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SCHEDULE 14A
(RULE 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Filed by the registrant [X]
Filed by a party other than the registrant [ ]
Check the appropriate box:
[ ] Preliminary proxy statement. [ ] Confidential, for use of the
Commission only (as permitted by
Rule 14a-6(e)(2)).
[X] Definitive proxy statement.
[ ] Definitive additional materials.
[ ] Soliciting material pursuant to Rule 14a-12
Independent Bank Corporation
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(Name of Registrant as Specified in Its Charter)
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(Name of Person(s) Filing Proxy Statement if Other Than the Registrant)
Payment of filing fee (check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and
0-11.
(1) Title of each class of securities to which transaction applies:
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(2) Aggregate number of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
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(4) Proposed maximum aggregate value of transaction:
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(5) Total fee paid:
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[ ] Fee paid previously with preliminary materials.
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[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration
statement number, or the form or schedule and the date of its filing.
(1) Amount Previously Paid:
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(2) Form, Schedule or Registration Statement No.:
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(3) Filing Party:
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(4) Date Filed:
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[INDEPENDENT BANK CORPORATION LOGO]
March 16, 2001
Dear Shareholder:
We invite you to attend the 2001 Annual Meeting of Shareholders. This year's
meeting will be held on Tuesday, April 17, 2001, at 3:00 p.m. at the Ionia
Theater, 205 West Main Street, Ionia, Michigan 48846.
It is important that your shares are represented at the Annual Meeting.
Please carefully read the Notice of Annual Meeting and Proxy Statement. Whether
or not you expect to attend the Annual Meeting, PLEASE SIGN, DATE AND RETURN THE
ENCLOSED PROXY IN THE ENVELOPE PROVIDED OR REGISTER YOUR VOTE BY PHONE OR THE
INTERNET.
Sincerely,
/s/ Charles C. Van Loan
Charles C. Van Loan
President and
Chief Executive Officer
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INDEPENDENT BANK CORPORATION
230 West Main Street
Ionia, Michigan 48846
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
To Be Held April 17, 2001
The Annual Meeting of Shareholders of Independent Bank Corporation will be
held at the Ionia Theater, 205 West Main Street, Ionia, Michigan 48846, on
Tuesday, April 17, 2001, at 3:00 p.m. (local time) for the following purposes:
1. To elect three nominees to the Board of Directors to serve three-year
terms expiring in 2004.
2. To transact such other business as may properly come before the meeting or
any adjournment thereof.
Shareholders of record as shown by the transfer books of the Company at the
close of business on February 16, 2001, are entitled to notice of and to vote at
the meeting or any adjournment thereof. Whether or not you expect to be present
in person at this meeting, please sign the enclosed proxy and return it promptly
in the enclosed envelope or register your vote by phone or the internet. If you
attend the meeting and wish to vote in person, you may do so even though you
have submitted a proxy.
By order of the Board of Directors,
/s/ William R. Kohls
William R. Kohls
Secretary
Dated: March 16, 2001
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INDEPENDENT BANK CORPORATION
230 West Main Street
Ionia, Michigan 48846
PROXY STATEMENT
March 16, 2001
This Proxy Statement is furnished in connection with the solicitation,
beginning approximately March 16, 2001, by the Board of Directors of Independent
Bank Corporation (the "Company"), of proxies for use at the Annual Meeting of
Shareholders. This meeting will be held on Tuesday, April 17, 2001, at 3:00 p.m.
at the Ionia Theater, 205 West Main Street, Ionia, Michigan 48846.
If the form of the Proxy accompanying this Proxy Statement is properly
executed and returned, the shares represented by the Proxy will be voted at the
Annual Meeting of Shareholders in accordance with the directions given in such
Proxy. If no choice is specified, the shares represented by the Proxy will be
voted for the election of directors listed as nominees.
To vote by telephone, shareholders of record (shareholders who have been
issued a certificate representing their shares) may call toll free on a
touch-tone telephone 1-877-PRX-VOTE (1-877-779-8683); enter the control number
located on your proxy card and follow the recorded instructions. To vote by
internet, go to the site http://www.eproxyvote.com/ibcp; enter the control
number located on your proxy card and follow the instructions provided.
If your shares are held through a bank or a broker (referred to as "street
name"), you may also be eligible to vote your shares electronically. Simply
follow the instructions on your voting form, using either the toll-free
telephone number or the internet address that is listed.
A Proxy may be revoked prior to its exercise by delivering a written notice
of revocation to the Secretary of the Company, executing a subsequent Proxy or
attending the meeting and voting in person. Attendance at the meeting does not,
however, automatically serve to revoke a Proxy.
VOTING SECURITIES AND RECORD DATE
As of February 16, 2001, the record date for the Annual Meeting, the Company
had issued and outstanding 11,548,822 shares of common stock, par value $1.00
per share ("Common Stock"). Shareholders are entitled to one vote for each share
of Common Stock registered in their names at the close of business on the record
date. Votes cast at the meeting and submitted by proxy are counted by the
inspectors of the meeting, who are appointed by the Company.
As of February 16, 2001, no person was known by Management to be the
beneficial owner of more than 5% of the Common Stock, except as follows:
Amount and
Nature of Approximate
Name and Address of Beneficial Percent
Title of Class Beneficial Owner Ownership of Class
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Common Stock, Independent Bank Corporation 730,034(1) 6.15%
$1 par value Employee Stock Ownership Trust
230 West Main Street
Ionia, Michigan 48846
Common Stock, Dimensional Fund Advisors, Inc. 588,996 5.08%
$1 par value 1299 Ocean Avenue
Santa Monica, California 90401
(1) Includes 188,850 shares of Common Stock held by the employee stock ownership
plan that was maintained by the former Mutual Savings Bank, f.s.b. Upon
receipt of a favorable determination by the Internal Revenue Service, that
plan will merge into the ESOP.
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The Employee Stock Ownership Trust ("ESOT") holds shares of Common Stock
pursuant to the terms of the Company's Employee Stock Ownership Plan ("ESOP").
Firstar Trust Company administers the ESOP and serves as directed trustee. The
Company's ESOP Administrative Committee has investment power with respect to the
shares of Common Stock held by the ESOT and has voting power to the extent that
the ESOP participants do not direct the voting of the shares of Common Stock
allocated to their accounts.
The Administrative Committee is comprised of William R. Kohls, James J.
Twarozynski and Laurinda M. Neve, each of whom are officers of the Company.
Except for the shares of Common Stock allocated to their account as participants
in the ESOP, each member of the Administrative Committee disclaims beneficial
ownership of the shares held by the ESOP.
Dimensional Fund Advisors, Inc. ("Dimensional") is registered under Section
203 of the Investment Advisors Act of 1940. Dimensional furnishes investment
advice to four registered investment companies and serves as investment manager
to certain other commingled group trusts and separate accounts ("the Funds").
Dimensional possesses sole voting and dispositive power over the shares of
Common Stock, but the shares of Common Stock are owned by the Funds. Dimensional
disclaims beneficial ownership of those shares.
ELECTION OF DIRECTORS
The Bylaws of the Company permit the Board of Directors to establish the size
of the Board from three to fifteen members. The current Board has fixed the size
of the Board at nine members. All directorships possible under the Company's
Bylaws are not being filled because the Board believes that under the present
circumstances, a Board of nine persons is adequate to manage the affairs of
the Company.
The Company's Articles of Incorporation provide that the Board be divided
into three classes of nearly equal size, with the classes to hold office for
staggered terms of three years each. Jeffrey A. Bratsburg, Charles A. Palmer and
Charles C. Van Loan are nominees to serve three-year terms ending in 2004. Each
nominee is an incumbent director.
The Proxies cannot be voted for a greater number of persons than the number
of nominees named. In the event that any nominee is unable to serve, which is
not now contemplated, the Board may designate a substitute nominee. The proxy
holders, to the extent they have been granted authority to vote in the
election of directors, may or may not vote for a substitute nominee.
In addition to the nominees for director, each director whose term will
continue after the meeting is named on the following page. Each nominee and
director owned beneficially, directly or indirectly, the number of shares of
Common Stock set forth opposite their respective names. The stock ownership
information and the information relating to each nominee's and director's age,
principal occupation or employment for the past five years has been furnished to
the Company as of February 16, 2001, by the respective nominees and directors.
A plurality of the votes cast at the Annual Meeting of Shareholders is
required to elect the nominees as directors. Accordingly, at this year's
meeting, the three individuals who receive the largest number of votes cast at
the meeting will be elected as directors. Shares not voted at the meeting,
whether by abstention, broker nonvote or otherwise, will not be treated as votes
cast at the meeting. The Board of Directors recommends a vote FOR the election
of the persons nominated by the Board.
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Amount and
Nature of
Beneficial Percent of
Ownership(1) Outstanding
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NOMINEES FOR THREE-YEAR TERMS EXPIRING IN 2004
Jeffrey A. Bratsburg (age 57) 97,186(2) .82%
Mr. Bratsburg served as President and Chief Executive
Officer of Independent Bank West Michigan from 1985 until
his retirement in 1999. He became a Director in 2000.
Charles A. Palmer (age 56) 47,311 .40
Mr. Palmer is an attorney and a professor of law at Thomas M. Cooley
Law School. He became a Director in 1991.
Charles C. Van Loan (age 53) 137,589(3) 1.16
Mr. Van Loan is the President and Chief Executive Officer of
Independent Bank Corporation. He became a Director in 1992.
DIRECTORS WHOSE TERMS EXPIRE IN 2002
Keith E. Bazaire (age 62) 31,008 .26
Mr. Bazaire was the President of Carter's Food Center, Inc.
(retail grocer) until his retirement in 2000. He became a Director in 1996.
Terry L. Haske (age 52) 22,707(4) .19
Mr. Haske is the President of Ricker & Haske, CPAs, P.C.
He became a Director in 1996.
Thomas F. Kohn (age 68) 24,557 .21
Mr. Kohn is the Chief Executive Officer of Belco Industries, Inc.
(manufacturer). He became a Director in 1995.
DIRECTORS WHOSE TERMS EXPIRE IN 2003
Robert L. Hetzler (age 56)
Mr. Hetzler is the President of Monitor Sugar Company 8,106 .07
(food processor). He became a Director in 2000.
Robert J. Leppink (age 68) 54,305 .46
Mr. Leppink is the President of Leppink's, Inc.
(retail grocer). He became a Director in 1980.
Arch V. Wright, Jr. (age 68) 59,669 .50
Mr. Wright is the President of Charlevoix Development Company
(real estate development). He became a Director in 1974.
(1) Except as described in the following notes, each nominee owns the shares
directly and has sole voting and investment power or shares voting and
investment power with his spouse under joint ownership. Includes shares of
Common Stock that are issuable under options exercisable within 60 days.
(2) Includes 15,391 shares allocated to Mr. Bratsburg's account under the ESOT.
Also includes 19,601 shares held by Mr. Bratsburg's wife.
(3) Includes 20,169 shares allocated to Mr. Van Loan's account under the ESOT.
Also includes 7,167 shares held by Mr. Van Loan's dependent children.
(4) Includes 2,630 shares owned jointly with Mr. Haske's father with respect to
which Mr. Haske shares voting and investment power.
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There are no family relationships between or among the directors, nominees or
executive officers of the Company. The Board of Directors had seven meetings in
2000. During 2000, all directors attended at least 75% of the aggregate number
of meetings of the Board and the Board committees on which they served. In
addition to the audit and personnel committees, the Board has a corporate
development committee.
The personnel committee (consisting of directors Bazaire, Haske, Hetzler, and
Leppink) met three times in 2000 to review and make recommendations to the Board
relating to remuneration, including benefit plans, to be paid to the Company's
directors and officers.
The corporate development committee (consisting of directors Kohn, Bratsburg,
Van Loan and Wright) met twice in 2000 to consider and approve candidates to
serve as directors of the Company's subsidiary banks (the "Banks"). Although
Management's nominees to serve as directors of the Company have been selected
from individuals serving as directors of the Banks, the committee will consider
qualified individuals who are recommended by shareholders. Written
recommendations of individuals for Board nomination may be forwarded to the
Company's secretary for consideration as nominees at the 2002 Annual Meeting of
Shareholders. Such recommendations must be received no earlier than January 17,
2002, and no later than February 16, 2002.
The audit committee consists of directors Haske, Bazaire, Hetzler, Kohn,
Leppink, Palmer and Wright, each of whom qualifies as an independent director
under the current listing standards of the NASD. The committee met three times
in 2000 to select independent public accountants and discuss financial matters
with such independent accountants; review internal audit and loan review reports
as well as Management's responses thereto; and review and discuss other
pertinent financial, accounting, audit, and policy matters with Management. The
Board of Directors has adopted a written charter for the Company's audit
committee, which is included as Exhibit A to this Proxy Statement. On March 2,
2001, the committee submitted to the Board the following report.
REPORT OF THE AUDIT COMMITTEE
The Committee has met with Management and the independent auditors to review
and discuss the Company's audited financial statements as of and for the year
ended December 31, 2000.
The Committee obtained from the independent auditors a formal written
statement describing the relationships between the auditors and the Company that
might bear on the auditors' independence, which is consistent with Independence
Standards Board Standard No. 1, "Independence Discussions with Audit
Committees." The Committee has also discussed with the auditors any
relationships that may impact their objectivity and independence and satisfied
itself as to the auditors' independence.
The Committee has reviewed with the independent auditors all communications
required by generally accepted auditing standards, including those described in
Statement on Auditing Standards No. 61, as amended, "Communication with Audit
Committees." The Committee also discussed, with and without management present,
the results of the independent auditors' examination of the financial
statements.
Based on the reviews and discussions referred to above, the Committee has
recommended to the Board of Directors that the financial statements referred to
above be included in the Company's Annual Report on Form 10-K for the year ended
December 31, 2000.
TERRY L. HASKE KEITH E. BAZAIRE ROBERT L. HETZLER THOMAS F. KOHN
ROBERT J. LEPPINK CHARLES A. PALMER ARCH V. WRIGHT, JR.
COMPENSATION OF DIRECTORS
Directors of the Company who are not employees of the Company or any of its
subsidiaries ("Non-employee Directors") receive an annual retainer of $10,000.
Each Non-employee Director also serves as a director of a subsidiary of the
Company. Non-employee Directors of these subsidiaries receive an annual retainer
of $1,000 and monthly meeting fees of $500. Non-employee Directors of the
Company and its subsidiaries are not compensated for committee meetings.
Pursuant to the Non-employee Director Stock Option Plan, a committee
designated by the Board may grant options to purchase shares of Common Stock
to each Non-employee Director. These options are not exercisable for 12 months
and expire not more than ten years after the date of the grant. During 2000,
each Non-employee Director received an option to purchase 4,102 shares of Common
Stock at $12.38 per share, the fair market value of the Common Stock on the date
of the grant.
The Company maintains a Deferred Compensation and Stock Purchase Plan for
Non-employee Directors (the "Plan"). The Plan provides that Non-employee
Directors of the Company or its subsidiaries may defer payment of all or a part
of their director fees ("Fees") or receive shares of Common Stock in lieu of
cash payment of Fees. Each Non-employee Director may elect to participate in a
Current Stock Purchase Account, a Deferred Cash Investment Account or a Deferred
Stock Account.
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A Current Stock Purchase Account is credited with shares of Common Stock
having a fair market value equal to the Fees otherwise payable. A Deferred Cash
Investment Account is credited with an amount equal to the Fees deferred and on
each quarterly credit date with an appreciation factor that may not exceed the
prime rate of interest charged by Independent Bank. A Deferred Stock Account is
credited with the amount of Fees deferred and converted into stock units based
on the fair market value of the Common Stock at the time of the deferral.
Amounts in the Deferred Stock Account are credited with cash dividends and
other distributions on the Common Stock. Fees credited to a Deferred Cash
Investment Account or a Deferred Stock Account are deferred for income tax
purposes. The Plan does not provide for distributions of amounts deferred prior
to a participant's termination as a Non-employee Director and the participant
may generally elect either a lump sum or installment distribution.
One of the Company's directors participates in a deferred compensation plan
in lieu of current payment of Fees. The plan was adopted by the Company in 1985
and provides for retirement and death benefits to be paid to the participating
director by the Company over a minimum of fifteen years. The Company is the
owner and beneficiary of life insurance policies which are structured to fund
the Company's obligations under the terms of the plan.
SHAREHOLDER RETURN PERFORMANCE GRAPH
Set forth below is a line graph comparing the yearly percentage change in the
cumulative total shareholder return on the Common Stock (based on the last
reported sales price of the respective year) with the cumulative total return of
the Nasdaq Stock Market Index (United States stocks, only) and the Nasdaq Bank
Stocks Index for the five-year period ended December 31, 2000. The following
information is based on an investment of $100 on January 1, 1996, in the Common
Stock, the Nasdaq Stock Market Index and the Nasdaq Bank Stocks Index, with
dividends reinvested.
December 31,
January 1, ---------------------------------------------------------
1996 1996 1997 1998 1999 2000
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Independent Bank Corporation $100.00 $138.45 $265.15 $211.44 $163.82 $239.35
Nasdaq Stock Market 100.00 123.04 150.69 212.51 394.92 237.62
Nasdaq Bank Stocks 100.00 132.04 221.06 219.64 211.14 241.08
[TOTAL SHAREHOLDER RETURN GRAPH]
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COMMITTEE REPORT ON EXECUTIVE COMPENSATION
GENERAL
The Company's ability to create shareholder wealth is predicated on its
ability to attract and retain qualified executives and senior managers. The
Board of Directors, therefore, believes that the Company's compensation policies
and practices must: 1) provide incentives and rewards for superior performance;
2) align the interests of its executive officers and senior managers with the
interests of its shareholders, and; 3) provide executive officers and senior
managers with the opportunity to accumulate wealth that is commensurate with
increases in the value of the Common Stock.
COMPENSATION STRATEGY
Consistent with these objectives and based on a compensation review by
nationally recognized compensation consultants, the Board of Directors adopted a
"pay-for-performance" compensation strategy in 1991. The strategy seeks to
maintain an optimum balance among three principal components of total
compensation, as follows:
BASE SALARY-Excluding consideration of other relevant factors, which may
include individual performance, experience, expertise and tenure, the Board
intends to maintain the base salaries of executive officers and senior managers
at approximately 95% of the level established by the Company's peers.
Annually, the Personnel Committee (the "Committee") recommends a base salary
for the President and Chief Executive Officer for consideration by the entire
Board of Directors. The Committee's recommendation is based upon compensation
levels established by the Company's peers and the Committee's evaluation of
the relevant factors that are described above. The base salaries of the
Presidents of each of the Banks are determined in a similar manner by the
Company's President and Chief Executive Officer and the Bank's respective board
of directors. The base salaries of other executive officers are established by
the Company's President and Chief Executive Officer.
ANNUAL CASH INCENTIVE-To provide performance incentives and to compensate for
the below-peer base salary, the strategy provides for annual cash awards that
are payable if the Company and the Banks meet or exceed annual performance
objectives established by the Board of Directors. Assuming "target performance"
is achieved under the Management Incentive Compensation Plan described below,
the Board intends that aggregate annual cash compensation (the total of base
salary and annual cash incentive) will equal approximately 105% of peer level.
LONG-TERM INCENTIVES-To align the interests of its executive officers and
senior managers with the Company's shareholders, the Board's compensation
strategy provides for equity-based compensation plans, including the Employee
Stock Ownership Plan and the Employee Stock Option Plan described below. Both of
these compensation plans have been adopted by the Board of Directors, and the
Employee Stock Option Plan has been approved by the Company's shareholders. Such
plans are, however, administered by the Committee.
COMPENSATION PLANS
Pursuant to the MANAGEMENT INCENTIVE COMPENSATION PLAN, the Board of
Directors establishes annual performance levels as follows: 1) threshold
represents the performance level which must be achieved before any incentive
awards are granted; 2) target performance is defined as the desired level of
performance in view of all relevant factors, as discussed below, and; 3) maximum
represents that which reflects outstanding performance.
The principal factors considered by the Board in the determination of these
performance levels include peer performance and investment community
expectations for return on equity and earnings per common share for the Company,
as well as similar expectations for its competitors in the financial services
industry. Corresponding performance levels are established for each of the
Banks.
In addition to the objective earnings goals for the Company and the Banks,
cash payments pursuant to this plan may also be subject to certain
pre-determined individual goals. Such individual goals may be objective or
subjective in nature. The individual performance component is, however, limited
to 20% of the total incentive formula for the Company's executive officers and
the Bank Presidents.
For the Chief Executive Officer, cash payments made pursuant to this plan may
range from 20% to 50% of base salary. For other executive officers and the Bank
Presidents, such cash payments may range from 15% to 35% of their base salary.
For the year ended December 31, 2000, the Company's executive officers and the
Bank Presidents received cash awards pursuant to the Management Incentive
Compensation Plan that ranged from 17.5% to 50% of their respective base
salaries.
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The EMPLOYEE STOCK OPTION PLAN is intended to provide the Company's
executive officers and senior managers with additional long-term incentives to
manage the affairs of the Company in the best interests of its shareholders. On
April 18, 2000, the Board of Directors granted options to purchase 105,525
shares of Common Stock to 35 executive officers and senior managers of the
Company and the Banks. Each of the options provides the recipient the right to
purchase 3,015 shares of Common Stock at $12.38 per share, the market price of
the Common Stock as of the date of the grant. Such options may not be exercised
prior to the expiration of one year from the date of the grant, are restricted
as to transferability and expire 10 years after the date of the grant.
On January 21, 2001, the Board of Directors granted options to purchase
41,193 shares of Common Stock to the Company's executive officers and the Bank
Presidents. Options covering 31,257 shares were designated as incentive stock
options, as defined by the Internal Revenue Code. Each option provides the
recipient the right to purchase the underlying shares of Common Stock at $19.625
per share, the market price of the Common Stock as of the date of the grant.
Such options may not be exercised prior to the expiration of one year from the
date of the grant, are restricted as to transferability and expire 10 years
after the date of the grant.
The EMPLOYEE STOCK OWNERSHIP PLAN provides substantially all full-time
employees with an equity interest in the Company. Contributions to the ESOP are
determined annually and are subject to the approval of the Board of Directors.
Contributions for the year ended December 31, 2000, were equal to 6% of the
eligible wages for each of the approximately 740 participants in the ESOP.
CHIEF EXECUTIVE OFFICER COMPENSATION
Charles C. Van Loan has served as the Company's Chief Executive Officer
since December 16, 1992. Prior to that time, Mr. Van Loan served as the
President and Chief Operating Officer of the Company and as the President and
Chief Executive Officer of Independent Bank.
Consistent with the Company's existing policies and practices, the Committee
reviewed compensation data from the Company's peers and evaluated Mr. Van Loan's
contributions to the Company's success as well as his experience and expertise.
On the basis of its evaluation, the Committee recommended for consideration
by the full Board of Directors a base salary of $252,000. As a result of the
Company's record earnings, relative to the goals established pursuant to the
Management Incentive Compensation Plan, Mr. Van Loan's cash incentive for 2000
totaled $126,000.
KEITH E. BAZAIRE ROBERT J. LEPPINK
TERRY L. HASKE ROBERT L. HETZLER
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SECURITIES OWNERSHIP OF MANAGEMENT
The following table sets forth the beneficial ownership of the Common Stock
by the Company's Chief Executive Officer and the four highest paid executive
officers of the Company or the Banks ("Named Executives") and by all directors
and executive officers as a group as of February 16, 2001.
Amount and
Nature of
Beneficial Percent of
Name Ownership(1) Outstanding
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Charles C. Van Loan 137,589(2) 1.16%
Michael M. Magee 35,256 .30
Edward B. Swanson 60,789 .51
Ronald L. Long 28,329 .24
Robert N. Shuster 46,475 .39
All executive officers and directors 1,421,525(3) 12.01
as a group (consisting of 18 persons)
(1) In addition to shares held directly or under joint ownership with their
spouses, beneficial ownership includes shares that are issuable under
options exercisable within 60 days, shares that are restricted and subject
to forfeiture pursuant to the Incentive Share Grant Plan and shares that are
allocated to their accounts as participants in the ESOP.
(2) Includes shares held by Mr. Van Loan's dependent children.
(3) Includes shares held by the ESOT. Beneficial ownership is disclaimed as to
702,570 shares, including 632,536 shares which are held by the ESOT.
SUMMARY COMPENSATION TABLE
The following table sets forth compensation received by the Named Executives
for each of the three years ended December 31, 2000.
Long-Term
Compensation Awards
Annual -------------------------- All
Compensation Restricted Securities Other
----------------------- Stock Underlying Compen-
Name & Principal Position Year Salary(1) Bonus(2) Awards(3) Options (#)(4) sation(5)
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Charles C. Van Loan 2000 $252,000 $126,000 15,855 $14,400
President and Chief 1999 240,000 120,000 21,424 16,295
Executive Officer 1998 223,450 $223,450 3,015 16,307
Michael M. Magee 2000 $175,000 $ 61,250 9,257 $14,400
President and CEO 1999 157,500 55,125 11,470 13,970
Independent Bank 1998 150,000 $105,000 3,015 13,449
Edward B. Swanson 2000 $157,500 $ 55,125 8,632 $14,226
President and CEO 1999 150,000 51,129 10,857 14,029
Independent Bank South Michigan 1998 141,000 $ 98,700 3,015 12,305
Ronald L. Long 2000 $157,500 $ 55,125 8,632 $14,211
President and CEO 1999 146,000 43,860 9,742 12,996
Independent Bank East Michigan 1998 137,000 $ 68,500 3,015 11,859
Robert N. Shuster 2000 $150,000 $ 26,250 5,690 $13,535
President and CEO 1999 188,950
Independent Bank MSB
(1) Includes elective deferrals by employees pursuant to Section 401(k) of the
Internal Revenue Code.
(2) Represents amounts earned under the Company's Management Incentive
Compensation Plan.
(3) Amounts represent the aggregate value of restricted shares of Common Stock
(based on the closing price of the stock on the date of grant) issued to the
Named Executives for the designated year under the Company's Incentive Share
Grant Plan. The Plan provided that the Personnel Committee may, at its sole
discretion, grant shares of restricted stock in lieu of cash incentives
payable under the Company's Management Incentive Compensation Plan. The
aggregate fair market value of the shares granted to each participant was
equal to twice the value of the amount otherwise payable in cash. The shares
are subject to
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restrictions on transfer and risks of forfeiture which lapse over a period
of five years at an annual rate of 20% of the granted shares, subject to
earlier termination of those restrictions and risks upon death, disability
or a change in control of the Company. The Named Executives have no right to
such restricted shares, except voting rights and the right to all dividends
or other distributions paid to holders of the Common Stock. As of December
31, 2000, the Named Executives held shares of restricted stock in the
following aggregate amounts and values (based on the closing price of the
Common Stock on December 31, 2000, which equaled $19.75): Mr. Van Loan -
6,674 shares ($131,812); Mr. Magee - 3,138 shares ($61,976); Mr. Swanson -
2,953 shares ($58,322); and Mr. Long - 2,023 shares ($39,954).
(4) Includes options granted in 2001 relating to 2000 performance.
(5) Amounts represent Company contributions to the Employee Deferred
Compensation Plan [401(k)] and Employee Stock Ownership Plan. Subject to
certain age and service requirements, all employees of the Company and its
subsidiaries are eligible to participate in these plans.
OPTION GRANTS IN 2000
The following table provides information on options granted to the Named
Executives during the year ended December 31, 2000.
Individual Grants
Number of Percent of Total Exercise or Grant Date
Securities Underlying Options Granted to Base Price Expiration Present
Options Granted(1) Employees in 2000 (per share)(2) Date Value(3)
- ---------------------------------------------------------------------------------------------------------------------
Charles C. Van Loan 3,015 2.05% $ 12.38 April 18, 2010 $ 17,034
12,840 8.75 19.625 January 21, 2011 111,451
Michael M. Magee 3,015 2.05% $ 12.38 April 18, 2010 $ 17,034
6,242 4.25 19.625 January 21, 2011 54,181
Edward B. Swanson 3,015 2.05% $ 12.38 April 18, 2010 $ 17,034
5,617 3.83 19.625 January 21, 2011 48,756
Ronald L. Long 3,015 2.05% $ 12.38 April 18, 2010 $ 17,034
5,617 3.83 19.625 January 21, 2011 48,756
Robert N. Shuster 3,015 2.05% $ 12.38 April 18, 2010 $ 17,034
2,675 1.82 19.625 January 21, 2011 23,219
(1) Indicates number of shares which may be purchased pursuant to options
granted under the Company's Employee Stock Option Plan. Options may not be
exercised in full or in part prior to the expiration of one year from the
date of grant. Options with an expiration date of January 21, 2011 were
granted in 2001. Such options relate to 2000 performance.
(2) The exercise price equals the prevailing market price of the Common Stock on
the date of grant. The exercise price may be paid in cash, by the delivery
of previously owned shares, through the withholding of shares otherwise
issuable upon exercise or a combination thereof.
(3) The values reflect application of the Black-Scholes option pricing model.
The assumptions employed on options with an expiration date of April 18,
2010, were expected volatility of 11.3%, risk-free rate of return of 6.00%,
dividend yield of 4.62% and time to exercise of ten years. The assumptions
employed on options with an expiration date of January 21, 2011, were
expected volatility of 17.34%, risk-free rate of return of 5.17%, dividend
yield of 3.06% and time to exercise of ten years.
9
13
AGGREGATED STOCK OPTION EXERCISES IN 2000
AND YEAR END OPTION VALUES
The following table provides information on the number and value of options
exercised in the past year, as well as the number and value of unexercised
options held by the Named Executives at December 31, 2000. Options covering
115,991 shares of Common Stock were exercised in 2000.
Number of Securities Underlying Value of Unexercised
Shares Unexercised Options In-the-Money Options(2)
Acquired Value ------------------------------- --------------------------
Name on Exercise Realized(1) Exercisable Unexercisable Exercisable Unexercisable
- ------------------------------------------------------------------------------------------------------------------------
Charles C. Van Loan 3,015 $ 8,010 12,057 21,425 $ 60,181 $145,829
Michael M. Magee 3,015 8,010 12,057 11,471 60,181 78,995
Edward B. Swanson 3,015 6,575 12,057 10,858 60,181 74,878
Ronald L. Long 12,057 9,743 60,181 67,391
Robert N. Shuster 8,887 80,876 24,969 3,015 309,573 22,214
(1) The value realized upon the exercise of options is equal to the difference
between the market value of the shares of Common Stock acquired at the time
of exercise and the aggregate exercise price paid by the Named Executive to
the Company.
(2) The value of unexercised options is based on the difference between the
closing price of the Common Stock on December 31, 2000 ($19.75) and the
exercise prices of the options.
MANAGEMENT CONTINUITY AGREEMENTS
The Company has entered into individual Management Continuity Agreements
with its executive officers and certain senior managers, including the Named
Executives. These agreements provide severance benefits if the individual's
employment is terminated within 36 months after a change in control of the
Company or within six months before a change in control if the Company
terminates the individual's employment in contemplation of a change in control
and to avoid the agreement. For the purposes of these agreements, a "change in
control" is any occurrence reportable as such in a proxy statement under
applicable rules of the Securities and Exchange Commission, and would include,
without limitation, the acquisition of beneficial ownership of 20% of the
Company's voting securities by any person, certain extraordinary changes in the
composition of the board of directors, or the merger or consolidation of the
Company in which it is not the surviving entity, or its sale or liquidation.
Severance benefits are not payable if the Company terminates the employment
for cause, if employment terminates due to the individual's death or disability,
or if the individual resigns without "good reason." An individual may resign
with "good reason" after a change in control and retain benefits if the Company
reduces the individual's salary or bonus, assigns duties inconsistent with the
individual's prior position, or makes other material, adverse changes in the
terms or conditions of the individual's employment. The agreements are for
self-renewing terms of one to three years unless the Company takes action to
terminate further extensions. The agreements are automatically extended for a
one- to three-year term from the date of a change in control. These agreements
provide a severance benefit of a lump-sum payment equal to one- to three-years'
salary and bonus and a continuation of benefits coverage for one to three years.
TRANSACTIONS INVOLVING MANAGEMENT
Directors and officers of the Company and their associates were customers
of, and had transactions with, subsidiaries of the Company in the ordinary
course of business during 2000. All loans and commitments included in such
transactions were made in the ordinary course of business on substantially the
same terms, including interest rates and collateral, as those prevailing at the
time for comparable transactions with other persons and do not involve an
unusual risk of collectibility or present other unfavorable features. Such loans
totaled $17,591,000 at December 31, 2000, equal to 13.7% of shareholders'
equity.
One director has financial interests in partnerships, that sold land
contracts to one of the Banks during 2000. Mr. Wright has interests in
partnerships that sold five contracts with an aggregate principal face value of
approximately $330,000. The contracts mature not later than June of 2005 and
have an average rate of approximately 8.5%. The contracts were sold without
recourse at face value.
10
14
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Pursuant to Section 16 of the Securities Exchange Act of 1934, the
Company's directors and executive officers, as well as any person holding more
than 10% of its Common Stock, are required to report initial statements of
ownership of the Company's securities and changes in such ownership to the
Securities and Exchange Commission. Based upon written representations by each
Director and Executive Officer, all of the required reports were timely filed by
such persons during 2000.
RELATIONSHIP WITH INDEPENDENT PUBLIC ACCOUNTANTS
Representatives of KPMG LLP will be present at the Annual Meeting and will
have the opportunity to make a statement if desired and will be available to
respond to appropriate questions. The Board of Directors has not yet selected
independent accountants for 2001. It is expected that KPMG LLP will be selected
to serve as the independent accountants for 2001.
The following table sets forth the aggregate fees billed to Independent Bank
Corporation for the fiscal year ended December 31, 2000, by the Company's
principal accounting firm, KPMG LLP:
Audit fees $170,000
Financial information systems design and implementation fees 0
All other fees(1) 149,000
--------
$319,000
========
(1) Includes fees for tax consulting, benefit plan audits and other non-audit
services. The audit committee has considered whether the provision of these
services is compatible with maintaining the principal accountant's
independence.
SHAREHOLDER PROPOSALS
Article VIII of the Company's Articles of Incorporation contains certain
procedural requirements applicable for shareholder nominations of persons to be
elected as directors of the Company. A copy of the Company's Articles of
Incorporation has been filed with the Securities and Exchange Commission and can
be obtained from its Public Reference Section or the Company. Any other
shareholder proposal to be considered by the Company for inclusion in the 2002
Annual Meeting of Shareholders proxy material must be received by the Company
not later than November 16, 2001.
GENERAL
The cost of soliciting proxies will be borne by the Company. In addition to
solicitation by mail, the officers and employees of the Company and its
subsidiaries may solicit proxies by telephone, telegraph or in person. The
Company has retained the services of Corporate Investor Communications, Inc. to
deliver proxy materials to brokers, nominees, fiduciaries and other custodians
for distribution to beneficial owners, as well as solicit proxies from these
institutions. The cost of such services is expected to total approximately
$4,500, plus reasonable out of pocket expenses.
As of the date of this proxy statement, Management knows of no other matters
to be brought before the meeting. However, if further business is presented by
others, the proxy holders will act in accordance with their best judgment.
By order of the Board of Directors,
/s/ William R. Kohls
------------------------------------
William R. Kohls
Secretary
Dated: March 16, 2001
11
15
EXHIBIT A
INDEPENDENT BANK CORPORATION
BOARD OF DIRECTORS' AUDIT COMMITTEE
CHARTER
OBJECTIVE
The objective of the Committee is to assist the Board of Directors in
fulfilling its fiduciary responsibilities. The Committee is responsible for
determining that the Company has adequate administrative, operating, and
internal accounting controls, and for evaluating the Company's compliance with
laws, regulations, and policies and procedures. Additionally, the Audit
Committee is responsible for providing reasonable assurance regarding the
integrity of financial and other data used by the Board of Directors, applicable
state and federal regulatory agencies, and the public.
RESPONSIBILITIES
The responsibility of the Committee is to provide reasonable assurance that
the Company is maintaining effective systems of internal controls, which reduce
the risk of loss due to employee errors, internal or external fraud, and
conflicts of interest. This responsibility will be met through the review of
written audit reports and the related written responses, and through discussions
with internal auditors, independent accountants, and Management. The Committee
will also seek reasonable assurance that financial disclosures made by
Management accurately reflect the Company's financial condition and results of
operations.
In carrying out these responsibilities, the Committee will:
- Select and evaluate the independent accountants who will audit the
financial statements of the Company.
- Ensure the independence of the independent accountant by requiring the
independent accountant to submit a formal written independence letter, at
least annually, and by monitoring the relationships and services that may
impact objectivity and independence, including a review of management
consulting services and the related fees.
- Review and concur with the appointment, replacement, reassignment, or
dismissal of the Vice President, Corporate Auditor.
- Review the internal audit function of the Company, including the
independence and authority of its reporting obligations, the proposed
audit plans for the coming year, and the coordination of such plans with
the independent auditors.
- Provide an open avenue of communication between the internal auditors, the
independent auditors, and the Board of Directors.
- Review with the internal auditors and the independent accountants, a
summary of findings from completed audits, along with recommendations for
improvements, and Management's responses to those findings and
recommendations. Review with the internal auditors and independent
accountants, the effectiveness and adequacy of the accounting and
financial controls of the Company; elicit any recommendations for
improving internal control procedures.
- Review and discuss the results of investigations involving conflicts of
interest or unethical conduct by the Company's officers or employees.
Review the results of employee investigations involving fraud or
embezzlement.
- Meet with the internal auditors and the independent accountants in
separate executive sessions to discuss any matters as deemed appropriate
by the Committee.
COMMITTEE MEMBERSHIP
The membership of the Committee shall consist of at least three financially
literate and independent members of the Board of Directors, designated by the
Chairman of the Board. At least one member of the Committee will have employment
experience in finance or accounting, a professional certification in
accounting, or other comparable experience that results in the member's
financial sophistication.
COMMITTEE MEETINGS
The Committee shall meet a minimum of three times annually. Written minutes
shall be prepared for each meeting, and a copy forwarded to the Board of
Directors.
CHARTER REVIEW
The Board of Directors shall review, update, and approve this charter, at
least annually.
12
16
APPENDIX
Independent Bank Corporation is a bank holding company with total assets of
$1.8 billion. Its five subsidiary banks (the "Banks") principally serve suburban
and rural communities located across Michigan's Lower Peninsula.
The Banks emphasize service and convenience as the principal means of
competing in the delivery of financial services. Accordingly, the Company's
community banking philosophy vests discretion and authority in the Banks'
management while providing financial incentives to align the interests of such
managers with those of its shareholders.
To support the Banks' service and sales efforts, while providing the internal
controls that are consistent with its decentralized structure, the Company has
consolidated the Banks' operations and provides administrative and operation
services to the Banks.
CONTENTS
Management's Discussion and Analysis ..................................... A-2
Selected Consolidated Financial Data ..................................... A-12
Independent Auditor's Report ............................................. A-13
Consolidated Financial Statements ........................................ A-14
Notes to Consolidated Financial Statements ............................... A-18
Quarterly Data ........................................................... A-34
Shareholder Information .................................................. A-35
Executive Officers and Directors ......................................... A-35
A-1
17
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management's discussion and analysis of financial condition and results of
operations contains forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. Actual results could differ materially
from those projected in such forward-looking statements.
The following section presents additional information to assess the financial
condition and results of operations of the Company and its subsidiary banks (the
"Banks"). This section should be read in conjunction with the consolidated
financial statements and the supplemental financial data contained elsewhere in
this appendix.
RESULTS OF OPERATIONS
SUMMARY. Net income totaled $20.0 million in 2000, compared to $8.7 million
and $11.9 million in 1999 and 1998, respectively. The Company's results of
operation for 1999 reflect certain charges, which relate to the acquisition of
Mutual Savings Bank ("MSB"). (See "Acquisitions.") Such charges include a net
loss on the sale of securities as well as settlement costs relating to a
shareholder suit against MSB. In the absence of such charges, the Company's
earnings in 1999 would have totaled $14.4 million.
Excluding consideration of acquisition-related charges, increases in the
Company's net income during 2000 and 1999 principally reflect increases in net
interest income. An increase in non-interest income and a decline in
non-interest expense also contributed to the increase in net income during 2000.
(See "Non-interest income" and "Non-interest expense.")
KEY PERFORMANCE RATIOS Year ended December 31,
2000 1999 1998
- ------------------------------------------------------------------------------------------------------
Net income to
Average equity ......................................... 16.59% 7.26% 10.72%
Average assets ......................................... 1.15 .52 .72
Net income per share
Basic .................................................. $ 1.71 $ .73 $ 1.01
Diluted ................................................ 1.69 .72 1.00
NET INTEREST INCOME. Tax equivalent net interest income totaled $74.3 million
during 2000, compared to $69.2 million and $62.8 million during 1999 and 1998,
respectively. The 7% increase during 2000 principally reflects an increase in
average earning assets. An increase in tax equivalent net interest income as a
percent of average earning assets ("Net Yield") also contributed to the
increase in net interest income. The 10% increase in tax equivalent net interest
income during 1999 principally reflects an increase in Net Yield.
Average earning assets totaled $1.63 billion in 2000 compared to $1.55
billion and $1.54 billion in 1999 and 1998, respectively. The 5% increase
during 2000 principally reflects increases in loans, excluding loans held for
sale ("Portfolio Loans.") The moderate increase in average earning assets during
1999 principally reflects efforts to restructure the balance sheet and manage
capital resources at MSB.
A-2
18
2000 1999 1998
AVERAGE ----------------------------------------------------------------------------------------
BALANCES AND TAX Average Average Average
EQUIVALENT RATES Balance Interest Rate Balance Interest Rate Balance Interest Rate
- ----------------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
ASSETS
Loans--all domestic(1,2) ........ $1,341,926 $120,110 8.95% $1,222,564 $106,233 8.69% $1,124,847 $101,852 9.05%
Taxable securities .............. 144,231 9,960 6.91 215,550 12,808 5.94 334,927 19,282 5.76
Tax-exempt securities(2) ........ 127,130 10,468 8.23 90,185 7,334 8.13 55,056 4,665 8.47
Other investments ............... 19,612 1,620 8.26 19,627 1,577 8.03 24,557 1,660 6.76
---------- -------- ---------- -------- ---------- --------
Interest earning assets ....... 1,632,899 142,158 8.71 1,547,926 127,952 8.27 1,539,387 127,459 8.28
-------- -------- --------
Cash and due from banks ......... 37,288 44,910 37,289
Other assets, net ............... 72,225 73,660 72,298
---------- ---------- ----------
Total assets ................. $1,742,412 $1,666,496 $1,648,974
========== ========== ==========
LIABILITIES
Savings and NOW ................. $ 574,556 14,800 2.58 $ 576,194 13,704 2.38 $ 525,638 13,912 2.65
Time deposits ................... 655,591 36,973 5.64 578,294 30,402 5.26 535,861 29,291 5.47
Long-term debt .................. 2,247 162 7.21 4,245 268 6.31 6,749 457 6.77
Other borrowings ................ 243,118 15,930 6.55 243,519 14,356 5.90 329,525 21,007 6.37
---------- -------- ---------- -------- ---------- --------
Interest bearing
liabilities .................. 1,475,512 67,865 4.60 1,402,252 58,730 4.19 1,397,773 64,667 4.63
-------- -------- --------
Demand deposits ................. 126,596 125,936 107,403
Other liabilities ............... 19,704 18,937 32,316
Shareholders' equity ............ 120,600 119,371 111,482
---------- ---------- ----------
Total liabilities and
shareholders' equity ....... $1,742,412 $1,666,496 $1,648,974
========== ========== ==========
Net interest income .......... $ 74,293 $ 69,222 $ 62,792
======== ======== ========
Net interest income
as a percent of
earning assets ............. 4.55% 4.47% 4.08%
==== ==== ====
(1) Interest on loans includes fees totaling $6.6 million, $6.3 million and $6.2
million in 2000, 1999 and 1998, respectively.
(2) Interest on tax-exempt securities is presented on a fully tax equivalent
basis assuming a marginal tax rate of 35%. For purposes of analysis,
tax-exempt loans are included in tax-exempt securities.
CHANGE IN TAX EQUIVALENT 2000 compared to 1999 1999 compared to 1998
NET INTEREST INCOME Volume Rate Net Volume Rate Net
- -------------------------------------------------------------------------------------------------------------------------------
(in thousands)
Increase (decrease) in interest income(1)
Loans--all domestic(2) .......................... $ 10,610 $ 3,267 $ 13,877 $ 8,604 $ (4,223) $ 4,381
Taxable securities .............................. (4,699) 1,851 (2,848) (7,075) 601 (6,474)
Tax-exempt securities(2) ........................ 3,041 93 3,134 2,864 (195) 2,669
Other investments ............................... (1) 44 43 (366) 283 (83)
-------- -------- -------- -------- -------- --------
Total interest income ......................... 8,951 5,255 14,206 4,027 (3,534) 493
-------- -------- -------- -------- -------- --------
Increase (decrease) in interest expense(1)
Savings and NOW ................................. (39) 1,135 1,096 1,272 (1,480) (208)
Time deposits ................................... 4,255 2,316 6,571 2,261 (1,150) 1,111
Long-term debt .................................. (140) 34 (106) (160) (29) (189)
Other borrowings ................................ (24) 1,598 1,574 (5,163) (1,488) (6,651)
-------- -------- -------- -------- -------- --------
Total interest expense ........................ 4,052 5,083 9,135 (1,790) (4,147) (5,937)
-------- -------- -------- -------- -------- --------
Net interest income .......................... $ 4,899 $ 172 $ 5,071 $ 5,817 $ 613 $ 6,430
-------- -------- -------- -------- -------- --------
(1) The change in interest due to changes in both balance and rate has been
allocated to change due to balance and change due to rate in proportion to
the relationship of the absolute dollar amounts of change in each.
(2) Interest on tax-exempt securities is presented on a fully tax equivalent
basis assuming a marginal tax rate of 35%. For purposes of analysis,
tax-exempt loans are included in tax-exempt securities.
A-3
19
COMPOSITION OF AVERAGE EARNING ASSETS Year Ended December 31,
AND INTEREST PAYING LIABILITIES 2000 1999 1998
- ------------------------------------------------------------------------------------------------------
As a percent of average earning assets
Loans--all domestic .................................... 82.2% 79.0% 73.1%
Other earning assets ................................... 17.8 21.0 26.9
----- ----- -----
Average earning assets .............................. 100.0% 100.0% 100.0%
===== ===== =====
Savings and NOW ........................................ 35.2% 37.2% 34.1%
Time deposits .......................................... 29.3 33.0 32.6
Brokered CDs ........................................... 10.9 4.4 2.3
Other borrowings and long-term debt .................... 15.0 16.0 21.8
----- ----- -----
Average interest bearing liabilities ................ 90.4% 90.6% 90.8%
===== ===== =====
Earning asset ratio ...................................... 93.7% 92.9% 93.4%
Free-funds ratio ......................................... 9.6 9.4 9.2
Net Yield was 4.55% during 2000, compared to 4.47% and 4.08% during 1999 and
1998, respectively. The increase in Net Yield may be attributed to the scheduled
maturity of certain low-yield assets and high-cost liabilities at MSB. Increases
in Portfolio Loans as a percent of average earning assets also contributed to
the increase in Net Yield. The implementation of new loan and deposit pricing
strategies at MSB as well as Management's efforts to restructure MSB's balance
sheet have also contributed to the increase in Net Yield.
PROVISION FOR LOAN LOSSES. The provision for loan losses was $3.3 million
during 2000 compared to $2.7 million and $3.6 million during 1999 and 1998,
respectively. The provision during 2000 reflects Management's assessment of the
allowance for loan losses, including losses which relate to a default by a land
development company on loans totaling $2.2 million. (See "Asset quality.")
NON-INTEREST INCOME. Non-interest income totaled $19.0 million during 2000
compared to $17.3 million and $19.1 million during 1999 and 1998, respectively.
Excluding net gains and losses on asset sales, non-interest income grew by 20%
to $16.7 million during 2000 and by 19% to $14.0 million during 1999 from $11.8
million during 1998. Increases in service charges on deposit accounts and other
non-interest income account for the majority of the increase in total
non-interest income during 2000 and 1999. Loan servicing fees as well as ATM and
debit card fees also contributed to the increase in non-interest income during
2000.
NON-INTEREST INCOME Year Ended December 31,
2000 1999 1998
- ---------------------------------------------------------------------------------------------------------
(in thousands)
Service charges on deposit accounts .............................. $ 6,857 $ 5,696 $ 4,554
Net gains (losses) on asset sales
Real estate mortgage loans ..................................... 2,209 4,247 7,052
Securities ..................................................... 9 (912) 267
Manufactured home loan origination fees and commissions .......... 2,144 2,009 1,304
Title insurance fees ............................................. 912 844 872
Mutual fund and annuity commissions .............................. 1,199 1,370 941
Real estate mortgage loan servicing fees ......................... 1,490 1,300 1,154
Other ............................................................ 4,141 2,769 2,974
------- ------- -------
Total non-interest income ................................... $18,961 $17,323 $19,118
======= ======= =======
Service charges on deposit accounts totaled $6.9 million during 2000,
compared to $5.7 million and $4.6 million during 1999 and 1998, respectively.
The increases in such service charges principally relate to the introduction of
High Performance Checking into each of the markets served by the Banks. (See
"Deposits and borrowings.")
Net gains on the sale of real estate mortgage loans are generally a function
of the volume of loans sold. The Banks realized net gains of $2.2 million on the
sale of such loans during 2000, compared to $4.2 million and $7.1 million during
1999 and 1998, respectively. The volume of loans sold is dependent upon the
Banks' ability to originate real estate mortgage loans which is particularly
sensitive to the absolute level of interest rates. In 1998, approximately 60% of
the $804.0 million of loans originated was the result of refinancing activity.
Management estimates that refinancing activities accounted for approximately 58%
and 38% of the real estate mortgage loans originated during 2000 and 1999,
respectively.
A-4
20
NET GAINS ON THE SALE OF REAL ESTATE Year ended December 31,
MORTGAGE LOANS 2000 1999 1998
- -----------------------------------------------------------------------------------------------------
(dollars in thousands)
Real estate mortgage loans originated ............................ $345,400 $508,700 $804,000
Real estate mortgage loans sold .................................. 153,800 271,100 500,900
Real estate mortgage loan servicing rights sold .................. 36,000 20,800 56,200
Net gains on the sale of real estate mortgage loans .............. 2,209 4,247 7,052
Net gains as a percent of real estate mortgage loans sold ........ 1.44% 1.57% 1.41%
The volume of loans sold is further dependent upon the demand for fixed-rate
obligations and other loans that the Banks cannot profitably fund within
established interest-rate risk parameters. (See "Portfolio loans and asset
quality.") Net gains on the sale of real estate mortgage loans are also
dependent upon economic and competitive factors as well as Management's ability
to effectively manage the Banks' exposure to changes in interest rates.
The purchase or sale of securities is dependent upon Management's assessment
of investment and funding opportunities as well as the Banks' asset/liability
management needs. The Banks sold securities with an aggregate market value of
$22.3 million during 2000 compared to $112.9 million and $11.3 million during
1999 and 1998, respectively. (See "Securities.")
REALIZED GAINS AND LOSSES ON THE SALE OF SECURITIES Year ended December 31,
Proceeds Gains Losses Net
- -----------------------------------------------------------------------------------------------------
(in thousands)
2000 .............................................. $ 22,319 $ 94 $ 85 $ 9
1999(A) ........................................... 112,871 23 935 (912)
1998 .............................................. 11,271 267 267
(A) Approximately $0.8 million of the net losses in 1999 relates to balance
sheet restructuring efforts at MSB. (See "Securities.")
NON-INTEREST EXPENSE. Non-interest expense totaled $58.9 million during
2000, compared to $69.5 million and $59.7 million during 1999 and 1998,
respectively. Non-interest expense in 1999 includes certain merger-related
charges as well as settlement costs relating to a shareholder suit against MSB,
which totaled $7.2 million. Excluding consideration of such charges,
non-interest expense would have totaled $62.3 million during 1999.
NON-INTEREST EXPENSE Year ended December 31,
2000 1999 1998
- ---------------------------------------------------------------------------------------------------------
(in thousands)
Salaries ............................................. $23,577 $23,788 $21,544
Performance-based compensation and benefits .......... 4,774 5,166 5,960
Other benefits ....................................... 5,162 5,335 4,845
------- ------- -------
Salaries and benefits .............................. 33,513 34,289 32,349
Occupancy, net ....................................... 4,653 4,607 4,194
Furniture and fixtures ............................... 4,382 4,230 3,659
Data processing ...................................... 2,467 3,356 2,912
Advertising .......................................... 2,129 2,545 2,176
Communications ....................................... 2,128 2,257 2,160
Amortization of intangible assets .................... 1,728 1,742 1,692
Supplies ............................................. 1,530 1,661 1,431
Loan and collection .................................. 1,463 1,348 1,554
FDIC insurance ....................................... 285 1,392 1,410
Merger-related ....................................... 5,203
Litigation settlement ................................ 2,025
Other ................................................ 4,671 4,825 6,189
------- ------- -------
Total non-interest expense ...................... $58,949 $69,480 $59,726
======= ======= =======
The Company and each of the Banks maintain performance-based compensation
plans. In addition to commissions and cash incentive awards, such plans include
employee stock ownership and employee stock option plans. Management believes
that these equity-based plans help align the interests of the Company's officers
and employees with those of its shareholders.
FDIC insurance assessments totaled $0.3 million during 2000, compared to $1.4
million in both 1999 and 1998. Costs relating to legal and professional fees and
data processing costs also declined during 2000. The decrease in FDIC insurance
assessments reflects the elimination of amounts paid by MSB in conjunction
with the recapitalization of the Savings Association Insurance Fund in 1995. The
decline in data processing costs principally reflects the efficiencies
associated with the conversion of MSB's data processing systems.
A-5
21
In addition to increases in salaries and benefits, increases in non-interest
expense during 1999 reflect direct-mail and other marketing expenses related
to deposit account promotions at two of the Banks. Costs associated with First
Home Financial and the operation of two branch offices acquired in 1998 also
contributed to the increase in non-interest expense during 1999. (See
"Acquisitions.")
FINANCIAL CONDITION
SUMMARY. Portfolio Loans totaled $1.380 billion at December 31, 2000,
compared to $1.291 billion at December 31, 1999. Commercial loans grew by $46.9
million to $381.1 million and account for approximately half of the $89.0
million increase in Portfolio Loans. (See "Portfolio loans and asset quality.")
The increase in Portfolio Loans has been principally funded with brokered
certificates of deposit ("Brokered CDs") as well as cash proceeds from the sale
or maturity of securities. (See "Deposits and borrowings.")
Deposits totaled $1.390 billion at December 31, 2000. The increase from
$1.311 billion a year earlier reflects Brokered CDs, which have been utilized to
fund Portfolio Loans. Brokered CDs increased by $111.0 million to $212.0 million
at December 31, 2000, from $101.0 million at December 31, 1999. A decline in
other borrowings partially offsets the increase in Brokered CDs.
(See "Deposits and borrowings.")
SECURITIES. The Banks maintain diversified securities portfolios, which
include obligations of the U.S. Treasury and government-sponsored agencies as
well as securities issued by states and political subdivisions, corporate
securities and mortgage-backed securities. The Banks also invest in capital
securities, which include preferred stocks and trust preferred securities.
Management continually evaluates the Banks' asset/liability management needs and
attempts to maintain a portfolio structure that provides sufficient liquidity
and cash flow. (See "Non-interest income" and "Asset/liability management.")
SECURITIES Amortized Unrealized Fair
Cost Gains Losses Value
- --------------------------------------------------------------------------------------------------------------
(in thousands)
Securities available for sale
December 31, 2000 ............................... $214,526 $ 3,486 $ 565 $217,447
December 31, 1999 ............................... 198,764 1,234 4,698 195,300
Securities held to maturity
December 31, 2000 ............................... $ 20,098 $ 200 $ 187 $ 20,111
December 31, 1999 ............................... 71,115 237 866 70,486
Securities held to maturity declined to $20.1 million at December 31, 2000,
from $71.1 million at December 31, 1999. The $51.0 million decline principally
reflects the proceeds from maturing 5- and 7-year balloon, mortgage-backed
securities. Such securities were held by MSB. (See "Acquisitions.") Securities
available for sale increased by $22.1 million during the year to $217.4 million
at December 31, 2000. The increase in securities available for sale largely
represents the purchase of capital securities.
PORTFOLIO LOANS AND ASSET QUALITY. Management believes that the Company's
decentralized loan origination structure provides important advantages in
serving the credit needs of the Banks' principal lending markets. In addition to
the communities served by the Banks' branch networks, principal lending markets
include nearby communities and metropolitan areas. Subject to established
underwriting criteria, the Banks also participate in commercial lending
transactions with certain non-affiliated banks and may also purchase real
estate mortgage loans from third-party originators.
LOAN PORTFOLIO COMPOSITION December 31,
2000 1999
- ----------------------------------------------------------------------------------------------------
(in thousands)
Real estate
Residential first mortgages ..................................... $ 597,472 $ 603,714
Residential home equity and other junior mortgages .............. 177,343 138,682
Construction and land development ............................... 144,401 130,373
Other(1) ........................................................ 262,246 230,005
Consumer .......................................................... 111,147 108,054
Commercial ........................................................ 66,574 60,637
Agricultural ...................................................... 20,481 19,176
---------- ----------
Total loans .................................................. $1,379,664 $1,290,641
========== ==========
(1) Includes loans secured by multi-family residential and non-farm, non-
residential property.
A-6
22
Although the Management and Board of Directors of each Bank retain authority
and responsibility for credit decisions, the Banks have adopted uniform
underwriting standards. Further, the Company's loan committee as well as the
centralization of commercial loan credit services and the loan review process
provides requisite controls and promote compliance with such established
underwriting standards. Such centralized functions also facilitate compliance
with consumer protection laws and regulations.
The Banks generally retain loans that may be profitably funded within
established risk parameters. (See "Asset/liability management.") As a result,
the Banks may hold adjustable-rate and balloon real estate mortgage loans as
Portfolio Loans, while 15- and 30-year, fixed-rate obligations are generally
sold to mitigate exposure to changes in interest rates. (See "Non-interest
income.")
The increase in commercial loans principally reflects Management's emphasis
on lending opportunities within the Lansing and Grand Rapids metropolitan areas.
Loans secured by real estate, including land development and construction
projects comprise the majority of new commercial loans. Continued growth within
this segment of Portfolio Loans is dependent upon a number of competitive and
economic factors.
NON-PERFORMING ASSETS December 31,
2000 1999 1998
- ----------------------------------------------------------------------------------------------------------------
(dollars in thousands)
Non-accrual loans .................................................... $5,200 $2,980 $4,302
Loans 90 days or more past due and still accruing interest ........... 1,571 2,029 2,240
Restructured loans ................................................... 260 270 295
------ ------ ------
Total non-performing loans ......................................... 7,031 5,279 6,837
Other real estate .................................................... 2,174 1,315 1,265
------ ------ ------
Total non-performing assets ..................................... $9,205 $6,594 $8,102
====== ====== ======
As a percent of Portfolio Loans
Non-performing loans ............................................... .51% .41% .59%
Non-performing assets .............................................. .67 .51 .70
Allowance for loan losses .......................................... 1.01 1.01 1.00
Allowance for loan losses as a percent of non-performing loans ....... 199 246 169
A default by a land-development company on loans totaling $2.2 million
accounts for the majority of the increase in non-performing loans during 2000.
Approximately $1.0 million of the principal amount of these loans has been
charged against the allowance for loan losses. The remaining balance of $1.2
million, which represents the anticipated liquidation value of the residential
real estate developments that secure the loans, has been designated as
non-accrual. One to four family residential real estate loans contributed to the
increase in both non-performing loans and other real estate during 2000.
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES December 31,
2000 1999 1998
- ------------------------------------------------------------------------------------------------------------------
(in thousands)
Specific allocations ............................................. $ 100 $ 400 $ 300
Other adversely rated loans ...................................... 3,166 2,739 2,302
Historical loss allocations ...................................... 4,717 4,063 3,576
Additional allocations based on subjective factors ............... 5,999 5,783 5,379
------- ------- -------
Total ....................................................... $13,982 $12,985 $11,557
======= ======= =======
In determining the allowance and the related provision for loan losses,
Management considers 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 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 element reflects Management's estimate of probable losses based
upon its systematic review of specific loans. These estimates are based upon a
number of objective factors, such as payment history, financial condition of the
borrower, and discounted collateral exposure.
The second element reflects the application of Management's eight point
rating system. This rating system is similar to those employed by state and
federal banking regulators. Loans that are rated below a certain predetermined
classification are assigned a loss allocation factor for each loan
classification category. The lower the rating assigned to a loan or category,
the greater the allocation percentage that is applied.
A-7
23
The third element is determined by assigning allocations based principally
upon the ten-year average of loss experience for each type of loan. Average
losses are weighted to place additional emphasis on the most recent years in the
ten-year average and may be further adjusted based on the current delinquency
rate. Loss analyses are conducted annually.
The fourth element is based on factors that cannot be associated with a
specific credit or loan category and reflects Management's attempt to ensure
that the overall allowance for loan losses appropriately reflects a margin for
the imprecision necessarily inherent in the estimates of expected credit losses.
Management considers a number of subjective factors when determining the
unallocated portion, including local and general economic business factors and
trends, portfolio concentrations and changes in the size and the general terms
of the loan portfolios. (See "Provision for loan losses.")
ALLOWANCE FOR LOAN LOSSES Year ended December 31,
2000 1999 1998
- -------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
Balance at beginning of period ............................. $ 12,985 $ 11,557 $ 9,639
Provision charged to operating expense ................... 3,287 2,661 3,628
Recoveries credited to allowance ......................... 678 746 655
Loans charged against allowance .......................... (2,968) (1,979) (2,365)
-------- -------- --------
Balance at end of period ................................... $ 13,982 $ 12,985 $ 11,557
======== ======== ========
Net loans charged against the allowance
to average Portfolio Loans ............................... 0.17% 0.10% 0.15%
Loans charged against the allowance for loan losses, net of recoveries, were
equal to .17% of average loans during 2000, compared to .10% and .15% during
1999 and 1998, respectively. The increase in net loans charged against the
allowance during 2000 relates to the default described above. (See "Provision
for loan losses.")
DEPOSITS AND BORROWINGS. The Banks' competitive position within many of the
markets served by the branch networks limits the ability to materially increase
deposits without adversely impacting the weighted-average cost of core deposits.
Accordingly, the Banks principally compete on the basis of convenience and
personal service, while employing pricing tactics that are intended to enhance
the value of core deposits.
AVERAGE CORE DEPOSIT BALANCES Year ended December 31,
2000 1999 1998
- --------------------------------------------------------------------------------------------------------------------
(in thousands)
Demand ..................................................... $ 126,596 $ 125,936 $ 107,403
Savings and Now ............................................ 574,556 576,194 525,638
Time, excluding brokered certificates of deposits .......... 477,802 510,034 501,225
---------- ---------- ----------
Total average core deposits ........................... $1,178,954 $1,212,164 $1,134,266
========== ========== ==========
To attract new core depositors, the Banks have implemented high-performance
checking, which has generated significant increases in relationships as well as
service charges. Management believes that the new relationships which result
from these marketing efforts provide valuable opportunities to cross sell
related financial products and services.
ALTERNATE SOURCES OF FUNDS December 31,
2000 1999
- ---------------------------------------------------------------------------------------------------------------------
Average Average
Amount Maturity Rate Amount Maturity Rate
- ---------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
Brokered CDs ...................... $212,010 3.5 years 6.73% $101,029 6.0 years 6.24%
Fixed-rate FHLB advances(1) ....... 68,743 7.9 years 6.33 131,592 3.2 years 5.98
Variable-rate FHLB advances ....... 114,345 0.2 years 6.69 59,056 0.4 years 4.63
Federal funds purchased ........... 27,550 1 day 6.85 42,350 1 day 5.42
-------- --------- ---- -------- --------- ----
Total $422,648 3.1 years 6.67% $334,027 3.1 years 5.75%
======== ========= ==== ======== ========= ====
(1) Advances totaling $10 million and $20 million, at December 31, 2000 and
1999, respectively, have provisions that allow the FHLB to convert fixed-
rate advances to adjustable rates prior to stated maturity.
A-8
24
The Banks have implemented strategies that incorporate federal funds
purchased, other borrowings and Brokered CDs to fund a portion of the increase
in Portfolio Loans. The use of such alternate sources of funds supplements the
Banks' core deposits and is an integral part of the Banks' asset/liability
management efforts.
Other borrowed funds, principally advances from the Federal Home Loan Bank
(the "FHLB"), totaled $196.0 million at December 31, 2000, compared to $224.6
million a year earlier. The $28.6 million decline in other borrowed funds
principally reflects the competitive cost of Brokered CDs as well as
Management's efforts to diversify the Banks' funding sources.
INTEREST-RATE DERIVATIVE FINANCIAL INSTRUMENTS December 31, 2000
Swaps
-----------------------
Caps Floors Collars Pay Fixed Pay Variable
- -------------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
Notional amount .................................. $48,500 $8,000 $15,000 $170,000 $196,000
Weighted-average maturity (in years) ............. 1.4 1.3 2.0 2.4 3.9
Cap strike ....................................... 7.23% 7.11%
Floor strike ..................................... 5.17% 5.92
Rate paying ...................................... 6.14% 6.62%
Rate receiving ................................... 6.62 6.82
Premium paid ..................................... $ 449 $ 31 $ 67
Annual cost ...................................... .33% .16% .22%
Amortized cost ................................... $ 226 $ 17 $ 63
Fair value ....................................... 8 20 (122) $ (958) $ (1,563)
Derivative financial instruments are employed to manage the Banks' exposure
to changes in interest rates. At December 31, 2000, the Banks employed
interest-rate caps, floors and collars with an aggregate notional amount of
$71.5 million. The Banks also employed interest-rate swaps with an aggregate
notional amount of $366.0 million. During 2000, the Banks terminated
interest-rate caps with a notional amount of $72.0 million. The realized loss of
$0.8 million is amortized as an adjustment to interest expense over the shorter
of the expected remaining term of the hedged debt or the terminated cap. (See
"Asset/liability management" and "Statements of Financial Accounting
Standards.")
LIQUIDITY AND CAPITAL RESOURCES. Effective management of capital resources is
critical to Management's mission to create value for the Company's shareholders.
The cost of capital is an important factor in creating shareholder value and,
accordingly, the Company's capital structure includes unsecured debt and
cumulative trust preferred securities.
Management believes that a diversified portfolio of quality loans will
provide superior risk-adjusted returns. Accordingly, the Banks have implemented
balance sheet management strategies that combine efforts to originate Portfolio
Loans with disciplined funding strategies. Acquisitions are also integral
components of Management's capital management strategies.
CAPITALIZATION December 31,
2000 1999
- --------------------------------------------------------------------------------------------------------------
(in thousands)
Unsecured debt .................................................... $ 11,500 $ 12,500
Trust preferred securities ........................................ 17,250 17,250
Shareholders' equity
Common stock .................................................... 11,610 11,235
Capital surplus ................................................. 77,255 71,672
Retained earnings ............................................... 37,544 33,921
Accumulated other comprehensive income (loss) ................... 1,927 (2,283)
Unearned employee stock ownership plan shares ................... (799)
--------- ---------
Total shareholders' equity .................................... 128,336 113,746
--------- ---------
Total capitalization ......................................... $ 157,086 $ 143,496
========= =========
Management has supplemented its balance-sheet management activities with open
market purchases of the Company's common stock. On October 21, 1999, the Company
adopted a share repurchase plan, which authorized the purchase of 325,000 shares
of common stock (341,000 shares as adjusted for stock dividends.) The purchase
of such shares was completed during the first quarter of 2000 at an average
price of $15.80 per share ($15.05 as adjusted for stock dividends).
On September 19, 2000, the Company adopted a plan, which authorized the
purchase of an additional 500,000 shares of common stock. At December 31, 2000,
the Company had purchased 167,000 shares of common stock at an average price of
$17.17 per share. Management anticipates that the remaining shares will be
acquired prior to September 30, 2001, when its authorization expires.
A-9
25
Shareholders' equity totaled $128.3 million at December 31, 2000. The
increase from $113.7 million at December 31, 1999 reflects the retention of
earnings as well as a decline in unrealized losses on securities available for
sale. The issuance of common stock pursuant to various equity-based incentive
compensation plans also contributed to the increase in shareholders' equity.
Shareholders' equity was equal to 7.19% of total assets at December 31, 2000,
compared to 6.59% a year earlier.
CAPITAL RATIOS December 31,
2000 1999
- -------------------------------------------------------------------------------------------------
Equity capital ................................................... 7.19% 6.59%
Average shareholders' equity to average assets ................... 6.92 7.16
Tier 1 leverage (tangible equity capital) ........................ 7.26 6.52
Tier 1 risk-based capital ........................................ 9.68 9.33
Total risk-based capital ......................................... 10.74 10.41
ASSET/LIABILITY MANAGEMENT. Interest-rate risk is created by differences in
the cash flow characteristics of the Banks' 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.
The asset/liability management efforts of the Company and the Banks identify
and evaluate opportunities to structure the balance sheet in a manner that is
consistent with Management's mission to maintain profitable financial leverage
within established risk parameters. Management's evaluations of various
opportunities and alternate balance-sheet strategies carefully consider the
likely impact on the Banks' risk profile as well as the anticipated contribution
to earnings. The marginal cost of funds is a principal consideration in the
implementation of the Banks' balance-sheet management strategies, but such
evaluations further consider interest-rate and liquidity risk as well as other
pertinent factors. The Banks have established parameters for interest-rate risk.
Management continually monitors the Banks' interest-rate risk and reports
quarterly to the respective Bank's board of directors.
Management employs simulation analyses to monitor the Banks' interest-rate
risk profiles and evaluate potential changes in the Banks' 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 the Banks' balance sheets. The simulations do not anticipate any
actions that Management might initiate in response to changes in interest rates
and, accordingly, the simulations do not provide a reliable forecast of
anticipated results. The simulations are predicated on immediate, permanent and
parallel shifts in interest rates and generally assume that current loan and
deposit pricing relationships remain constant. The simulations further
incorporate assumptions relating to changes in customer behavior, including
changes in prepayment rates on certain assets and liabilities.
CHANGES IN MARKET VALUE OF PORTFOLIO EQUITY December 31, 2000
AND NET INTEREST INCOME Market Value of Percent Net Interest Percent
Change in Interest Rates Portfolio Equity(1) Change Income(2) Change
- -------------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
400 basis point rise ............................. $111,200 (41.90)% $ 62,300 (11.38)%
300 basis point rise ............................. 134,500 (29.73) 65,100 (7.40)
200 basis point rise ............................. 159,300 (16.77) 67,900 (3.41)
100 basis point rise ............................. 177,600 (7.21) 69,400 (1.28)
Base-rate scenario ............................... 191,400 70,300
100 basis point decline .......................... 201,200 5.12 70,800 .71
200 basis point decline .......................... 202,500 5.80 71,400 1.56
300 basis point decline .......................... 209,000 9.20 72,200 2.70
400 basis point decline .......................... 220,600 15.26 73,700 4.84
(1) Simulation analyses calculate the change in the net present value of the
Company's assets and liabilities, including debt and related financial
derivative instruments, under parallel shifts in interest rates by
discounting the estimated future cash flows using a market-based discount
rate. Cash flow estimates incorporate anticipated changes in prepayment
speeds and other embedded options.
(2) Simulation analyses calculate the change in net interest income under
parallel shifts in interest rates over the next twelve months, based upon a
static balance sheet, which includes debt and related financial derivative
instruments, and do not consider loan fees.
A-10
26
ACQUISITIONS
On September 15, 1999, the Company completed its acquisition of Mutual
Savings Bank, f.s.b. ("MSB"). On that date, MSB's assets and shareholders'
equity totaled approximately $580 million and $44 million, respectively.
Consideration consisted of 3.4 million shares of common stock (3.8 million
shares adjusted for stock dividends). The transaction was accounted for as a
"pooling of interests" and the Company's results of operations for 1999 and
1998 have been restated to include MSB's revenues and expenses. Charges relating
to the acquisition incurred during 1999 totaled approximately $8.0 million
before federal income tax.
On April 17, 1998, the Company purchased the outstanding capital stock of
First Home Financial, Inc. ("FHF"), an originator of manufactured home loans.
Aggregate consideration consisted of 80,000 shares of common stock (adjusted for
stock splits and dividends). Goodwill totaled approximately $2.0 million. FHF
operates as a subsidiary of one of the Banks and substantially all of the
loans originated by FHF are sold to non-affiliated banks and finance companies.
On June 12, 1998, one of the Banks purchased two branches from the former
Great Lakes National Bank. On that date, these offices had deposits totaling
$18.3 million and the Bank recorded an intangible asset of $1.3 million. The
Bank also purchased certain real and personal property and net cash proceeds
from the transaction totaled $16.2 million.
STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS
The Financial Accounting Standards Board adopted Statement of Financial
Accounting Standards, No. 133, "Accounting for Derivative Instruments and
Hedging Activities," ("SFAS #133") in June 1998. SFAS #133, which has been
subsequently amended by SFAS #137 and SFAS #138, requires companies to record
derivatives on the balance sheet as assets and liabilities measured at fair
value. The accounting for increases and decreases in the value of derivatives
will depend upon the use of derivatives and whether the derivatives will
qualify for hedge accounting. Management has evaluated the impact of SFAS #133
at January 1, 2001. As a result of its assessment, the majority of the Banks'
interest-rate derivatives will qualify for hedge accounting treatment.
DERIVATIVE FINANCIAL INSTRUMENTS December 31, 2000
Weighted
Average
Notional Maturity Book Fair Unrealized
Amount (in years) Value Value Gain (Loss)
- -------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
Fair Value Hedge - pay variable interest-rate swap agreements .... $111,000 6.5 $ (1,800) $ (1,800)
======== ===== ======== ======== ========
Cash Flow Hedge
Pay fixed interest-rate swap agreements ........................ $128,000 2.9 $ (1,031) $ (1,031)
Interest-rate collar agreements ................................ 10,000 2.9 $ 63 (122) (185)
-------- ----- -------- -------- --------
Total ....................................................... $138,000 2.9 $ 63 $ (1,153) $ (1,216)
======== ===== ======== ======== ========
No hedge designation
Pay variable interest-rate swap agreements ..................... $ 85,000 .4 $ 237 $ 236
Pay fixed interest-rate swap agreements ........................ 42,000 .9 73 73
Interest-rate cap agreements ................................... 48,500 1.4 $ 226 8 (218)
Interest-rate floor agreements ................................. 8,000 1.3 17 20 3
Interest-rate collar agreements ................................ 5,000 .1
-------- ----- -------- -------- --------
Total ....................................................... $188,500 0.8 $ 243 $ 338 $ 94
======== ===== ======== ======== ========
The $1.8 million unrealized loss on derivative instruments qualifying as
fair-value hedges will be offset by an unrealized gain on the fixed-rate debt
being hedged. On January 1, 2001, the Company recorded a transition adjustment
of $0.7 million, net of tax, in other comprehensive income for the unrealized
loss on $128.0 million of pay-fixed swaps qualifying as a cash-flow hedge. A
transition adjustment of $0.1 million, net of tax, was recorded in earnings for
the unrealized loss on $10.0 million of collars qualifying as a cash-flow hedge
and the $188.5 million of derivative instruments not qualifying as a hedge.
As permitted by SFAS #133, held to maturity security portfolios, with book
values and market values totaling $20.1 million, will be designated as available
for sale at January 1, 2001.
The Financial Accounting Standards Board has adopted Statement of Financial
Accounting Standards, No. 140, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities," ("SFAS #140"). SFAS #140,
which replaces SFAS #125, "Accounting for Transfers and Servicing of Financial
Asset and Extinguishments of Liabilities," ("SFAS #125"), revises the
standards for accounting for the securitization and other transfers of financial
assets and collateral. SFAS #140 also requires certain disclosures, but carries
over most of the provisions of SFAS #125. This statement is effective for fiscal
years ending after December 15, 2000, with earlier application not allowed and
is to be applied prospectively. The adoption of this statement is not expected
to have a material impact on the Company's financial statements.
A-11
27
SELECTED CONSOLIDATED FINANCIAL DATA
Year Ended December 31,
2000 1999 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands, except per share amounts)
SUMMARY OF OPERATIONS
Interest income ................................... $ 138,415 $ 125,510 $ 125,908 $ 119,911 $ 102,350
Interest expense .................................. 67,865 58,730 64,667 66,018 56,984
---------- ---------- ---------- ---------- ----------
Net interest income ............................. 70,550 66,780 61,241 53,893 45,366
Provision for loan losses ......................... 3,287 2,661 3,628 1,975 1,413
Net gains on the sale of real estate
mortgage loans .................................. 2,209 4,247 7,052 2,899 2,480
Other non-interest income ......................... 16,752 13,848 12,066 9,389 6,950
Merger-related charges and litigation
settlements ..................................... 8,000 9,650
Other non-interest expenses ....................... 58,949 62,252 59,726 51,152 42,365
---------- ---------- ---------- ---------- ----------
Income before federal income tax expense ........ 27,275 11,962 17,005 3,404 11,018
Federal income tax expense ........................ 7,266 3,293 5,056 1,935 3,239
---------- ---------- ---------- ---------- ----------
Net income ................................... $ 20,009 $ 8,669 $ 11,949 $ 1,469 $ 7,779
========== ========== ========== ========== ==========
PER COMMON SHARE DATA (1)
Income
Basic ........................................... $ 1.71 $ .73 $ 1.01 $ .13 $ .68
Diluted ......................................... 1.69 .72 1.00 .13 .67
Cash dividends declared ........................... .58 .43 .31 .28 .25
Book value ........................................ 11.05 9.64 9.82 8.90 8.91
SELECTED BALANCES
Assets ............................................ $1,783,791 $1,725,205 $1,660,893 $1,640,879 $1,564,307
Loans ............................................. 1,379,664 1,290,641 1,152,139 1,061,252 862,207
Allowance for loan losses ......................... 13,982 12,985 11,557 9,693 8,815
Deposits .......................................... 1,389,900 1,310,602 1,255,544 1,121,298 1,082,841
Shareholders' equity .............................. 128,336 113,746 117,042 104,625 103,367
Long-term debt .................................... 1,000 3,000 5,000 7,000
SELECTED RATIOS
Tax equivalent net interest income
to average earning assets ....................... 4.55% 4.47% 4.08% 3.66% 3.46%
Net income to
Average equity .................................. 16.59 7.26 10.72 1.37 7.80
Average assets .................................. 1.15 .52 .72 .09 .55
Average shareholders' equity to
average assets .................................. 6.92 7.16 6.76 6.69 7.06
Tier 1 leverage (tangible equity capital) ratio.... 7.26 6.52 6.65 6.11 6.40
Non-performing loans to Portfolio Loans ........... .51 .41 .59 .53 .50
(1) Per share data has been adjusted for three-for-two stock splits in 1998 and
1997 and 5% stock dividends in each of the years presented.
A-12
28
INDEPENDENT AUDITOR'S REPORT
Board of Directors and Shareholders
Independent Bank Corporation
Ionia, Michigan
We have audited the accompanying consolidated statements of financial
condition of Independent Bank Corporation and subsidiaries as of December 31,
2000 and 1999, and the related consolidated statements of operations,
shareholders' equity, comprehensive income, and cash flows for each of the years
in the three-year period ended December 31, 2000. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express our opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Independent
Bank Corporation and subsidiaries as of December 31, 2000 and 1999, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2000, in conformity with accounting
principles generally accepted in the United States of America.
/s/ KPMG LLP
KPMG LLP
Detroit, Michigan
February 1, 2001
A-13
29
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
December 31,
2000 1999
- -------------------------------------------------------------------------------------------------------------------------
(in thousands)
ASSETS
Cash and due from banks ............................................................... $ 58,149 $ 58,646
Securities available for sale ......................................................... 217,447 195,300
Securities held to maturity (fair value of $20.1 million at December 31, 2000 and
$70.5 million at December 31, 1999) ................................................. 20,098 71,115
Federal Home Loan Bank stock, at cost ................................................. 19,612 19,612
Loans held for sale ................................................................... 20,817 12,950
Loans
Commercial .......................................................................... 381,066 334,212
Real estate mortgage ................................................................ 772,223 757,019
Installment ......................................................................... 226,375 199,410
----------- -----------
Total Loans ........................................................................ 1,379,664 1,290,641
Allowance for loan losses ........................................................... (13,982) (12,985)
----------- -----------
Net Loans .......................................................................... 1,365,682 1,277,656
Property and equipment, net ........................................................... 34,757 37,582
Accrued income and other assets ....................................................... 47,229 52,344
----------- -----------
Total Assets ..................................................................... $ 1,783,791 $ 1,725,205
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Non-interest bearing ................................................................ $ 140,945 $ 135,868
Savings and NOW ..................................................................... 576,621 567,108
Time ................................................................................ 672,334 607,626
----------- -----------
Total Deposits ..................................................................... 1,389,900 1,310,602
Federal funds purchased ............................................................... 27,550 42,350
Other borrowings ...................................................................... 196,032 224,570
Guaranteed preferred beneficial interests in Company's subordinated debentures ........ 17,250 17,250
Accrued expenses and other liabilities ................................................ 24,723 16,687
----------- -----------
Total Liabilities .................................................................. 1,655,455 1,611,459
----------- -----------
Commitments and contingent liabilities
Shareholders' Equity
Preferred stock, no par value-200,000 shares authorized; none issued or
outstanding
Common stock, $1.00 par value-30,000,000 shares authorized;
issued and outstanding: 11,609,524 shares at December 31, 2000 and 11,235,088 shares
at December 31, 1999 ............................................................... 11,610 11,235
Capital surplus ..................................................................... 77,255 71,672
Retained earnings ................................................................... 37,544 33,921
Accumulated other comprehensive income (loss) ....................................... 1,927 (2,283)
Unearned employee stock ownership plan shares ....................................... (799)
----------- -----------
Total Shareholders' Equity ......................................................... 128,336 113,746
----------- -----------
Total Liabilities and Shareholders' Equity ....................................... $ 1,783,791 $ 1,725,205
=========== ===========
See notes to consolidated financial statements
A-14
30
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended December 31,
2000 1999 1998
- -------------------------------------------------------------------------------------------------------------------
(in thousands, except per share amounts)
INTEREST INCOME
Interest and fees on loans ................................... $ 120,702 $ 106,733 $ 102,227
Securities available for sale
Taxable .................................................... 7,625 6,680 8,849
Tax-exempt ................................................. 5,587 3,566 1,657
Securities held to maturity
Taxable .................................................... 2,335 6,127 10,433
Tax-exempt ................................................. 546 827 1,082
Other investments ............................................ 1,620 1,577 1,660
--------- --------- ---------
Total Interest Income ...................................... 138,415 125,510 125,908
--------- --------- ---------
INTEREST EXPENSE
Deposits ..................................................... 51,773 44,106 43,203
Other borrowings ............................................. 16,092 14,624 21,464
--------- --------- ---------
Total Interest Expense ..................................... 67,865 58,730 64,667
--------- --------- ---------
Net Interest Income ........................................ 70,550 66,780 61,241
Provision for loan losses ...................................... 3,287 2,661 3,628
--------- --------- ---------
Net Interest Income After Provision for Loan Losses ........ 67,263 64,119 57,613
--------- --------- ---------
NON-INTEREST INCOME
Service charges on deposit accounts .......................... 6,857 5,696 4,554
Net gains (losses) on asset sales
Real estate mortgage loans ................................. 2,209 4,247 7,052
Securities ................................................. 9 (912) 267
Other income ................................................. 9,886 8,292 7,245
--------- --------- ---------
Total Non-interest Income .................................. 18,961 17,323 19,118
--------- --------- ---------
NON-INTEREST EXPENSE
Salaries and employee benefits ............................... 33,513 34,289 32,349
Occupancy, net ............................................... 4,653 4,607 4,194
Furniture and fixtures ....................................... 4,382 4,230 3,659
Merger-related ............................................... 5,203
Settlement of lawsuit ........................................ 2,025
Other expenses ............................................... 16,401 19,126 19,524
--------- --------- ---------
Total Non-interest Expense ................................. 58,949 69,480 59,726
--------- --------- ---------
Income Before Federal Income Tax ........................... 27,275 11,962 17,005
Federal income tax expense ..................................... 7,266 3,293 5,056
--------- --------- ---------
Net Income ................................................ $ 20,009 $ 8,669 $ 11,949
========= ========= =========
Income per common share
Basic ........................................................ $ 1.71 $ .73 $ 1.01
========= ========= =========
Diluted ...................................................... $ 1.69 $ .72 $ 1.00
========= ========= =========
Cash dividends declared per common share ....................... $ .58 $ .43 $ .31
========= ========= =========
See notes to consolidated financial statements
A-15
31
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
2000 1999 1998
- ------------------------------------------------------------------------------------------------------------------------
(in thousands)
Net Income $ 20,009 $ 8,669 $ 11,949
--------- --------- ----------
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH
FROM OPERATING ACTIVITIES
Proceeds from sales of loans held for sale .............................. 155,999 275,364 507,944
Disbursements for loans held for sale ................................... (161,657) (238,368) (525,202)
Provision for loan losses ............................................... 3,287 2,661 3,628
Deferred federal income tax expense (credit) ............................ 937 913 (688)
Deferred loan fees ...................................................... (327) 443 163
Depreciation, amortization of intangible assets and premiums and
accretion of discounts on securities and loans ........................ 6,540 6,134 4,886
Net gains on sales of real estate mortgage loans ........................ (2,209) (4,247) (7,052)
Net (gains) losses on sales of securities ............................... (9) 912 (267)
(Increase) decrease in accrued income and other assets .................. 3,388 (6,133) (1,096)
Increase (decrease) in accrued expenses and other liabilities ........... 4,853 (109) (6,845)
--------- --------- ---------
Total Adjustments ..................................................... 10,802 37,570 (24,529)
--------- --------- ---------
Net Cash from Operating Activities .................................... 30,811 46,239 (12,580)
--------- --------- ---------
CASH FLOW FROM INVESTING ACTIVITIES
Proceeds from the sale of securities available for sale ................. 22,319 86,136 11,271
Proceeds from the maturity of securities available for sale ............. 2,065 35,045 28,973
Proceeds from the sale of securities held to maturity ................... 26,735
Proceeds from the maturity of securities held to maturity ............... 8,631 572,356 929,517
Principal payments on securities available for sale ..................... 8,991 16,628 20,579
Principal payments on securities held to maturity ....................... 43,318 5,690 1,723
Purchases of securities available for sale .............................. (49,903) (187,255) (31,257)
Purchases of securities held to maturity ................................ (500) (512,330) (850,057)
Portfolio loans made to customers, net of principal payments ............ (94,827) (142,250) (86,342)
Portfolio loans purchased ............................................... (18,916)
Principal payments on portfolio loans purchased ......................... 3,840 2,073 14,695
Acquisition of branch offices, less cash received ....................... 16,168
Acquisition of business ................................................. 1,459
Capital expenditures .................................................... (1,645) (6,542) (8,852)
--------- --------- ---------
Net Cash from Investing Activities .................................... (57,711) (103,714) 28,961
--------- --------- ---------
CASH FLOW FROM FINANCING ACTIVITIES
Net increase in total deposits .......................................... 79,298 55,058 125,308
Net increase (decrease) in other borrowings ............................. (33,778) 8,693 (52,686)
Proceeds from Federal Home Loan Bank advances ........................... 274,211 236,751 124,463
Payments of Federal Home Loan Bank advances ............................. (281,771) (228,423) (198,652)
Retirement of long-term debt ............................................ (2,000) (2,000) (2,000)
Dividends paid .......................................................... (6,615) (4,587) (3,587)
Repurchase of common stock .............................................. (3,674) (4,331)
Proceeds from issuance of common stock .................................. 732 1,017 948
--------- --------- ---------
Net Cash from Financing Activities .................................... 26,403 62,178 (6,206)
--------- --------- ---------
Net Increase (Decrease) in Cash and Cash Equivalents .................. (497) 4,703 10,175
Cash and Cash Equivalents at Beginning of Year ............................ 58,646 53,943 43,768
--------- --------- ---------
Cash and Cash Equivalents at End of Year ........................... $ 58,149 $ 58,646 $ 53,943
========= ========= =========
Cash paid during the year for
Interest ................................................................ $ 64,250 $ 58,627 $ 64,445
Income taxes ............................................................ 3,000 2,600 5,300
Transfer of loans to other real estate .................................... 3,051 1,534 1,151
See notes to consolidated financial statements
A-16
32
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Accumulated
Other
Compre- Unearned Total
Common Capital Retained hensive ESOP Shareholders'
Stock Surplus Earnings Income (Loss) Shares Equity
- -----------------------------------------------------------------------------------------------------------------------------------
(in thousands)
Balances at January 1, 1998 .................... $ 10,135 $ 53,443 $ 40,665 $ 1,385 $ (1,003) $104,625
Net income for 1998 ............................ 11,949 11,949
Cash dividends declared, $.31 per share ........ (3,688) (3,688)
5% stock dividend .............................. 514 9,759 (10,287) (14)
Issuance of 165,719 shares of common stock ..... 166 3,320 3,486
Cash in lieu of fractional shares for
three-for-two stock split .................... (13) (13)
Net change in unrealized gain on
securities available for sale, net of
$0.3 million of related tax effect ........... 596 596
ESOP loan guarantee payment and
valuation adjustment ......................... (103) 204 101
-------- -------- -------- -------- -------- --------
Balances at December 31, 1998 .................. 10,815 66,406 38,639 1,981 (799) 117,042
Net income for 1999 ............................ 8,669 8,669
Cash dividends declared, $.43 per share ........ (5,181) (5,181)
5% stock dividend .............................. 546 7,651 (8,206) (9)
Issuance of 142,774 shares of common stock ..... 143 1,725 1,868
Repurchase of 268,736 shares of
common stock ................................. (269) (4,062) (4,331)
Net change in unrealized gain on
securities available for sale, net of
$2.2 million of related tax effect ........... (4,264) (4,264)
ESOP loan valuation adjustment ................. (48) (48)
-------- -------- -------- -------- -------- --------
Balances at December 31, 1999 .................. 11,235 71,672 33,921 (2,283) (799) 113,746
Net income for 2000 ............................ 20,009 20,009
Cash dividends declared, $.58 per share ........ (6,791) (6,791)
5% stock dividend .............................. 557 9,089 (9,659) (13)
Issuance of 107,961 shares of common stock ..... 108 677 785
Repurchase of 223,264 shares of
common stock ................................. (223) (3,451) (3,674)
Net change in unrealized loss on
securities available for sale, net of
$2.2 million of related tax effect ........... 4,210 4,210
Retirement of ESOP shares ...................... (67) (732) 64 799 64
-------- -------- -------- -------- -------- --------
Balances at December 31, 2000 ............. $ 11,610 $ 77,255 $ 37,544 $ 1,927 $ 0 $128,336
======== ======== ======== ======== ======== ========
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
2000 1999 1998
- ---------------------------------------------------------------------------------------------------------------------
(in thousands)
Net income ...................................................................... $20,009 $ 8,669 $11,949
Other comprehensive income
Net change in unrealized gain (loss) on securities available for sale,
net of related tax effect ................................................... 4,210 (4,264) 596
------- ------- -------
Comprehensive Income ....................................................... $24,219 $ 4,405 $12,545
======= ======= =======
See notes to consolidated financial statements
A-17
33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies and practices of Independent Bank
Corporation and subsidiaries conform with accounting principles generally
accepted in the United States of America and prevailing practices within the
banking industry. The following summaries describe the significant accounting
and reporting policies that are employed in the preparation of the consolidated
financial statements.
The Banks transact business in the single industry of commercial banking. The
Banks' activities cover traditional phases of commercial banking, including
checking and savings accounts, commercial and agricultural lending, direct and
indirect consumer financing, mortgage lending and deposit box services. The
principal markets are the rural and suburban communities across lower Michigan
that are served by the Banks' branches and loan production offices. The
economies of these communities are relatively stable and reasonably diversified.
Subject to established underwriting criteria, the Banks also participate in
commercial lending transactions with certain non-affiliated banks and purchase
real estate mortgage loans from third-party originators. At December 31, 2000,
86% of the Banks' loan portfolios were secured by real estate.
Management is required to make estimates and assumptions in the preparation
of the financial statements which affect the amounts reported. Material
estimates that are particularly susceptible to changes in the near term relate
to the evaluation of the allowance for loan losses. While Management uses
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.
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include
the accounts of Independent Bank Corporation and its subsidiaries. The income,
expenses, assets and liabilities of the subsidiaries are included in the
respective accounts of the consolidated financial statements, after elimination
of all material intercompany accounts and transactions.
STATEMENTS OF CASH FLOWS - For purposes of reporting cash flows, cash and
cash equivalents include cash on hand, amounts due from banks, and federal funds
sold. Generally, federal funds are sold for one-day periods. The Company reports
net cash flows for customer loan and deposit transactions.
COMPREHENSIVE INCOME - Statement of Financial Accounting Standards, No. 130,
"Reporting Comprehensive Income," establishes standards for reporting
comprehensive income, which consists of unrealized gains and losses on
securities available for sale. The net change in unrealized gain or loss on
securities available for sale in 2000 and 1998 reflect net realized gains of
$9,000 and $0.3 million, respectively, and reflect net realized losses of $0.9
million in 1999. The reclassification of these amounts from comprehensive income
resulted in federal income tax expense of $3,000 and $0.1 million in 2000 and
1998, respectively and federal income tax benefit of $0.3 million in 1999.
LOANS HELD FOR SALE - Loans held for sale are carried at the lower of
aggregate amortized cost or market value. Lower of cost or market value
adjustments, as well as realized gains and losses, are recorded in current
earnings. The Banks recognize as separate assets the rights to service mortgage
loans for others. The fair value of originated mortgage servicing rights has
been determined based upon market value indications for similar servicing. These
mortgage servicing rights are amortized in proportion to and over the period of
estimated net loan servicing income. The Banks assess mortgage servicing rights
for impairment based on the fair value of those rights. For purposes of
measuring impairment, the characteristics used by the Banks include interest
rate, term and type.
SECURITIES - The Company classifies its securities as trading, held to
maturity or available for sale. Trading securities are bought and held
principally for the purpose of selling them in the near term and are reported at
fair value with realized and unrealized gains and losses included in earnings.
The Company does not have any trading securities. Securities held to maturity
represent those securities for which the Banks 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. Securities available for sale represent those securities not
classified as trading or held to maturity and are reported at fair value with
unrealized gains and losses, net of applicable income taxes reported in
comprehensive income. 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. Premiums and discounts are recognized in
interest income computed on the level-yield method.
LOAN REVENUE RECOGNITION - Interest on loans is accrued based on the
principal amounts outstanding. The accrual of interest income is discontinued
when a loan becomes 90 days past due and the borrower's capacity to repay the
loan and collateral values appear insufficient. A non-accrual loan may be
restored to accrual status when interest and principal payments are current and
the loan appears otherwise collectible.
Certain loan fees and direct loan origination costs, are deferred and
recognized as an adjustment of yield over the anticipated life of the related
loan. Fees received in connection with loan commitments are deferred until the
loan is advanced and are then recognized over the anticipated life of the loan
as an adjustment of yield. Fees on commitments that expire unused are recognized
at expiration. Fees received for a letter of credit are recognized as revenue
over its life.
A-18
34
ALLOWANCE FOR LOAN LOSSES - Some loans will not be repaid in full. Therefore,
an allowance for loan losses is maintained at a level which represents
Management's best estimate of losses incurred. In determining the allowance and
the related provision for loan losses, Management considers 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 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. Increases in the allowance are recorded by a provision for loan
losses charged to expense. Although Management periodically allocates portions
of the allowance to specific loans and loan portfolios, the entire allowance is
available for any losses which occur. Collection efforts may continue and
recoveries may occur after a loan is charged against the allowance.
The Company measures its 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. The Company does not measure impairment on homogenous
residential mortgage and installment loans.
PROPERTY AND EQUIPMENT - Property and equipment is stated at cost less
accumulated depreciation and amortization. Depreciation and amortization is
computed using both straight-line and accelerated methods over the estimated
useful lives of the related assets.
OTHER REAL ESTATE - Other real estate represents properties acquired through
foreclosure or by acceptance of a deed in lieu of foreclosure. The carrying
values of these properties are periodically evaluated and are adjusted to the
lower of cost or fair value minus estimated costs to sell. Other real estate and
repossessed assets totaling $2.2 million and $1.3 million at December 31, 2000
and 1999, respectively, are included in other assets.
INTANGIBLE ASSETS - Goodwill, which represents the excess of the purchase
price over the fair value of net tangible assets acquired, is amortized on a
straight-line basis over the period of expected benefit, generally 12 to 20
years. Goodwill totaled $7.6 million and $8.3 million as of December 31, 2000
and 1999, respectively. Other intangible assets, including core deposit
intangibles, are amortized using both straight-line and accelerated methods over
10 to 15 years. Other intangible assets amounted to $7.7 million and $8.7
million as of December 31, 2000 and 1999, respectively.
INCOME TAXES - The Company employs 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 the Company's 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.
The Company and its subsidiaries file a consolidated federal income tax
return. Intercompany tax liabilities are settled as if each subsidiary filed a
separate return.
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE - Securities sold under
agreements to repurchase are treated as debt and are reflected as a liability
in the consolidated statements of financial condition. The book value of
securities pledged to secure the repurchase agreements remains in the securities
portfolio.
DERIVATIVE FINANCIAL INSTRUMENTS - Derivative financial instruments are
employed to reduce the cost of certain liabilities as well as to manage
interest-rate risk. Such instruments include interest-rate swaps, collars,
floors and caps. These instruments are accounted for on an accrual basis. Any
net interest differential, including premiums paid, is recognized as an
adjustment to interest expense of the related liability. The Company considers
its interest-rate swaps to be synthetic alterations of the related liability
as long as (i) a specific liability has been designated; (ii) there is a high
correlation with the changes in interest expense generated by the liability; and
(iii) the notional amount is less than or equal to the principal amount of the
designated liability. If these criteria are not met, the swap is no longer
considered a synthetic alteration and changes in fair value are included in
other income in the financial statements. The criteria for consideration of a
collar, floor or cap as a synthetic alteration are similar to those for a swap
arrangement.
If a synthetic alteration is terminated before maturity, the net proceeds
received or paid are deferred and amortized as an adjustment to interest expense
over the shorter of the remaining contract life or the maturity of the
designated liability. If the designated liability is sold or matures, the
synthetic alteration is marked to market and the gain or loss is included with
the gain or loss on the sale/maturity of the designated liability.
COMMON STOCK - At December 31, 2000, 303,255 shares of common stock were
reserved for issuance under the dividend reinvestment plan and 1,163,043
shares of common stock were reserved for issuance under stock option plans.
RECLASSIFICATION - Certain amounts in the 1999 and 1998 financial statements
have been reclassified to conform with the 2000 presentation.
A-19
35
NOTE 2 - ACQUISITIONS
On September 15, 1999, the Company acquired Mutual Savings Bank, f.s.b,
("MSB"). On that date MSB's total assets and shareholders' equity totaled
approximately $580 million and $44 million, respectively. The Company issued 3.8
million shares of common stock in exchange for all the outstanding common stock
of MSB. The acquisition was accounted for as a pooling of interests and,
accordingly, the accompanying financial statements have been restated to include
the accounts and operations of MSB for all periods prior to the acquisition.
Separate results of operations of the combining entities as of December 31,
follow:
1999 1998
- ------------------------------------------------------------------------------------------
(in thousands)
Net interest income after provision for loan losses
Independent Bank Corporation ................................... $55,212 $46,190
Mutual Savings Bank, f.s.b.(1) ................................. 8,907 11,423
------- -------
Total ....................................................... $64,119 $57,613
======= =======
Net income
Independent Bank Corporation ................................... $ 7,035 $10,221
Mutual Savings Bank, f.s.b.(1)(2) .............................. 1,634 1,728
------- -------
Total ....................................................... $ 8,669 $11,949
======= =======
(1) Amounts are through the acquisition date of September 15, 1999.
(2) Federal income tax expense or benefit has been adjusted to reflect the
estimated tax expense or benefit that would have been recognized by Mutual
Savings Bank, f.s.b. if no deferred tax asset valuation allowance had been
recognized during the periods presented.
The Company recognized approximately $5.2 million in merger-related costs
relating to the acquisition of MSB, which are classified as such in the
financial statements. Such costs included data-processing and related costs,
legal and professional, severance and write-off of duplicate fixed assets. As of
December 31, 2000, all of these costs have been paid.
On April 17, 1998, the Company purchased the outstanding capital stock of
First Home Financial, Inc., an originator of manufactured home loans.
Aggregate consideration consisted of 80,000 shares of common stock. The assets
purchased and liabilities assumed have been recorded at fair value. Goodwill
totaled approximately $2.0 million and is being amortized over 15 years.
On June 12, 1998, one of the Banks purchased the real and personal property
and assumed the deposit liabilities associated with two offices of the former
Great Lakes National Bank. On that date, deposits totaled $18.3 million and the
Bank recorded an intangible asset of $1.3 million which is being amortized over
10 years. The assets purchased and the liabilities assumed have been recorded at
fair value.
NOTE 3 - RESTRICTIONS ON CASH AND DUE FROM BANKS
The Banks' legal reserve requirements were satisfied by average vault cash of
$13.9 million and $10.9 million during 2000 and 1999, respectively. The Banks do
not maintain compensating balances with correspondent banks.
NOTE 4 - SECURITIES
Securities available for sale consist of the following at December 31:
Amortized Unrealized Fair
Cost Gains Losses Value
- -----------------------------------------------------------------------------------------------------------------------------
(in thousands)
2000
U.S. Treasury ............................................ $ 302 $ 1 $ 303
U.S. Government agencies ................................. 2,000 $ 18 1,982
Mortgage-backed securities ............................... 50,505 949 109 51,345
Obligations of states and political subdivisions ......... 100,560 2,045 354 102,251
Other securities ......................................... 61,159 491 84 61,566
-------- -------- -------- --------
Total ................................................. $214,526 $ 3,486 $ 565 $217,447
======== ======== ======== ========
1999
U.S. Treasury ............................................ $ 303 $ 2 $ 301
U.S. Government agencies ................................. 1,970 $ 30 126 1,874
Mortgage-backed securities ............................... 55,148 824 326 55,646
Obligations of states and political subdivisions ......... 118,955 320 4,155 115,120
Other securities ......................................... 22,388 60 89 22,359
-------- -------- -------- --------
Total ................................................. $198,764 $ 1,234 $ 4,698 $195,300
======== ======== ======== ========
A-20
36
Securities held to maturity consist of the following at December 31:
Amortized Unrealized Fair
Cost Gains Losses Value
- -------------------------------------------------------------------------------------------------------------------------
(in thousands)
2000
Mortgage-backed securities ............................... $11,972 $ 1 $ 186 $11,787
Obligations of states and political subdivisions ......... 7,626 199 1 7,824
Other securities ......................................... 500 500
------- ------- ------- -------
Total ................................................. $20,098 $ 200 $ 187 $20,111
======= ======= ======= =======
1999
Mortgage-backed securities ............................... $59,467 $ 1 $ 865 $58,603
Obligations of states and political subdivisions ......... 11,148 236 1 11,383
Other securities ......................................... 500 500
------- ------- ------- -------
Total ................................................. $71,115 $ 237 $ 866 $70,486
======= ======= ======= =======
The amortized cost and fair value of securities at December 31, 2000, by
contractual maturity, follow. The actual maturity will differ from the
contractual maturity because issuers may have the right to call or prepay
obligations with or without call or prepayment penalties.
Available for Sale Held to Maturity
Amortized Fair Amortized Fair
Cost Value Cost Value
- ------------------------------------------------------------------------------------------------------------------------
(in thousands)
Maturing within one year ................................ $ 2,239 $ 2,241 $ 2,844 $ 2,862
Maturing after one year but within five years ........... 11,281 11,457 3,634 3,732
Maturing after five years but within ten years .......... 30,252 31,075 872 927
Maturing after ten years ................................ 101,902 103,021 276 303
-------- -------- -------- --------
145,674 147,794 7,626 7,824
Mortgage-backed securities .............................. 50,505 51,345 11,972 11,787
Other securities ........................................ 18,347 18,308 500 500
-------- -------- -------- --------
Total .............................................. $214,526 $217,447 $ 20,098 $ 20,111
======== ======== ======== ========
A summary of proceeds from the sale of securities and realized gains and
losses follows:
Realized
Proceeds Gains Losses
- ----------------------------------------------------------------------
(in thousands)
2000 ........................ $ 22,319 $ 94 $ 85
1999 ........................ 112,871 23 935
1998 ........................ 11,271 267
During 1999, proceeds from the sale of securities held to maturity totaled
approximately $26.7 million and are included in the table above. Such sales
occurred in conjunction with the acquisition of MSB to address its interest-rate
risk position.
Securities with a book value of $34.6 million and $56.4 million at December
31, 2000 and 1999, respectively, were pledged to secure public deposits and for
other purposes as required by law.
There were no investment obligations of state and political subdivisions that
were payable from or secured by the same source of revenue or taxing authority
that exceeded 10% of consolidated shareholders' equity at December 31, 2000 or
1999.
A-21
37
NOTE 5 - LOANS
An analysis of the allowance for loan losses for the years ended December
31 follows:
2000 1999 1998
- ----------------------------------------------------------------------------------------------------
(in thousands)
Balance at beginning of period .................... $ 12,985 $ 11,557 $ 9,639
Provision charged to operating expense .......... 3,287 2,661 3,628
Recoveries credited to allowance ................ 678 746 655
Loans charged against allowance ................. (2,968) (1,979) (2,365)
-------- -------- --------
Balance at end of period .......................... $ 13,982 $ 12,985 $ 11,557
======== ======== ========
Loans are presented net of deferred fees of $1.7 million at December 31,
2000, and $2.0 million at December 31, 1999.
Loans on non-accrual status, 90 days or more past due and still accruing
interest, or restructured amounted to $7.0 million, $5.3 million and $6.8
million at December 31, 2000, 1999 and 1998, respectively. If these loans had
continued to accrue interest in accordance with their original terms,
approximately $0.5 million, $0.6 million, and $0.6 million of interest income
would have been realized in 2000, 1999 and 1998, respectively. Interest income
realized on these loans was approximately $0.2 million, $0.3 million and $0.2
million in 2000, 1999 and 1998, respectively.
Impaired loans totaled approximately $3.7 million, $3.4 million and $4.0
million at December 31, 2000, 1999 and 1998, respectively. The Banks' average
investment in impaired loans was approximately $3.7 million, $3.3 million and
$4.3 million in 2000, 1999 and 1998, respectively. Cash receipts on impaired
loans on non-accrual status are generally applied to the principal balance.
Interest income recognized on impaired loans was approximately $0.2 million in
2000, 1999 and 1998. Certain impaired loans with a balance of approximately $0.3
million, $1.2 million and $1.8 million had specific allocations of the allowance
for loan losses totaling approximately $0.1 million, $0.4 million and $0.3
million at December 31, 2000, 1999 and 1998, respectively.
The Banks capitalized approximately $1.0 million, $2.0 million and $3.5
million of servicing rights relating to loans that were originated and sold
during the years ended December 31, 2000, 1999 and 1998, respectively.
Amortization of capitalized servicing rights during those years was $1.1
million, $1.2 million and $1.0 million, respectively. The book value of
capitalized mortgage servicing rights was $4.6 million at December 31, 2000.
The fair value of capitalized servicing rights at that same date was
approximately $5.3 million, and therefore, no valuation allowance was considered
necessary. The capitalized servicing rights relate to approximately $804.1
million of loans sold and serviced at December 31, 2000.
At December 31, 2000, 1999 and 1998, the Banks serviced loans totaling $995.0
million, $995.3 million and $905.2 million, respectively, for the benefit of
third parties.
NOTE 6 - PROPERTY AND EQUIPMENT
A summary of property and equipment at December 31 follows:
2000 1999
- -------------------------------------------------------------------------------------
(in thousands)
Land ........................................................ $ 5,781 $ 5,663
Buildings ................................................... 32,972 32,152
Equipment ................................................... 27,840 24,969
-------- --------
66,593 62,784
Accumulated depreciation and amortization ................... (31,836) (25,202)
-------- --------
Property and equipment, net ............................ $ 34,757 $ 37,582
======== ========
NOTE 7 - DEPOSITS
A summary of interest expense on deposits for the years ended December 31
follows:
2000 1999 1998
- ----------------------------------------------------------------------------------------------------
(in thousands)
Savings and NOW ........................................... $14,800 $13,704 $13,912
Time deposits under $100,000 .............................. 21,444 22,227 24,415
Time deposits of $100,000 or more ......................... 15,529 8,175 4,876
------- ------- -------
Total ................................................ $51,773 $44,106 $43,203
======= ======= =======
Aggregate certificates of deposit and other time deposits in denominations of
$100,000 or more amounted to $278.0 million, $182.1 million, and $117.3 million
at December 31, 2000, 1999 and 1998, respectively.
A-22
38
A summary of the maturity of certificates of deposit at December 31, 2000
follows:
(in thousands)
2001 ............................................................. $403,757
2002 ............................................................. 105,807
2003 ............................................................. 32,737
2004 ............................................................. 21,014
2005 ............................................................. 33,041
2006 and thereafter .............................................. 75,978
--------
Total ....................................................... $672,334
========
NOTE 8 - OTHER BORROWINGS
A summary of other borrowings at December 31 follows:
2000 1999
- ------------------------------------------------------------------------------------------------
(in thousands)
Advances from Federal Home Loan Bank ......................... $183,088 $190,648
Repurchase agreements ........................................ 20,000
Notes payable ................................................ 11,500 12,500
U.S. Treasury demand notes ................................... 1,414 1,380
Other ........................................................ 30 42
-------- --------
Total ................................................... $196,032 $224,570
======== ========
Advances from the Federal Home Loan Bank ("FHLB") are secured by the Banks'
unencumbered qualifying mortgage loans as well as U.S. Treasury and government
agency securities equal to at least 145% of outstanding advances. Advances are
also secured by FHLB stock owned by the Banks. Interest expense on advances
amounted to $11.3 million, $9.0 million and $14.0 million for the years ending
December 31, 2000, 1999 and 1998, respectively.
As members of the FHLB, the Banks must own FHLB stock equal to the greater of
1.0% of the unpaid principal balance of residential mortgage loans or 5.0% of
its outstanding advances. At December 31, 2000, the Banks were in compliance
with the FHLB stock ownership requirements.
Certain fixed-rate advances have provisions that allow the FHLB to convert
the advance to an adjustable rate prior to stated maturity. At December 31,
2000, advances totaling $10 million, with a stated maturity in 2008, are
convertible in 2003.
The maturity and weighted average interest rates of FHLB advances at
December 31 follow:
2000 1999
Amount Rate Amount Rate
- ---------------------------------------------------------------------------------------------------------
(dollars in thousands)
Fixed-rate advances
2000 .................................. $ 84,580 6.11%
2001 .................................. $ 13,230 6.28% 3,230 5.90
2002 .................................. 2,770 6.87 10,000 5.65
2003 .................................. 9,515 5.36 9,515 5.36
2005 .................................. 1,100 5.72
2006 and thereafter ................... 42,128 6.55 24,267 5.95
-------- ---- -------- ----
Total fixed-rate advances ........... 68,743 6.33 131,592 5.98
-------- ---- -------- ----
Variable-rate advances
2000 .................................. 59,056 4.63
2001 .................................. 114,345 6.69
-------- ---- -------- ----
Total variable-rate advances ........ 114,345 6.69 59,056 4.63
-------- ---- -------- ----
Total advances ..................... $183,088 6.55% $190,648 5.56%
======== ==== ======== ====
Repurchase agreements are secured by mortgage-backed securities with a book
value of approximately $20.7 million at December 31, 1999. There were no
repurchase agreements outstanding at December 31, 2000.
Repurchase agreements averaged $3.3 million and $40.8 million during 2000 and
1999, respectively. The maximum amounts outstanding at any month end during 2000
and 1999 were $20.0 million and $45.0 million, respectively. Interest expense on
repurchase agreements totaled $0.2 million, $2.4 million and $3.9 million for
the years ending 2000, 1999 and 1998, respectively.
The Company has established a $25.0 million unsecured credit facility
comprised of a $10.0 million five-year term loan, payable in equal quarterly
installments and a $15.0 million revolving credit agreement. At December 31,
2000, the term note and the revolving credit facility had unpaid principal
balances of $1.0 million and $10.5 million, respectively. The term note and the
revolving credit facility accrue interest at LIBOR, plus 1.00% and federal
funds, plus .75%, respectively. The term note will mature in 2001.
A-23
39
NOTE 9 - GUARANTEED PREFERRED BENEFICIAL INTERESTS
IN COMPANY'S SUBORDINATED DEBENTURES
IBC Capital Finance, a trust subsidiary of the Company, has issued and
outstanding, 690,000 shares of cumulative trust preferred securities
("Preferred Securities") with a liquidation preference of $25 per security. The
preferred securities represent an interest in the Company's subordinated
debentures, which have terms that are similar to the Preferred Securities.
Distributions on the securities are payable quarterly at the annual rate of
9.25% of the liquidation preference and are included in interest expense in the
consolidated financial statements.
The Preferred Securities are subject to mandatory redemption at the
liquidation preference, in whole or in part, upon repayment of the subordinated
debentures at maturity or their earlier redemption. The subordinated debentures
are redeemable prior to the maturity date of December 31, 2026, at the option of
the Company on or after December 31, 2001, in whole at any time or in part from
time to time. The subordinated debentures are also redeemable at any time, in
whole, but not in part, upon the occurrence of specific events defined within
the trust indenture. The Company has the option to defer distributions on the
subordinated debentures from time to time for a period not to exceed 20
consecutive quarters.
NOTE 10 - COMMITMENTS AND CONTINGENT LIABILITIES
The Company and the Banks are routinely engaged in legal proceedings and
regulatory matters that have occurred in the ordinary course of business and do
not involve amounts in the aggregate that are believed by Management to be
material to the financial condition of the Company.
During 1999 the Company settled a lawsuit against MSB for $2.0 million. This
amount was charged against net income during 1999. The lawsuit represented
actions by shareholders of MSB which alleged certain violations of federal and
state securities laws.
NOTE 11 - EARNINGS PER SHARE
A reconciliation of basic and diluted earnings per share for the years ended
December 31 follows:
2000 1999 1998
- -------------------------------------------------------------------------------------------------------------------------
(in thousands, except per share amounts)
Net income ................................................................... $ 20,009 $ 8,669 $ 11,949
======== ======== ========
Shares outstanding(1) ........................................................ 11,735 11,988 11,878
ESOP shares not committed to be released ................................... (34) (44)
-------- -------- --------
Shares outstanding for calculation of basic earnings per share ........... 11,735 11,954 11,834
Effect of stock options .................................................... 98 131 165
-------- -------- --------
Shares outstanding for calculation of diluted earnings per share(1) ...... 11,833 12,085 11,999
======== ======== ========
Earning per share
Basic ...................................................................... $ 1.71 $ .73 $ 1.01
======== ======== ========
Diluted .................................................................... $ 1.69 $ .72 $ 1.00
======== ======== ========
(1) Shares outstanding have been adjusted for a three-for-two stock split in
1998 and 5% stock dividends in each year.
NOTE 12 - FEDERAL INCOME TAX
The composition of federal income tax expense for the years ended December
31 follows:
2000 1999 1998
- --------------------------------------------------------------------------------------------
(in thousands)
Current ....................................... $ 6,329 $ 2,380 $ 5,744
Deferred ...................................... 937 913 (688)
------- ------- -------
Federal income tax expense ............... $ 7,266 $ 3,293 $ 5,056
======= ======= =======
A reconciliation of federal income tax expense to the amount computed by
applying the statutory federal income tax rate of 35% in 2000, 1999 and 1998 to
income before federal income tax for the years ended December 31 follows:
2000 1999 1998
- -------------------------------------------------------------------------------------------------------------
(in thousands)
Statutory rate applied to income before federal income tax ........ $ 9,546 $ 4,187 $ 5,952
Tax-exempt interest income ........................................ (2,318) (1,506) (961)
Amortization of goodwill .......................................... 262 265 270
Non-deductible costs .............................................. 466
Other, net ........................................................ (224) (119) (205)
------- ------- -------
Federal income tax expense ................................... $ 7,266 $ 3,293 $ 5,056
======= ======= =======
A-24
40
The deferred federal income tax expense of $0.9 million in both 2000 and
1999, and the deferred federal income tax benefit of $0.7 million in 1998,
resulted from the tax effect of temporary differences. There was no impact for
changes in tax laws and rates or changes in the valuation allowance for deferred
tax assets.
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:
2000 1999
- --------------------------------------------------------------------------------------------------------
(in thousands)
Deferred tax assets
Net operating loss carryforward ....................................... $10,219 $10,707
Allowance for loan losses ............................................. 4,893 3,967
Deferred compensation ................................................. 601 695
Deferred credit life premiums ......................................... 388 117
Purchase discounts .................................................... 225 462
Unrealized loss on securities available for sale ...................... 1,180
Alternative minimum tax credit carryforward ........................... 617
Other ................................................................. 429 736
------- -------
Gross deferred tax assets ........................................... 16,755 18,481
------- -------
Deferred tax liabilities
Mortgage servicing rights ............................................. 1,606 1,569
Unrealized gain on securities available for sale ...................... 994
Deferred loan fees .................................................... 854 342
Fixed assets .......................................................... 244 402
------- -------
Gross deferred tax liabilities ...................................... 3,698 2,313
------- -------
Net deferred tax assets ............................................ $13,057 $16,168
======= =======
At December 31, 2000, the Company had a net operating loss ("NOL")
carryforward of approximately $29.2 million which, if not used against taxable
income, will expire as follows:
(in thousands)
2004 ...................................................................... $ 2,136
2007 ...................................................................... 164
2008 ...................................................................... 15,260
2009 ...................................................................... 81
2010 ...................................................................... 6,779
2011 ...................................................................... 929
2012 ...................................................................... 411
2018 ...................................................................... 3,437
-------
Total ................................................................ $29,197
=======
The use of the $29.2 million NOL carryforward, which was acquired from MSB,
is limited to $2.9 million per year as the result of a change in control as
defined in the Internal Revenue Code.
Management believes that the tax benefits associated with the deferred tax
assets will more likely than not be realized, and therefore no valuation
allowance is considered necessary.
A-25
41
NOTE 13 - EMPLOYEE BENEFIT PLANS
The Company maintains stock option plans for its non-employee directors as
well as certain officers of the Company and the Banks. An aggregate of 1,461,000
shares of common stock has been authorized for issuance under the plans. Options
that were granted under these plans are exercisable not earlier than one year
after the date of grant, at a price equal to the fair market value of the common
stock on the date of grant, and expire not more than ten years after the date of
grant.
The Company has elected to provide pro forma disclosures for its net income
and earnings per share as if it had adopted the fair value accounting method for
stock-based compensation.
The per share weighted-average fair value of stock options was obtained using
the Black Scholes options pricing model. A summary of the assumptions used and
values obtained follows:
2000 1999 1998
- ----------------------------------------------------------------------------------------------------
Expected dividend yield .................................. 4.46% 3.35% 1.98%
Risk-free interest rate .................................. 6.22 5.04 5.65
Expected life (in years) ................................. 10 5 5
Expected volatility ...................................... 10.48% 15.52% 23.78%
Per share weighted-average fair value .................... $ 5.98 $ 4.01 $ 5.83
The Company applies APB Opinion No. 25 in accounting for its plans and,
accordingly, no compensation cost has been recognized for its stock options.
The following table summarizes the impact on the Company's net income had
compensation cost included the fair value of options at the grant date:
2000 1999 1998
- -------------------------------------------------------------------------------------------------
(in thousands, except per share amounts)
Net income
As reported ...................................... $ 20,009 $ 8,669 $ 11,949
Pro-forma ........................................ 19,236 8,353 11,424
Income per share
Basic
As reported .................................... $ 1.71 $ .73 $ 1.01
Pro-forma ...................................... 1.64 .70 .97
Diluted
As reported .................................... $ 1.69 $ .72 $ 1.00
Pro-forma ...................................... 1.63 .69 .95
A summary of outstanding stock option grants and transactions follows:
Number Average
of Exercise
Shares Price
- ------------------------------------------------------------------------------------------------------
Outstanding at January 1, 1998 ....................................... 569,213 $10.78
Granted ............................................................ 138,636 20.55
Exercised .......................................................... (45,220) 6.52
-------- ------
Outstanding at December 31, 1998 ..................................... 662,629 13.11
Granted ............................................................ 121,063 15.19
Exercised .......................................................... (94,376) 5.89
-------- ------
Outstanding at December 31, 1999 ..................................... 689,316 14.47
Granted ............................................................ 198,024 12.58
Exercised .......................................................... (129,451) 7.08
Forfeited .......................................................... (27,949) 20.63
-------- ------
Outstanding at December 31, 2000 ..................................... 729,940 $14.93
======== ======
A-26
42
A summary of stock options outstanding at December 31, 2000 follows:
Options Outstanding Options Exercisable
-------------------------------- -------------------------------
Weighted-Average Weighted-Average
Number ----------------------- Number ---------------------
of Remaining Exercise of Remaining Exercise
Range of Exercise Prices Shares Life (years) Price Shares Life (years) Price
- --------------------------------------------------------------------------------------------------------------------------------
$4.82 to $6.52 ...................................... 42,838 3.44 $ 5.61 42,838 3.44 $ 5.61
$9.85 to $10.01 ...................................... 78,042 2.24 9.93 78,042 2.24 9.93
$12.38 to $13.04 ..................................... 198,024 9.22 12.58
$14.17 to $15.19 ..................................... 236,900 3.60 14.75 236,900 3.60 14.75
$21.83 to $22.75 ..................................... 174,136 2.87 22.39 174,136 2.87 22.39
------- ---- ----- ------- ---- -----
729,940 4.79 $14.93 531,916 3.15 $15.81
======= ==== ====== ======= ==== ======
The Company maintains 401(k) and employee stock ownership plans covering
substantially all full-time employees of the Company and its subsidiaries. The
Company matches employee contributions to the 401(k) up to a maximum of 3% of
participating employees' eligible wages. At December 31, 2000, the Company is
in the process of combining the employee stock ownership plan of MSB ("MSB
ESOP") with the Company's plan. The combination of these plans is dependent upon
the receipt of a favorable determination by the Internal Revenue Service, which
is expected to be received during 2001. During 2000, the outstanding loan
balance of the MSB ESOP, which was shown as a reduction to shareholders' equity
at December 31, 1999 was retired. Contributions to the employee stock ownership
plan are determined annually and require approval of the Company's Board of
Directors. During 2000, 1999 and 1998, $1.9 million, $1.4 million and $1.6
million respectively, was expensed for these retirement plans.
Officers of the Company and its subsidiaries participate in various
performance-based compensation plans. Prior to 1999, the Company maintained the
Incentive Share Grant Plan which provided that the Board of Directors, at its
sole discretion, could award restricted shares of common stock to the
participants in the Management Incentive Compensation Plan in lieu of cash
bonuses. The market value of such incentive shares at the date of grant was
equal to twice the amount of the cash incentive otherwise payable. The
Incentive Share Grant plan was terminated during 1999 in favor of cash incentive
payments and stock option grants. Amounts expensed for all incentive plans
totaled $2.0 million, $1.9 million, and $1.9 million, in 2000, 1999 and 1998,
respectively.
Substantially all salaried employees of MSB were covered by the
multi-employer Financial Institutions Retirement Fund ("FIRF"). Effective
January 1, 2000, MSB withdrew as a participant in the FIRF and all employees
became 100% vested. As of June 30, 1999, the aggregate market value of the
assets held by the FIRF exceeded the value of the vested benefits.
There was no pension expense or required contribution for 1999 or 1998
pursuant to the FIRF. The FIRF does not segregate the assets, liabilities or
costs by participating employer. Significant actuarial assumptions include a
5.5% rate of compensation increase for 1999 and 1998. The return on assets held
by the FIRF and the weighted-average discount rate was 8% in 1999 and 1998.
The Company also provides certain health care and life insurance programs to
substantially all full-time employees. These insurance programs are available to
retired employees at their expense.
A-27
43
NOTE 14 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
In the normal course of business, the Banks 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, standby letters of credit and
interest-rate derivatives. Financial instruments involve varying degrees of
credit and interest-rate risk in excess of amounts reflected in the consolidated
balance sheets. 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. Management does 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:
2000 1999
----------------------------------------
(dollars in thousands)
Financial instruments whose risk is represented by contract amounts
Commitments to extend credit ......................................... $ 141,964 $ 134,103
Standby letters of credit ............................................ 26,841 26,518
Interest-rate derivative financial instruments
Interest-rate cap agreements
Notional amount .................................................... $ 48,500 $ 29,000
Strike(1) .......................................................... 7.23% 6.51%
Weighted-average maturity (in years) ............................... 1.4 4.0
Amortized cost ..................................................... $ 226 $ 792
Fair value ......................................................... 8 900
Interest-rate floor agreements
Notional amount .................................................... $ 8,000 $ 8,000
Strike(1) .......................................................... 5.17% 5.17%
Weighted-average maturity (in years) ............................... 1.3 2.3
Amortized cost ..................................................... $ 17 $ 27
Fair value ......................................................... 20 9
Interest-rate collar agreements
Notional amount .................................................... $ 15,000 $ 7,000
Cap strike(1) ...................................................... 7.11% 6.38%
Floor strike(1) .................................................... 5.92 5.75
Weighted-average maturity (in years) ............................... 2.0 1.0
Amortized cost ..................................................... $ 63
Fair value ......................................................... (122) $ 13
Interest-rate swap agreements (pay fixed)
Notional amount .................................................... $ 170,000 $ 69,500
Weighted-average rate paying ....................................... 6.14% 5.51%
Weighted-average rate receiving..................................... 6.62 6.10
Weighted-average maturity (in years) ............................... 2.4 2.7
Fair value ......................................................... $ (958) $ 1,485
Interest-rate swap agreements (pay variable)
Notional amount .................................................... $ 196,000 $ 81,000
Weighted-average rate paying ....................................... 6.62% 5.96%
Weighted-average rate receiving .................................... 6.82 6.40
Weighted-average maturity (in years) ............................... 3.9 7.4
Fair value ......................................................... $ (1,563) $ (2,446)
(1) The index used for the strike price is 3 or 6 month LIBOR.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and generally require payment of a fee. Since commitments may expire without
being drawn upon, the commitment amounts do not represent future cash
requirements. Commitments are issued subject to similar underwriting standards,
including collateral requirements, as are generally involved in the extension
of credit facilities.
Standby letters of credit are written conditional commitments issued to
guarantee the performance of a customer to a third party. The credit risk
involved in such transactions is essentially the same as that involved in
extending loan facilities and, accordingly, standby letters of credit are issued
subject to similar underwriting standards, including collateral requirements, as
are generally involved in the extension of credit facilities.
A-28
44
NOTE 15 - RELATED PARTY TRANSACTIONS
Certain directors and executive officers of the Company and the Banks,
including companies in which they are officers or have significant ownership,
were loan customers of the Banks during 2000 and 1999.
A summary of loans to directors and executive officers whose borrowing
relationship exceeds $60,000, and to entities in which they own a 10% or more
voting interest for the years ended December 31 follows:
2000 1999
----------------------
(in thousands)
Balance at beginning of period ........................ $16,829 $ 13,872
New loans and advances .............................. 9,823 16,099
Repayments .......................................... (9,061) (13,142)
------- --------
Balance at end of period .............................. $17,591 $ 16,829
======= ========
NOTE 16 - OTHER NON-INTEREST EXPENSES
Other non-interest expenses for the years ended December 31 follow:
2000 1999 1998
-------------------------------------
(in thousands)
Data processing ..................................... $ 2,467 $ 3,356 $ 2,912
Advertising ......................................... 2,129 2,545 2,176
Communications ...................................... 2,128 2,257 2,160
Amortization of intangible assets ................... 1,728 1,742 1,692
Supplies ............................................ 1,530 1,661 1,431
Loan and collection ................................. 1,463 1,348 1,554
FDIC insurance ...................................... 285 1,392 1,410
Other ............................................... 4,671 4,825 6,189
------- ------- -------
Total non-interest expense ..................... $16,401 $19,126 $19,524
======= ======= =======
NOTE 17 - REGULATORY MATTERS
Capital guidelines adopted by Federal and State regulatory agencies and
restrictions imposed by law limit the amount of cash dividends the Banks can pay
to the Company. At December 31, 2000, using the most restrictive of these
conditions for each Bank, the aggregate cash dividends that the Banks can pay
the Company without prior approval was $52.0 million. It is not the intent of
Management to have dividends paid in amounts which would reduce the capital of
the Banks to levels below those which are considered prudent by Management and
in accordance with guidelines of regulatory authorities.
The Company and the Banks are also subject to various regulatory capital
requirements. Quantitative measures established by regulation to ensure
capital adequacy require minimum amounts and ratios of total and Tier 1 capital
to risk-weighted assets and Tier 1 capital to average assets. Failure to meet
minimum capital requirements can initiate certain mandatory, and possibly
discretionary, actions by regulators that could have a material effect on the
Company's financial statements. Under capital adequacy guidelines, the Company
and the Banks must meet specific capital requirements that involve quantita-
tive measures as well as qualitative judgments by the regulators.
A-29
45
Actual capital amounts and ratios for the Company and the Banks at
December 31, 2000 follow:
Minimum Ratio Minimum Ratio
Actual for Adequately for Well-Capitalized
Amount Ratio Capitalized Institutions Institutions
------------------ ------------------------ --------------------
(dollars in thousands)
Total capital to risk-weighted assets
Consolidated .......................... $141,795 10.74% 8.00% 10.00%
Independent Bank ...................... 34,614 10.29 8.00 10.00
Independent Bank West Michigan ........ 27,445 10.24 8.00 10.00
Independent Bank South Michigan ....... 17,364 10.35 8.00 10.00
Independent Bank East Michigan ........ 23,227 10.42 8.00 10.00
Independent Bank MSB .................. 32,809 10.64 8.00 10.00
Tier 1 capital to risk-weighted assets
Consolidated .......................... $127,813 9.68% 4.00% 6.00%
Independent Bank ...................... 31,008 9.22 4.00 6.00
Independent Bank West Michigan ........ 24,093 8.99 4.00 6.00
Independent Bank South Michigan ....... 15,265 9.10 4.00 6.00
Independent Bank East Michigan ........ 20,866 9.36 4.00 6.00
Independent Bank MSB .................. 30,410 9.86 4.00 6.00
Tier 1 capital to average assets
Consolidated .......................... $127,813 7.31% 4.00% 5.00%
Independent Bank ...................... 31,008 7.32 4.00 5.00
Independent Bank West Michigan ........ 24,093 6.96 4.00 5.00
Independent Bank South Michigan ....... 15,265 7.20 4.00 5.00
Independent Bank East Michigan ........ 20,866 6.85 4.00 5.00
Independent Bank MSB .................. 30,410 6.81 4.00 5.00
NOTE 18 - FAIR VALUES OF FINANCIAL INSTRUMENTS
Most of the Company's assets and liabilities are considered financial
instruments. Many of these financial instruments lack an available trading
market and it is the Company's general practice and intent to hold the majority
of its financial instruments to maturity. Significant estimates and assumptions
were used to determine the fair value of financial instruments. These esti-
mates are subjective in nature, involving uncertainties and matters of judgment,
and therefore, fair values cannot be determined with precision. Changes in
assumptions could significantly affect the estimates.
Estimated fair values have been determined using available data and
methodologies that are considered suitable for each category of financial
instrument. For instruments with adjustable-interest rates which reprice
frequently and without significant credit risk, it is presumed that estimated
fair values approximate the recorded book balances.
Financial instrument assets actively traded in a secondary market, such as
securities, have been valued using quoted market prices while recorded book
balances have been used for cash and due from banks.
The fair value of loans is calculated by discounting estimated future cash
flows using estimated market discount rates that reflect credit and
interest-rate risk inherent in the loans.
Financial instruments with a stated maturity, such as certificates of
deposit, have been valued based on the discounted value of contractual cash
flows using a discount rate approximating current market rates for liabilities
with a similar maturity.
Financial instrument liabilities without a stated maturity, such as demand
deposits, savings, NOW and money market accounts, have a fair value equal to the
amount payable on demand.
A-30
46
The estimated fair values and recorded book balances at December 31 follow:
2000 1999
Estimated Recorded Estimated Recorded
Fair Book Fair Book
Value Balance Value Balance
- ----------------------------------------------------------------------------------------------------------------
(in thousands)
ASSETS
Cash and due from banks ........................... $ 58,100 $ 58,100 $ 58,600 $ 58,600
Securities available for sale ..................... 217,400 217,400 195,300 195,300
Securities held to maturity ....................... 20,100 20,100 70,500 71,100
Net loans and loans held for sale ................. 1,402,800 1,386,500 1,267,000 1,290,600
LIABILITIES
Deposits with no stated maturity .................. $ 717,600 $ 717,600 $ 703,000 $ 703,000
Deposits with stated maturity ..................... 673,400 672,300 604,200 607,600
Other borrowings .................................. 243,000 240,800 281,200 284,200
The fair values for commitments to extend credit and standby letters of
credit are estimated to approximate their aggregate book balance.
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
substantial 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.
A-31
47
NOTE 19 - OPERATING SEGMENTS
The Company's reportable segments are based upon legal entities. The Company
has five reportable segments: Independent Bank ("IB"), Independent Bank West
Michigan ("IBWM"), Independent Bank South Michigan ("IBSM"), Independent Bank
East Michigan ("IBEM") and Independent Bank MSB ("IBMSB"). The accounting
policies of the segments are the same as those described in Note 1 to the
Consolidated Financial Statements. The Company evaluates performance based
principally on net income of the respective reportable segments.
A summary of selected financial information for the Company's reportable
segments follows:
IB IBWM IBSM IBEM IBMSB Other(1) Total
- --------------------------------------------------------------------------------------------------------------------------------
(in thousands)
2000
Total assets .................... $446,383 $353,556 $213,014 $313,536 $451,901 $ 5,401 $1,783,791
Interest income ................. 34,607 30,074 17,206 23,369 33,134 25 138,415
Net interest income ............. 19,844 17,542 9,590 13,297 12,758 (2,481) 70,550
Provision for loan losses ....... 1,395 540 380 480 492 3,287
Income (loss) before
income tax .................... 8,786 8,225 4,306 5,036 5,025 (4,103) 27,275
Net income (loss) ............... 6,252 5,644 3,252 3,930 3,852 (2,921) 20,009
1999
Total assets .................... $410,744 $323,847 $196,665 $308,733 $475,475 $ 9,741 $1,725,205
Interest income ................. 29,039 25,958 13,562 20,470 36,456 25 125,510
Net interest income ............. 17,740 16,182 8,203 12,495 14,311 (2,151) 66,780
Provision for loan losses ....... 600 540 220 615 686 2,661
Income (loss) before
income tax .................... 6,573 6,069 3,074 3,944 (4,104) (3,594) 11,962
Net income (loss) ............... 4,640 4,198 2,345 3,040 (2,966) (2,588) 8,669
1998
Total assets .................... $361,936 $276,385 $174,396 $268,559 $575,635 $ 3,982 $1,660,893
Interest income ................. 28,439 24,825 13,764 19,012 39,835 33 125,908
Net interest income ............. 17,022 15,107 8,010 11,428 12,008 (2,334) 61,241
Provision for loan losses ....... 940 1,050 340 713 585 3,628
Income (loss) before
income tax .................... 6,363 5,456 3,019 3,276 2,658 (3,767) 17,005
Net income (loss) ............... 4,401 3,814 2,205 2,397 1,728 (2,596) 11,949
(1) Includes amounts relating to the Company and certain insignificant
operations.
NOTE 20 - INDEPENDENT BANK CORPORATION (PARENT COMPANY ONLY)
FINANCIAL INFORMATION
Presented below are condensed financial statements for the parent company.
CONDENSED STATEMENTS OF FINANCIAL CONDITION
December 31,
2000 1999
- -----------------------------------------------------------------------------------
(in thousands)
ASSETS
Cash and due from banks ............................ $ 7,496 $ 2,268
Investment in subsidiaries ......................... 147,210 137,810
Other assets ....................................... 6,771 7,157
-------- --------
Total Assets .................................... $161,477 $147,235
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Notes payable ...................................... $ 11,500 $ 12,500
Subordinated debentures ............................ 17,783 17,783
Other liabilities .................................. 3,858 3,206
Shareholders' equity ............................... 128,336 113,746
-------- --------
Total Liabilities and Shareholders' Equity ...... $161,477 $147,235
======== ========
A-32
48
CONDENSED STATEMENTS OF OPERATIONS
Year Ended December 31,
2000 1999 1998
---------------------------------------
(in thousands)
OPERATING INCOME
Dividends from subsidiaries ............................................ $15,400 $ 9,100 $ 8,175
Management fees from subsidiaries and other income ..................... 12,905 10,242 8,444
------- ------- -------
Total Operating Income ............................................... 28,305 19,342 16,619
------- ------- -------
OPERATING EXPENSES
Interest expense ....................................................... 2,506 2,176 2,367
Administrative and other expenses ...................................... 14,281 12,078 9,962
------- ------- -------
Total Operating Expenses ............................................. 16,787 14,254 12,329
------- ------- -------
Income Before Federal Income Tax and Undistributed Net Income
of Subsidiaries ..................................................... 11,518 5,088 4,290
Federal income tax credit ................................................ 1,175 1,209 1,289
------- ------- -------
Income Before Equity in Undistributed Net Income of Subsidiaries ..... 12,693 6,297 5,579
Equity in undistributed net income of subsidiaries ....................... 7,316 2,372 6,370
------- ------- -------
Net Income .......................................................... $20,009 $ 8,669 $11,949
======= ======= =======
CONDENSED STATEMENTS OF CASH FLOWS
Year Ended December 31,
2000 1999 1998
-----------------------------------------
(in thousands)
Net Income ............................................................... $ 20,009 $ 8,669 $11,949
-------- ------- -------
ADJUSTMENTS TO RECONCILE NET INCOME
TO NET CASH FROM OPERATING ACTIVITIES
Depreciation, amortization of intangible assets and premiums,
and accretion of discounts on securities and loans ................... 977 787 540
(Increase) decrease in other assets .................................... 2,150 993 (559)
Increase in other liabilities .......................................... 581 213 2,975
Equity in undistributed net income of subsidiaries ..................... (7,316) (2,372) (6,370)
-------- ------- -------
Total Adjustments .................................................... (3,608) (379) (3,414)
-------- ------- -------
Net Cash from Operating Activities ................................... 16,401 8,290 8,535
-------- ------- -------
CASH FLOW FROM INVESTING ACTIVITIES
Purchase of securities available for sale .............................. (100)
Maturity of securities available for sale .............................. 100
Capital expenditures ................................................... (616) (2,264) (2,264)
Investment in subsidiaries ............................................. (3,383)
-------- ------- -------
Net Cash from Investing Activities ................................... (616) (2,164) (5,747)
-------- ------- -------
CASH FLOW FROM FINANCING ACTIVITIES
Proceeds from short-term borrowings .................................... 1,000 4,500
Retirement of long-term debt ........................................... (2,000) (2,000) (2,000)
Dividends paid ......................................................... (6,615) (4,587) (3,587)
Repurchase of common stock ............................................. (3,674) (4,331)
Proceeds from issuance of common stock ................................. 732 1,017 948
-------- ------- -------
Net Cash from Financing Activities ................................... (10,557) (5,401) (4,639)
-------- ------- -------
Net Increase (Decrease) in Cash and Cash Equivalents ................. 5,228 725 (1,851)
Cash and Cash Equivalents at Beginning of Year ........................... 2,268 1,543 3,394
-------- ------- -------
Cash and Cash Equivalents at End of Year ............................ $ 7,496 $ 2,268 $ 1,543
======== ======= =======
A-33
49
QUARTERLY SUMMARY
Reported Sale Prices of Common Shares
2000 1999 Cash Dividends
------------------------- -------------------------- Declared
High Low Close High Low Close 2000 1999
First quarter .................... $13.81 $9.89 $12.14 $19.16 $14.06 $14.46 $ .14 $ .09
Second quarter ................... 13.81 11.90 12.91 15.82 13.10 15.76 .14 .09
Third quarter .................... 18.29 12.80 16.34 16.32 13.38 13.89 .14 .13
Fourth quarter ................... 19.88 15.75 19.75 16.49 12.14 13.93 .15 .13
The Company has approximately 2,300 holders of record of its common stock.
The common stock trades on the Nasdaq stock market 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 the Company
is not aware.
In addition to the provisions of the Michigan Business Corporation Act, the
Company's ability to pay dividends is limited by its ability to obtain funds
from the Banks and by regulatory capital guidelines applicable to the Company.
(See Note 17 to the Consolidated Financial Statements.)
QUARTERLY FINANCIAL DATA (UNAUDITED)
A summary of selected quarterly results of operations for the years ended
December 31 follows:
Three Months Ended
March June September December
31, 30, 30, 31,
----------------------------------------------------
(in thousands, except per share amounts)
2000
Interest income ..................................... $33,005 $34,136 $35,464 $35,810
Net interest income ................................. 17,158 17,556 17,896 17,940
Provision for loan losses ........................... 557 1,392 657 681
Income before income tax expense .................... 6,034 6,227 7,508 7,506
Net income .......................................... 4,486 4,636 5,459 5,428
Income per share
Basic ............................................. $ .38 $ .39 $ .46 $ .46
Diluted ........................................... .38 .39 .46 .46
1999
Interest income ..................................... $30,779 $30,894 $31,764 $32,073
Net interest income ................................. 16,176 16,552 17,139 16,913
Merger-related charges and litigation settlement .... 6,743 1,257
Provision for loan losses ........................... 666 655 645 695
Income (loss) before income tax expense (benefit) ... 4,667 4,978 (1,564) 3,881
Net income (loss) ................................... 3,271 3,501 (1,179) 3,076
Income (loss) per share
Basic ............................................. $ .27 $ .29 $ (.10) $ .26
Diluted ........................................... .27 .29 (.10) .26
A-34
50
SHAREHOLDER INFORMATION
HOW TO ORDER FORM 10-K
Shareholders may obtain, without charge, a copy of Form 10-K, the 2000
Annual Report to the Securities and Exchange Commission, by writing to the Chief
Financial Officer, Independent Bank Corporation, P.O. Box 491, Ionia, Michigan
48846 or by e-mail at info@ibcp.com.
PRESS RELEASES
The Company's press releases, including earnings and dividend announcements
as well as other financial information, are available on the Company's website
at www.ibcp.com.
NOTICE OF ANNUAL MEETING
The Company's Annual Meeting of Shareholders will be held at 3:00 p.m. on
April 17, 2001, in the Ionia Theater located at 205 West Main Street, Ionia,
Michigan, 48846.
TRANSFER AGENT AND REGISTRAR
State Street Bank & Trust Company (c/o EquiServe, P.O. Box 8200, Boston,
Massachusetts 02266-8200, #800/4265523, www.equiserve.com) serves as transfer
agent and registrar of the Company's common stock.
DIVIDEND REINVESTMENT
The Company maintains an Automatic Dividend Reinvestment and Stock Purchase
Plan which provides an opportunity for shareholders of record to reinvest cash
dividends into the Company's common stock. Optional cash purchases up to $5,000
per quarter are also permitted. A prospectus is available by writing to the
Company's Chief Financial Officer.
EXECUTIVE OFFICERS AND DIRECTORS
EXECUTIVE OFFICERS
Charles C. Van Loan, President and Chief Executive Officer, Independent
Bank Corporation
Ronald L. Long, President and Chief Executive Officer, Independent Bank
East Michigan
Michael M. Magee, Jr., President and Chief Executive Officer,
Independent Bank
David C. Reglin, President and Chief Executive Officer Independent Bank
West Michigan
Robert N. Shuster, President and Chief Executive Officer, Independent
Bank MSB
Edward B. Swanson, President and Chief Executive Officer Independent
Bank South Michigan
William R. Kohls, Executive Vice President and Chief Financial Officer,
Independent Bank Corporation
Richard E. Butler, Senior Vice President, Independent Bank Corporation
Peter R. Graves, Senior Vice President, Independent Bank Corporation
DIRECTORS
Keith E. Bazaire, Retired, former President, Carter's Food Center, Inc,
Retail Grocer, Charlotte
Jeffrey A. Bratsburg, Retired, former President and Chief Executive
Officer, Independent Bank West Michigan
Terry L. Haske, President, Ricker & Haske, CPA.s, P.C., Marlette
Robert L. Hetzler, President, Monitor Sugar Company Food Processor, Bay
City
Thomas F Kohn, Chief Executive Officer Belco Industries, Inc,
Manufacturer, Belding
Robert J. Leppink, President, Leppink's Inc, Retail Grocer, Belding
Charles A. Palmer, Professor of Law, Thomas M. Cooley Law School,
Lansing
Charles C. Van Loan, President and Chief Executive Officer, Independent
Bank Corporation, Ionia
Arch V Wright, Jr., President, Charlevoix Development Company Real
Estate Development, Charlevoix
A-35
51
Independent Bank Corporation
P.O. Box 491, 230 West Main Street
Ionia, Michigan 48846
616-527-9450 INPCO-PS-01
52
INDEPENDENT BANK CORPORATION
230 WEST MAIN STREET, IONIA, MICHIGAN
PROXY SOLICITED BY THE BOARD OF DIRECTORS FOR THE
ANNUAL MEETING OF SHAREHOLDERS TO BE HELD APRIL 17, 2001
The undersigned hereby appoints Arch V. Wright, Jr. and William R. Kohls and
each of them, Proxies, with power of substitution, to vote all shares of common
stock of Independent Bank Corporation, which the undersigned is entitled to
vote at the Annual Meeting of Shareholders to be held at the Ionia Theater,
located at 205 West Main Street, Ionia, Michigan 48846 on Tuesday, April 17,
2001 at 3:00 p.m. (local time), and at all adjournments thereof, as directed on
the reverse side.
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED HEREIN
BY THE UNDERSIGNED SHAREHOLDER(S). IF NO DIRECTION IS MADE, THIS PROXY WILL BE
VOTED "FOR" THE NOMINEES AS DIRECTORS.
- --------------------------------------------------------------------------------
PLEASE VOTE, DATE AND SIGN ON REVERSE AND RETURN PROMPTLY IN THE ENCLOSED
ENVELOPE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Please sign this Proxy exactly as your name(s) appear(s) hereon. Joint owners
should each sign personally. Trustees and other fiduciaries should indicate the
capacity in which they sign, and where more than one name appears, a majority
must sign. If a corporation, this signature should be that of an authorized
officer who should state his or her title.
- --------------------------------------------------------------------------------
HAS YOUR ADDRESS CHANGED? DO YOU HAVE ANY COMMENTS?
- ------------------------------------- ---------------------------------------
- ------------------------------------- ---------------------------------------
- ------------------------------------- ---------------------------------------
INDEPENDENT BANK CORPORATION
Dear Shareholder,
Please take note of the important information enclosed with this Proxy. Your
vote counts, and you are strongly encouraged to exercise your right to vote
your shares.
Mark the boxes on this proxy card to indicate how your shares will be voted.
Then sign the card, detach it and return your proxy vote in the enclosed
postage paid envelope. If you wish to register your vote by touch-tone
telephone or the Internet see the reverse side for instructions.
Your vote must be received prior to the Annual Meeting of Shareholders to be
held April 17, 2001.
Thank you in advance for your prompt consideration of these matters.
Sincerely,
The Board of Directors
INDEPENDENT BANK CORPORATION
53
/X/ PLEASE MARK VOTES
AS IN THIS EXAMPLE
- -------------------------------------------------------------------------------
INDEPENDENT BANK CORPORATION
- -------------------------------------------------------------------------------
CONTROL NUMBER:
RECORD DATE SHARES:
----------------------------------
Please be sure to sign and date this Proxy. | Date
- -------------------------------------------------------------------------------
|
|
|
|
- -------------------Shareholder sign here------------Co-owner sign here---------
For All With- For All
1. Election of three Directors for terms expiring in Nominees hold Except
2004.
/ / / / / /
(01) Jeffrey A. Bratsburg
(02) Charles A. Palmer
(03) Charles C. Van Loan
NOTE: If you do not wish to vote "For" a particular nominee, mark the "For
All Except" box and strike a line through the name(s) of the nominee(s). Your
shares will be voted for the remaining nominee(s).
2. To transact such other business that may properly come before the meeting or
at any adjournment thereof.
Mark box at right if an address change or comment has been noted on the / /
reverse side of this card
DETACH CARD
VOTE BY TELEPHONE
It's fast, convenient, and immediate!
Call Toll-Free on a Touch-Tone Phone
FOLLOW THESE FOUR EASY STEPS:
- -------------------------------------------------------------------------------
1. READ THE ACCOMPANYING PROXY STATEMENT AND PROXY CARD.
2. CALL THE TOLL-FREE NUMBER
1-877-PRX-VOTE (1-877-779-8683).
THERE IS NO CHARGE FOR THIS CALL.
3. ENTER YOUR CONTROL NUMBER LOCATED ON YOUR PROXY CARD.
4. FOLLOW THE RECORDED INSTRUCTIONS.
- -------------------------------------------------------------------------------
YOUR VOTE IS IMPORTANT!
CALL 1-877-PRX-VOTE anytime!
DETACH CARD
VOTE BY INTERNET
It's fast, convenient, and your vote is immediately confirmed and posted.
FOLLOW THESE FOUR EASY STEPS:
- -------------------------------------------------------------------------------
1. READ THE ACCOMPANYING PROXY STATEMENT AND PROXY CARD.
2. GO TO THE WEBSITE
http://www.eproxyvote.com/ibcp
3. ENTER YOUR CONTROL NUMBER LOCATED ON YOUR PROXY CARD.
4. FOLLOW THE INSTRUCTION PROVIDED.
- -------------------------------------------------------------------------------
YOUR VOTE IS IMPORTANT!
Go to http://www.eproxyvote.com/ibcp anytime!
DO NOT RETURN YOUR PROXY CARD IF YOU ARE VOTING BY TELEPHONE OR INTERNET