,117
9.4
$ (242)
Cash flow hedge designation
Pay-fixed interest rate swap agreements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest rate cap agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 25,000
150,000
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$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. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 49,268
95,363
153,946
153,946
2,908
2,848
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$458,279
1.6
2.6
2.5
0.1
0.1
5.5
5.5
1.5
1.5
3.7
$ (174)
214
$
40
$ 1,412
(150)
(3,641)
3,641
141
(139)
$ 1,264
77
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
2018
Average
Maturity
(years)
Fair
Value
Notional
Amount
(Dollars in thousands)
Cash flow hedge designation
Pay-fixed interest rate swap agreements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest rate cap agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 25,000
150,000
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$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. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 32,473
57,583
94,451
94,451
3,095
3,095
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$285,148
2.6
3.6
3.5
0.1
0.1
5.5
5.5
2.5
2.5
3.7
$ 280
2,245
$2,525
$ 687
(383)
405
(405)
116
(116)
$ 304
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 $2.2 million and $2.7 million at December 31, 2019 and 2018,
respectively.
It is anticipated that $0.05 million, net of tax, of unrealized losses on Cash Flow Hedges at December 31, 2019,
will be reclassified into earnings over the next twelve months. The maximum term of any Cash Flow Hedge at
December 31, 2019 is 3.8 years.
Beginning in the second quarter of 2019 we entered into a pay-fixed interest rate swap to protect a portion of
the fair value of a certain fixed rate commercial loan commitment (‘‘Fair Value Hedge’’). As a result, changes in the
fair value of the pay-fixed interest rate swap is expected to offset changes in the fair value of the fixed rate
commercial loan commitment due to fluctuations in interest rates. We record the fair value of Fair Value Hedges in
accrued income and other assets and accrued expenses and other liabilities on our Consolidated Statements of
Financial Condition. The hedged item (fixed rate commercial loan commitment) is also recorded at fair value which
offsets the adjustment to the Fair Value Hedge. On an ongoing basis, we adjust our Consolidated Statements of
Financial Condition to reflect the then current fair value of both the Fair Value Hedge and the hedged item. The
related gains or losses are reported in non-interest income – other in our Consolidated Statements of Operations.
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
78
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
commitments to sell mortgage loans (‘‘Mandatory Commitments’’) to reduce the impact of price fluctuations of
mortgage loans held for sale and Rate-Lock Commitments. Mandatory Commitments help protect our loan sale profit
margin from fluctuations in interest rates. The changes in the fair value of Rate Lock Commitments and Mandatory
Commitments are recognized currently as part of net gains on mortgage loans 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.
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,
2019
2018
Balance
Sheet
Location
Fair
Value
Balance
Sheet
Location
Fair
Value
2019
Balance
Sheet
Location
Fair
Value
2018
Balance
Sheet
Location
Fair
Value
(In thousands)
Derivatives designated as hedging
instruments
Pay-fixed interest rate
swap agreements . . . . . . Other assets $ — Other assets $ 280 Other liabilities $ 416 Other liabilities $ —
Interest rate cap
agreements . . . . . . . . . . Other assets
214 Other assets
2,245 Other liabilities
— Other liabilities
214
2,525
416
—
—
Derivatives not designated as
hedging instruments
Rate-lock mortgage loan
commitments . . . . . . . . . Other assets
1,412 Other assets
687 Other liabilities
— Other liabilities
—
Mandatory commitments to
sell mortgage loans. . . . . Other assets
— Other assets
— Other liabilities
150 Other liabilities
383
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
28 Other assets
1,116 Other liabilities
3,669 Other liabilities
711
3,669 Other assets
141 Other assets
— Other assets
711 Other liabilities
116 Other liabilities
— Other liabilities
28 Other liabilities
— Other liabilities
139 Other liabilities
1,116
—
116
2,326
$2,326
Total derivatives. . . . . . .
5,250
$5,464
2,630
$5,155
3,986
$4,402
79
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
The effect of derivative financial instruments on the Consolidated Statements of Operations follows:
Year Ended December 31,
Gain (loss) Recognized
in Other
Comprehensive
Income (Loss)
(Effective Portion)
2019
2018
2017
Location
Gain (Loss)
Reclassified from
Accumulated Other
Comprehensive
Loss into Income
(Effective
Portion)
Gain (Loss)
Reclassified from
Accumulated Other
Comprehensive
Loss into Income
(Effective Portion)
2019
2018
2017
(In thousands)
Location of
Gain (Loss)
Recognized
in Income(1)
Gain (Loss)
Recognized
in Income(1)
2019
2018
2017
Non-interest
income-
other
$ (242) $ — $ —
Fair Value Hedges
Pay-fixed interest rate
swap agreements . . . .
Cash Flow Hedges
Interest rate cap
agreements . . . . . . . . $(1,211) $(340)
$108
Pay-fixed interest rate
swap agreements . . . .
(392)
78
216
Interest
expense
Interest
expense
$363
$206
$ —
62
31
(18)
Interest
expense
Interest
expense
$ — $ — $ —
—
(12)
(12)
Total . . . . . . . . . . . . . . $(1,603) $(262)
$324
$425
$237
$(18)
$ — $ (12) $ (12)
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net gains on
mortgage
loans
Net gains on
mortgage
loans
Interest
income
Interest
income
Interest
expense
Interest
expense
$
725
$ 157
$(116)
233
(420)
(593)
(4,046)
113
43
4,046
(113)
(43)
25
(206)
84
(23)
206
(84)
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
960
$(263) $(709)
(1)
For cash flow hedges, this location and amount refers to the ineffective portion.
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 2019 and 2018.
A summary of loans to our directors and executive officers (which includes loans to entities in which the
individual owns a 10% or more voting interest) for the years ended December 31 follows:
Balance at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
New loans and advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repayments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$14,205
713
(1,841)
$ 2,621
13,572
(1,988)
Balance at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$13,077
$14,205
Deposits held by us for directors and executive officers totaled $2.0 million and $1.5 million at December 31,
2019 and 2018, respectively.
2019
2018
(In thousands)
80
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
NOTE 18 – LEASES
We have entered into leases in the normal course of business primarily for office facilities, some of which
include renewal options and escalation clauses. Certain leases also include both lease components (fixed payments
including rent, taxes and insurance costs) and non-lease components (common area or other maintenance costs)
which are accounted for as a single lease component as we have elected the practical expedient to group lease and
non-lease components together for all leases. We have also elected not to recognize leases with original lease terms
of 12 months or less (short-term leases) on our Consolidated Statements of Financial Condition. Most of our leases
include one or more options to renew. The exercise of lease renewal options is typically at our sole discretion and
are included in our ROU assets and lease liabilities if they are reasonably certain of exercise.
Leases are classified as operating or finance leases at the lease commencement date (we did not have any finance
leases as of December 31, 2019). Lease expense for operating leases and short-term leases is recognized on a
straight-line basis over the lease term. The ROU assets represent our right to use an underlying asset for the lease
term and lease liabilities represent our obligation to make lease payments arising from the lease. ROU assets and lease
liabilities are recognized at the lease commencement date based on the estimated present value of the lease payment
over the lease term.
As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the
information available at the lease commencement date in determining the present value of the lease payments.
The cost components of our operating leases follows:
Operating lease cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Variable lease cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Short-term lease cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2019
(In thousands)
$2,217
142
19
$2,378
Variable lease costs consist primarily of taxes, insurance, and common area or other maintenance costs for our
leased facilities.
Supplemental balance sheet information related to our operating leases follows:
Lease right of use asset(1). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Lease liabilities(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$8,282
$8,304
Weighted average remaining lease term (years) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
7.47
Weighted average discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2.8%
2019
(In thousands)
(1)
(2)
Included in Accrued income and other assets in our Consolidated Statements of Financial Condition.
Included in Accrued expenses and other liabilities in our Consolidated Statements of Financial Condition.
81
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
Maturity analysis of our lease liabilities at December 31, 2019 based on required contractual payments follows:
2020. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2021. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2022. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2023. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2024. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2025 and thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total lease payments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less imputed interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,681
1,418
1,322
1,186
802
2,792
9,201
(897)
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$8,304
(In thousands)
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, 2019, include $1.010 billion of loans secured by residential real estate and
$249.7 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, 2019: Lessors of Nonresidential
Real Estate ($379.9 million); Lessors of Residential Real Estate ($142.0 million); Construction ($97.3 million);
Accommodation and Food Services ($76.6 million); Manufacturing ($74.6 million) and Health Care and Social
Assistance ($58.9 million). A geographic concentration arises because we primarily conduct our lending activities in
the State of Michigan.
NOTE 20 – REGULATORY MATTERS
Capital guidelines adopted by federal and state regulatory agencies and restrictions imposed by law limit the
amount of cash dividends our Bank can pay to us. Under these guidelines, the amount of dividends that may be paid
in any calendar year is limited to the Bank’s current year net profits, combined with the retained net profits of the
preceding two years. Further, the Bank cannot pay a dividend at any time that it has negative undivided profits. As
of December 31, 2019, the Bank had positive undivided profits of $44.7 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. In addition, capital adequacy rules include a
common equity Tier 1 capital conservation buffer of 2.5% of risk-weighted assets that applies to all supervised
financial institutions. To avoid limits on capital distributions and certain discretionary bonus payments we must meet
the minimum ratio for adequately capitalized institutions plus the buffer. 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, 2019 and 2018, 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.
82
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
Our actual capital amounts and ratios at December 31 follow(1):
Actual
Amount
Ratio
Minimum for
Adequately Capitalized
Institutions
Amount
(Dollars in thousands)
Ratio
Minimum for
Well-Capitalized
Institutions
Amount
Ratio
$380,454
358,914
13.74%
12.96
$221,562
221,482
8.00%
8.00
NA
$276,852
NA
10.00%
$352,764
331,224
12.74%
11.96
$166,171
166,111
6.00%
6.00
NA
$221,482
NA
8.00%
$314,532
331,224
11.36%
11.96
$124,628
124,583
4.50%
4.50
NA
$179,954
NA
6.50%
2019
Total capital to risk-weighted
assets
Consolidated . . . . . . . . . . . . . .
Independent Bank . . . . . . . . . .
Tier 1 capital to risk-weighted
assets
Consolidated . . . . . . . . . . . . . .
Independent Bank . . . . . . . . . .
Common equity tier 1 capital to
risk-weighted assets
Consolidated . . . . . . . . . . . . . .
Independent Bank . . . . . . . . . .
Tier 1 capital to average assets
Consolidated . . . . . . . . . . . . . .
Independent Bank . . . . . . . . . .
$352,764
331,224
10.11%
9.49
$139,632
139,615
4.00%
4.00
NA
$174,519
NA
5.00%
2018
Total capital to risk-weighted
assets
Consolidated . . . . . . . . . . . . . .
Independent Bank . . . . . . . . . .
Tier 1 capital to risk-weighted
assets
Consolidated . . . . . . . . . . . . . .
Independent Bank . . . . . . . . . .
Common equity tier 1 capital to
risk-weighted assets . . . . . . . .
Consolidated . . . . . . . . . . . . . .
Independent Bank . . . . . . . . . .
Tier 1 capital to average assets
$371,603
337,227
14.25%
12.94
$208,572
208,456
8.00%
8.00
NA
$260,569
NA
10.00%
$345,419
311,043
13.25%
11.94
$156,429
156,342
6.00%
6.00
NA
$208,456
NA
8.00%
$307,255
311,043
11.79%
11.94
$117,322
117,256
4.50%
4.50
NA
$169,370
NA
6.50%
Consolidated . . . . . . . . . . . . . .
Independent Bank . . . . . . . . . .
$345,419
311,043
10.47%
9.44
$131,930
131,778
4.00%
4.00
NA
$164,723
NA
5.00%
(1)
These ratios do not reflect a capital conservation buffer of 2.50% and 1.875% at December 31, 2019 and 2018, respectively.
NA - Not applicable
83
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
The components of our regulatory capital are as follows:
Consolidated
December 31,
Independent Bank
December 31,
2019
2018
2019
2018
(In thousands)
Total shareholders’ equity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$350,169
$338,994
$366,861
$341,496
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(2,011)
(33,626)
—
314,532
38,232
—
352,764
4,311
(34,715)
(1,335)
307,255
38,164
—
345,419
(2,011)
(33,626)
—
331,224
—
—
331,224
4,311
(34,715)
(49)
311,043
—
—
311,043
27,690
26,184
27,690
26,184
Total risk-based capital . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$380,454
$371,603
$358,914
$337,227
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 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 for which there are quoted prices in active markets (at
December 31, 2018). If quoted market prices are not available for the specific security, then fair values are estimated
by (1) using quoted market prices of securities with similar characteristics, (2) matrix pricing, which is a
mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted
prices for specific securities but rather by relying on the securities’ relationship to other benchmark quoted prices,
or (3) a discounted cash flow analysis whose significant fair value inputs can generally be verified and do not
typically involve judgment by management. These securities are classified as Level 2 of the valuation hierarchy and
84
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
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, 2019 and 2018, 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
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 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
interest rate cap agreements are derived from proprietary models which utilize current market data. The significant
85
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
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
December 31, 2019:
Measured at Fair Value on a Recurring Basis
Assets
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) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Derivatives(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 14,661
227,762
10,756
39,693
93,886
96,102
33,195
1,843
502
69,800
19,171
5,464
4,402
Measured at Fair Value on a Non-recurring Basis:
Assets
Impaired loans(3)
Commercial
Commercial and industrial . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mortgage
1-4 family owner occupied - jumbo. . . . . . . . . . . . . . . . . . .
1-4 family owner occupied - non-jumbo . . . . . . . . . . . . . . .
1-4 family non-owner occupied. . . . . . . . . . . . . . . . . . . . . .
1-4 family - 2nd lien . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Resort lending . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Installment
Boat lending . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Recreational vehicle lending . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other real estate(4)
Mortgage - 1-4 family owner occupied - non-jumbo . . . . . .
Installment - other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
655
316
987
470
281
294
245
67
2
121
31
28
$—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
$ 14,661
227,762
10,756
39,693
93,886
96,102
33,195
1,843
502
69,800
—
5,464
$ —
—
—
—
—
—
—
—
—
—
19,171
—
4,402
—
—
—
—
—
—
—
—
—
—
—
—
—
655
316
987
470
281
294
245
67
2
121
31
28
(1)
(2)
Included in accrued income and other assets in the Consolidated Statements of Financial Condition.
Included in accrued expenses and other liabilities in the Consolidated Statements of Financial Condition.
(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.
86
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
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
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
$
— $ —
—
—
—
—
—
—
—
—
—
—
—
—
—
20,014
123,751
5,726
29,419
83,319
127,555
34,309
1,819
2,014
44,753
—
5,155
—
—
—
—
—
—
—
—
—
—
21,400
—
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
41,471
41,471
Impaired loans(3)
Commercial
Commercial and industrial . . . . . . . . . . . . . . . . . . . . . . . .
Commercial real estate . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,243
323
Mortgage
1-4 family owner occupied - non-jumbo. . . . . . . . . . . . . .
1-4 family non-owner occupied . . . . . . . . . . . . . . . . . . . .
Resort lending. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other real estate(4)
Mortgage
1-4 family owner occupied - non-jumbo. . . . . . . . . . . . . .
1-4 family - 2nd lien . . . . . . . . . . . . . . . . . . . . . . . . . . . .
316
17
572
95
59
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
2,243
323
316
17
572
95
59
(1)
(2)
Included in accrued income and other assets in the Consolidated Statements of Financial Condition.
Included in accrued expenses and other liabilities in the Consolidated Statements of Financial Condition.
(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, 2019 and 2018.
87
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
2019
Equity securities at fair value. . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capitalized mortgage loan servicing rights . . . . . . . . . . . . . . . .
$167
—
—
2018
Trading securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capitalized mortgage loan servicing rights . . . . . . . . . . . . . . . .
$ (62)
—
—
2017
Trading securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capitalized mortgage loan servicing rights . . . . . . . . . . . . . . . .
$ 45
—
—
$ —
637
—
$ —
413
—
$ —
407
—
$ —
—
(9,532)
$
167
637
(9,532)
$ —
—
(2,323)
$
(62)
413
(2,323)
$ —
—
(2,744)
$
45
407
(2,744)
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, 2019, 2018 and
2017 relating to assets measured at fair value on a non-recurring basis:
•
•
Loans which are measured for impairment using the fair value of collateral for collateral dependent loans
had a carrying amount of $3.4 million, which is net of a valuation allowance of $1.5 million at
December 31, 2019, and had a carrying amount of $3.5 million, which is net of a valuation allowance of
$1.5 million at December 31, 2018. An additional provision for loan losses relating to these impaired loans
of $1.3 million, $1.3 million and $0.5 million was included in our results of operations for the years ending
December 31, 2019, 2018 and 2017, respectively.
Other real estate, which is measured using the fair value of the property, had a carrying amount of
$0.06 million which is net of a valuation allowance of $0.09 million at December 31, 2019, and a carrying
amount of $0.15 million which is net of a valuation allowance of $0.14 million, at December 31, 2018. An
additional charge relating to other real estate measured at fair value of $0.03 million, $0.09 million and
$0.08 million was included in our results of operations during the years ended December 31, 2019, 2018
and 2017, respectively.
88
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
(In thousands)
2017
2019
Beginning balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in accounting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$21,400
—
$15,699
$ —
— 14,213
Beginning balance, as adjusted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
21,400
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(9,532)
—
7,303
—
(2,323)
—
8,024
—
(2,744)
—
4,230
—
Ending balance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$19,171
$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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ (9,532) $ (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,
float rate and prepayment rate. Significant changes in all five 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
2019
Capitalized mortgage loan
servicing rights . . . . . . .
$19,171
2018
Capitalized mortgage loan
servicing rights . . . . . . .
$21,400
Present value of
net servicing
revenue
Discount rate
Cost to service
Ancillary income
Float rate
Prepayment rate
10.00% to 13.00%
$66 to $316
20 to 37
1.73%
7.01% to 69.34%
Present value of
net servicing
revenue
Discount rate
Cost to service
Ancillary income
Float rate
Prepayment rate
10.00% to 13.00%
$68 to $216
20 to 36
2.57%
6.68% to 78.78%
10.14%
$81
22
1.73%
14.96
10.15%
$81
23
2.57%
10.54
89
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
2019
Impaired loans
Commercial . . . . . . . . . . . . . .
$ 971
Mortgage and Installment(1) . . .
2,467
Other real estate
Mortgage and Installment. . . . .
59
2018
Impaired loans
Commercial(2). . . . . . . . . . . . .
$2,566
Mortgage . . . . . . . . . . . . . . . .
905
Other real estate
Mortgage . . . . . . . . . . . . . . . .
154
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
(48.0)% to 19.2%
(5.6)%
(25.2) to 49.2
11.5
(11.6) to 5.0
(5.1)
(32.5)% to 60.0%
(1.9)%
(40.1) to 25.6
0.7
0.0 to 34.1
11.2
(1)
(2)
In addition to the valuation techniques and unobservable inputs discussed above, at December 31, 2019 certain impaired collateral dependent
installment loans totaling approximately $0.14 million are secured by collateral other than real estate. For the majority of these loans, we
apply internal discount rates to industry valuation guides.
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
at December 31, 2018.
The following table reflects the difference between the aggregate fair value and the aggregate remaining
contractual principal balance outstanding for loans held for sale for which the fair value option has been elected at
December 31:
Aggregate
Fair Value
Contractual
Principal
Difference
(In thousands)
Loans held for sale
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$69,800
44,753
39,436
$1,894
1,257
844
$67,906
43,496
38,592
90
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.
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.
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)
2019
Assets
Cash and due from banks . . . . . . . . . . . . . . . . . . . . $
Interest bearing deposits . . . . . . . . . . . . . . . . . . . . .
Interest bearing deposits - time . . . . . . . . . . . . . . . .
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 . . . . . . . . . . . . . . . .
53,295 $
12,009
350
518,400
53,295
12,009
350
518,400
$
53,295
12,009
—
—
$
— $
—
350
518,400
—
—
—
—
18,359
2,768,675
10,108
5,464
NA
2,768,817
10,108
5,464
NA
—
8
—
NA
69,800
1,752
5,464
NA
2,699,017
8,348
—
Liabilities
Deposits with no stated maturity(1). . . . . . . . . . . . . . $2,427,190 $2,427,190
Deposits with stated maturity(1) . . . . . . . . . . . . . . . .
610,235
88,680
Other borrowings . . . . . . . . . . . . . . . . . . . . . . . . . .
33,149
Subordinated debentures . . . . . . . . . . . . . . . . . . . . .
1,296
Accrued interest payable . . . . . . . . . . . . . . . . . . . . .
4,402
Derivative financial instruments . . . . . . . . . . . . . . . .
609,537
88,646
39,456
1,296
4,402
$2,427,190
—
—
—
97
—
— $
$
610,235
88,680
33,149
1,199
4,402
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
—
Liabilities
$
— $
—
594
—
427,926
NA
44,753
1,789
5,155
NA
2,520,032
8,353
—
Deposits with no stated maturity(1). . . . . . . . . . . . . . $2,197,494 $2,197,494
Deposits with stated maturity(1) . . . . . . . . . . . . . . . .
711,312
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
—
—
—
—
—
—
NA – Not applicable
(1) Deposits with no stated maturity include reciprocal deposits with a recorded book balance of $388.369 million and $123.080 million at
December 31, 2019 and 2018, respectively. Deposits with a stated maturity include reciprocal deposits with a recorded book balance of
$42.658 million and $58.992 million at December 31, 2019 and 2018, respectively.
91
—
—
—
—
—
—
—
—
—
—
—
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
The fair values for commitments to extend credit and standby letters of credit are estimated to approximate their
aggregate book balance, which is nominal, and therefore are not disclosed.
Fair value estimates are made at a specific point in time, based on relevant market information and information
about the financial instrument. These estimates do not reflect any premium or discount that could result from offering
for sale the entire holdings of a particular financial instrument.
Fair value estimates are based on existing on- and off-balance sheet financial instruments without attempting to
estimate the value of anticipated future business, the value of future earnings attributable to off-balance sheet
activities and the value of assets and liabilities that are not considered financial instruments.
Fair value estimates for deposit accounts do not include the value of the core deposit intangible asset resulting
from the low-cost funding provided by the deposit liabilities compared to the cost of borrowing funds in the market.
NOTE 23 – ACCUMULATED OTHER COMPREHENSIVE LOSS
A summary of changes in accumulated other comprehensive loss (‘‘AOCL’’), net of tax during the years ended
December 31 follows:
Unrealized
Gains
(Losses) on
Securities
Available
for Sale
Dispropor-
tionate
Tax Effects
from
Securities
Available
for Sale
Unrealized
Gains
(Losses) on
Cash Flow
Hedges
Dispropor-
tionate
Tax Effects
from
Cash Flow
Hedges
Total
2019
Balances at beginning of period . . . . . . . . . . . . . . . . . . . . .
$(4,185)
$(5,798)
$ (125)
$ — $(10,108)
Other comprehensive income (loss) before
reclassifications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amounts reclassified from AOCL . . . . . . . . . . . . . . . . . .
8,035
(111)
—
—
(1,266)
(336)
—
—
6,769
(447)
Net current period other comprehensive income
(loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balances at end of period . . . . . . . . . . . . . . . . . . . . . . . . . .
7,924
$ 3,739
—
$(5,798)
(1,602)
$(1,727)
—
6,322
$ — $ (3,786)
2018
Balances at beginning of period . . . . . . . . . . . . . . . . . . . . .
Other comprehensive loss before reclassifications. . . . . .
Amounts reclassified from AOCL . . . . . . . . . . . . . . . . . .
Net current period other comprehensive loss. . . . . . . .
Balances at end of period . . . . . . . . . . . . . . . . . . . . . . . . . .
2017
Balances at beginning of period . . . . . . . . . . . . . . . . . . . . .
Cumulative effect of change in accounting . . . . . . . . . . .
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). . . . . . .
Balances at end of period . . . . . . . . . . . . . . . . . . . . . . . . . .
$ (470)
(3,671)
(44)
(3,715)
$(4,185)
$(3,310)
300
(3,010)
2,763
(140)
2,623
(83)
—
$ (470)
$(5,798)
—
—
—
$(5,798)
$(5,798)
—
(5,798)
—
—
—
83
(83)
$(5,798)
$
269
(207)
(187)
(394)
$ (125)
$ —
—
—
210
12
222
47
—
269
$
$ — $ (5,999)
(3,878)
(231)
(4,109)
$ — $(10,108)
—
—
—
—
—
—
—
—
(47)
47
$ — $ (9,108)
300
(8,808)
2,973
(128)
2,845
—
(36)
$ — $ (5,999)
(1) Amounts reclassified to accumulated deficit due to adoption of ASU 2018-02, ‘‘Income Statement – Reporting Comprehensive Income
(Topic 220), Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income’’ during the fourth quarter of 2017.
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
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
92
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
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
2019
Unrealized gains (losses) on securities
available for sale
Unrealized gains (losses) on cash flow
hedges
2018
Unrealized gains (losses) on securities
available for sale
Unrealized gains (losses) on cash flow
hedges
2017
Unrealized gains (losses) on securities
available for sale
Unrealized gains (losses) on cash flow
hedges
Reclassified
From
AOCL
(In thousands)
Affected Line Item in
Consolidated Statements of Operations
Net gains on securities
Net impairment loss recognized in earnings
Total reclassifications before tax
Income tax expense
Reclassifications, net of tax
Interest expense
Income tax expense
Reclassification, net of tax
Total reclassifications for the period, net of tax
Net gains on securities
Net impairment loss recognized in earnings
Total reclassifications before tax
Income tax expense
Reclassifications, net of tax
Interest expense
Income tax expense
Reclassification, net of tax
Total reclassifications for the period, net of tax
Net gains on securities
Net impairment loss recognized in earnings
Total reclassifications before tax
Income tax expense
Reclassifications, net of tax
Interest expense
Income tax expense
Reclassification, net of tax
Total reclassifications for the period, net of tax
$ 140
—
140
29
$ 111
$(425)
(89)
$(336)
$ 447
$ 56
—
56
12
$ 44
$(237)
(50)
$(187)
$ 231
$ 215
—
215
75
$ 140
$ 18
6
$ 12
$ 128
93
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
December 31,
2019
2018
(In thousands)
ASSETS
Cash and due from banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest bearing deposits - time. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment in subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued income and other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 10,505
10,000
369,861
463
$
7,624
25,000
343,872
2,857
Total Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$390,829
$379,353
LIABILITIES AND SHAREHOLDERS’ EQUITY
Subordinated debentures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued expenses and other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 39,456
575
350,798
$ 39,388
530
339,435
Total Liabilities and Shareholders’ Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$390,829
$379,353
CONDENSED STATEMENTS OF OPERATIONS
2019
Year Ended December 31,
2018
(In thousands)
2017
OPERATING INCOME
Dividends from subsidiary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Operating Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$29,000
230
61
29,291
$33,500
160
56
33,716
$16,000
29
41
16,070
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. . . . . . . . . . . . . . . . . . . .
2,104
655
2,759
26,532
(423)
26,955
19,480
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
Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$46,435
$39,839
$20,475
94
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
CONDENSED STATEMENTS OF CASH FLOWS
2019
Year Ended December 31,
2018
(In thousands)
2017
Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 46,435
$ 39,839
$ 20,475
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH
FROM OPERATING ACTIVITIES
Deferred income tax expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,503
65
68
891
45
(19,480)
(16,908)
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
29,527
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 . . . . . . . . . . . . . . . . . . . . . . . . .
(20,000)
35,000
—
Net Cash From (Used In) Investing Activities . . . . . . . . . . . . . . . . . . . . .
15,000
(30,000)
10,000
431
(19,569)
(10,000)
10,000
—
—
CASH FLOW USED IN FINANCING ACTIVITIES
Dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from issuance of common stock . . . . . . . . . . . . . . . . . . . . . . . . . .
Share based compensation withholding obligation . . . . . . . . . . . . . . . . . . . .
Repurchase of common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(16,554)
2,074
(882)
(26,284)
(14,055)
1,945
(1,467)
(12,681)
Net Cash Used in Financing Activities . . . . . . . . . . . . . . . . . . . . . . . . . . .
(41,646)
(26,258)
Net Increase (Decrease) in Cash and Cash Equivalents. . . . . . . . . . . . . .
Cash and Cash Equivalents at Beginning of Year . . . . . . . . . . . . . . . . . . . . . .
2,881
7,624
(8,830)
16,454
(8,960)
1,776
(579)
—
(7,763)
6,939
9,515
Cash and Cash Equivalents at End of Year . . . . . . . . . . . . . . . . . . . . . . .
$ 10,505
$ 7,624
$ 16,454
NOTE 25 – REVENUE FROM CONTRACTS WITH CUSTOMERS
We account for revenue in accordance with ASC Topic 606, Revenue from Contracts with Customers. 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 this topic. These sources of revenue that are excluded from the scope
of this topic include interest income, net gains on mortgage loans, net gains on securities, mortgage loan servicing,
net and bank owned life insurance and were approximately 84.9% and 82.9% of total revenues at December 31, 2019
and 2018, 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, 2019.
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
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.
95
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
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 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 2019 that were financed
by us.
96
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
Disaggregation of our revenue sources by attribute for the years ended December 31 follow:
2019
Retail
Service
Charges
on Deposit
Accounts
Overdraft fees . . . . . . . . . . . . . . . . . . . . . . . . .
Account service charges. . . . . . . . . . . . . . . . . .
ATM fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 7,590
2,103
—
—
Business
Overdraft fees . . . . . . . . . . . . . . . . . . . . . . . . .
ATM fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interchange income . . . . . . . . . . . . . . . . . . . . . . .
Asset management revenue . . . . . . . . . . . . . . . . .
Transaction based revenue . . . . . . . . . . . . . . . . . .
1,515
—
—
—
—
—
Other
Deposit
Related
Income
$ —
—
1,368
965
—
35
422
—
—
—
Investment
and
Insurance
Commissions
Interchange
Income
(In thousands)
$ —
—
—
—
—
—
—
10,297
—
—
$ —
—
—
—
—
—
—
—
1,123
535
Total
$ 7,590
2,103
1,368
965
1,515
35
422
10,297
1,123
535
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$11,208
$2,790
$10,297
$1,658
$25,953
Reconciliation to Consolidated Statement of Operations:
Non-interest income - other:
Other deposit related income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment and insurance commissions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Bank owned life insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$2,790
1,658
1,111
3,723
$9,282
2018
Retail
Overdraft fees . . . . . . . . . . . . . . . . . . . . . . . . .
Account service charges. . . . . . . . . . . . . . . . . .
ATM fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Business
Overdraft fees . . . . . . . . . . . . . . . . . . . . . . . . .
ATM fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interchange income . . . . . . . . . . . . . . . . . . . . . . .
Asset management revenue . . . . . . . . . . . . . . . . .
Transaction based revenue . . . . . . . . . . . . . . . . . .
Service
Charges
on
Deposit
Accounts
$ 8,285
2,406
—
—
1,567
—
—
—
—
—
Other
Deposit
Related
Income
$ —
—
1,423
941
—
34
594
—
—
—
Investment
and
Insurance
Commissions
Interchange
Income
(In thousands)
$ —
—
—
—
—
—
—
9,905
—
—
$ —
—
—
—
—
—
—
—
1,100
871
Total
$ 8,285
2,406
1,423
941
1,567
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
97
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 zero, $3.5 million and $0.3 million of costs incurred during the years ended
December 31, 2019, 2018 and 2017, respectively related to the Merger.
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) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total assets acquired. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deposits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Subordinated debentures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued expenses and other liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities assumed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net assets acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(In thousands)
$ 23,521
4,054
6,066
778
295,799
1,067
3,047
3,362
5,798
343,492
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 final as the one-year measurement period for
finalizing acquisition-date fair values has expired. During this measurement period we had one adjustment to our
acquisition date fair values. During 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.
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.
98
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 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.
99
A summary of selected quarterly results of operations for the years ended December 31 follows:
QUARTERLY FINANCIAL DATA (UNAUDITED)
Three Months Ended
March 31,
June 30,
September 30,
December 31,
(In thousands, except per share amounts)
2019
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income before income tax . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$36,636
30,243
664
11,548
9,381
$37,573
30,756
652
13,417
10,730
$37,811
30,872
(271)
15,570
12,445
$36,908
30,710
(221)
17,225
13,879
Net income per common share
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
0.40
0.39
0.47
0.46
0.55
0.55
0.62
0.61
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
During the fourth quarter of 2019, we recognized a positive fair value adjustment due to price on our capitalized
mortgage loan servicing rights of $0.6 million (see note #4). 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).
QUARTERLY SUMMARY (UNAUDITED)
First quarter . . . . . . . . . . . . . . . . . . .
Second quarter. . . . . . . . . . . . . . . . .
Third quarter . . . . . . . . . . . . . . . . . .
Fourth quarter . . . . . . . . . . . . . . . . .
High
$23.64
22.42
22.25
23.93
Reported Sales Prices of Common Shares
2018
2019
Low
Low
Close
High
Cash Dividends
Declared
Close
2019
2018
$20.40
20.60
18.94
20.40
$21.50
21.79
21.32
22.65
$24.50
27.10
26.65
25.13
$22.06
22.20
21.51
20.18
$22.90
25.50
23.65
21.02
$0.18
0.18
0.18
0.18
$0.15
0.15
0.15
0.15
We have approximately 1,400 holders of record of our common stock. Our common stock trades on the
NASDAQ Global Select Market System under the symbol ‘‘IBCP.’’ The prices shown above are supplied by
NASDAQ and reflect the inter-dealer prices and may not include retail markups, markdowns or commissions. There
may have been transactions or quotations at higher or lower prices of which we are not aware.
In addition to limitations imposed by the provisions of the Michigan Business Corporation Act (which, among
other things, limits us from paying dividends to the extent we are insolvent), our ability to pay dividends is limited
by our ability to obtain funds from our Bank and by regulatory capital guidelines applicable to us (see note #20).
100
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[THIS PAGE INTENTIONALLY LEFT BLANK]
LETTER FROM
THE PRESIDENT & CEO
Dear Shareholders:
It is my honor and pleasure to provide you with an update on Independent
Bank Corporation (IBC). We continue to be focused on building shareholder
value and position the Company to be successful in view of the opportunities
and challenges within a marketplace with an accelerating rate of change.
This starts with creating and maintaining a high performance culture with
talented individuals who are highly engaged and work as a team to serve
and guide our customers. This focus involves maintaining disciplined lending
standards, a diversified earning asset mix, ample liquidity, continuous
emphasis on growing our core deposit base, and strong capital levels.
As a community bank, at the center of all our strategies is a focus on serving our customers and investing in
our markets and in our people. During 2019, we committed over $1.7 billion in financing in our markets, we
invested nearly $750,000 in sponsorships and donations, and our associates volunteered nearly 20,000 hours
of time. Our customer base is growing, as is our brand. During 2019, we were recognized by Forbes for the
second consecutive year as having the highest customer satisfaction for banks in Michigan.
FINANCIAL RESULTS FOR 2019 – CONTINUED STRENGTH AND CONSISTENCY
In 2019, we generated excellent growth in our earnings and earnings per share. For the year ended
December 31, 2019, the Company reported net income of $46.4 million, or $2.00 per diluted share
compared to net income of $39.8 million, or $1.68 per diluted share, in 2018. This represents increases of
$6.6 million, or 17%, and 32 cents, or 19%, in net income and diluted earnings per share, respectively. For all
of 2019, our pre-tax, pre-provision earnings increased by $7.9 million or 16% to $58.6 million, from $50.6
million in 2018. Over this same period, our tangible book value per share increased by 9%, to $14.08 per
share from $12.90 per share at the end of 2018.
As reflected in our balance sheet, our fundamentals continue to be strong. The growth in our earnings was
fueled by strong loan growth and increased operating leverage. Loans, excluding loans held for sale, totaled
$2.73 billion at December 31, 2019, an increase of 6% from $2.58 billion at December 31, 2018. For the year, our
commercial loan portfolio increased by 2%, our consumer installment loan portfolio by 16% and our mortgage
loan portfolio by 5%. We have now put together a string of 23 consecutive quarters of loan growth. I am also
pleased to report that our investments in the mortgage banking business over the last few years continue to
pay off for us with mortgage gains of almost $20 million and total originations in excess of $1 billion for the
second time in our Company’s history.
On the funding side, deposits totaled $3.04 billion at December 31, 2019, compared to $2.91 billion at
December 31, 2018. The $123.3 million increase in total deposits during 2019 reflects growth in reciprocal
deposits. At year-end 2019, our loan to deposit ratio was a healthy 90%, primarily unchanged from 89% at the
prior year end, allowing capacity for additional growth. Our balance sheet is slightly asset sensitive, where
generally we 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. Non-performing loans at December 31, 2019, increased slightly to $9.5 million from $8.6 million
at the prior year end. Other real estate and repossessed assets totaled just $1.9 million at December 31,
2
INDEPENDENT BANK CORPORATION
SENIOR OFFICERS
William B. Kessel
Stephen A. Erickson
James J. Twarozynski
BOARD OF DIRECTORS1
Michael M. Magee, Jr., Chairman
Michael J. Cok
Ronia F. Kruse
Terance L. Beia
Stephen L. Gulis, Jr.
Matthew J. Missad
William J. Boer, Lead Director
Christina L. Keller
Joan A. Budden
William B. Kessel
INDEPENDENT BANK
SENIOR OFFICERS
William B. Kessel
Cheryl A. Bartholic
Martha A. Blandford
Tami E. Coates
Larry R. Daniel
Stephen A. Erickson
Patrick J. Ervin
Susan M. Johnson
Stefanie M. Kimball
Keith J. Lightbody
Dennis J. Mack
Jamie L. Macumber
Cheryl L. McKellar
Edward W. Ryan
Tricia L. Schabel
Raymond P. Stecko
Michael J. Stodolak
Christopher S. Michaels
James J. Twarozynski
Dean M. Morse
Kevin D. Pierce
Joel F. Rahn
Thomas J. Ranville
Joane E. VanLuven
Denise E. Wheaton
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 2019 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.
2019
Annual Report
Our vision for
the future is clear,
2020 ACTUALLY.
Every bank will tell you they’re different,
but at Independent Bank we know that
YOU are. We help you discover what
financial independence means to you.
Then we help you get there.
Be Bold. Be You.