SCHEDULE 14A
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 Section 240.14a-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 15, 2002
Dear Shareholder:
We invite you to attend the 2002 Annual Meeting of Shareholders. This
year's meeting will be held on Tuesday, April 16, 2002, 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 Van Loan
Charles Van Loan
President and
Chief Executive Officer
INDEPENDENT BANK CORPORATION
230 West Main Street
Ionia, Michigan 48846
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
To Be Held April 16, 2002
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 16, 2002, at 3:00 p.m. (local time) for the following purposes:
1. To elect two nominees to the Board of Directors to serve
three-year terms expiring in 2005.
2. To consider and vote upon the approval of the Company's
Long-Term Incentive Plan.
3. 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 15, 2002, 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/ Robert N. Shuster
Robert N. Shuster
Secretary
Dated: March 15, 2002
INDEPENDENT BANK CORPORATION
230 West Main Street
Ionia, Michigan 48846
PROXY STATEMENT
March 15, 2002
This Proxy Statement is furnished in connection with the solicitation,
beginning approximately March 15, 2002, 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 16, 2002, 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 and for the proposal to
approve the Company's Long-Term Incentive Plan.
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 15, 2002, the record date for the Annual Meeting, the
Company had issued and outstanding 11,750,007 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 15, 2002, 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 724,052 6.01%
$1 par value Employee Stock Ownership Trust ("ESOT")
230 West Main Street
Ionia, Michigan 48846
1
The ESOT holds shares of Common Stock pursuant to the terms of the
Company's Employee Stock Ownership Plan ("ESOP"). U.S. Bank 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 Robert N. Shuster, 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.
ELECTION OF DIRECTORS
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. 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 until
April 16, 2002, and at eight members thereafter. Terry L. Haske and Thomas F.
Kohn are nominees to serve three-year terms ending in 2005. Each nominee is an
incumbent director. Mr. Bazaire, the Company's current chairman, will retire as
of this year's annual meeting. At this time the Board has elected not to
nominate a replacement, rather it elected to reduce the size of the Board from
nine members to eight.
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 15, 2002, 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 two 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.
2
Amount and
Nature of
Beneficial Percent of
Ownership(1) Outstanding
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NOMINEES FOR THREE-YEAR TERMS EXPIRING IN 2005
Terry L. Haske (age 53) 24,733(2) .21%
Mr. Haske is the President of Ricker & Haske, CPAs, P.C.
He became a Director in 1996.
Thomas F. Kohn (age 69) 32,013 .27
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 57)
Mr. Hetzler is the President of Monitor Sugar Company 12,818 .11
(food processor). He became a Director in 2000.
Robert J. Leppink (age 69) 61,328 .51
Mr. Leppink is the President of Leppink's, Inc.
(retail grocer). He became a Director in 1980.
Arch V. Wright, Jr. (age 69) 65,470 .54
Mr. Wright is the President of Charlevoix Development Company
(real estate development). He became a Director in 1974.
DIRECTORS WHOSE TERMS EXPIRE IN 2004
Jeffrey A. Bratsburg (age 58) 82,788 .69
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 57) 53,089 .44
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 54) 156,825(3) 1.30
Mr. Van Loan is the President and Chief Executive Officer of
Independent Bank Corporation. He became a Director in 1992.
(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 2,836 shares owned jointly with Mr. Haske's father with
respect to which Mr. Haske shares voting and investment power.
(3) Includes 22,350 shares allocated to Mr. Van Loan's account under the
ESOT. Also includes 5,423 shares held by Mr. Van Loan's dependent
children.
3
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 2001. During 2001, 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, Hetzler,
Kohn, Leppink, Palmer and Wright) met two times in 2001 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 Leppink,
Palmer, Hetzler, Haske, Bazaire, Kohn, Bratsburg, Van Loan and Wright) met once
in 2001 to consider and approve candidates to serve as directors of the
Company's subsidiary banks (the "Banks"). Although nominees to serve as
directors of the Company have been selected from individuals serving as
directors of the Banks, the committee will consider other 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 2003 Annual Meeting of Shareholders. Such recommendations
must be received no earlier than January 16, 2003, and no later than February
15, 2003.
The audit committee consists of directors Haske, Bazaire, Hetzler, and
Wright, each of whom qualifies as an independent director under the current
listing standards of the NASD. The committee met five times in 2001 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.
Last year, the Board of Directors adopted revisions to the written
charter for the Company's audit committee. A copy of that charter, as revised,
is included as Exhibit A to this Proxy Statement.
On March 1, 2002, 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, 2001.
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, 2001.
TERRY L. HASKE KEITH E. BAZAIRE
ROBERT L. HETZLER ARCH V. WRIGHT, JR.
PROPOSAL TO APPROVE THE INDEPENDENT BANK CORPORATION
LONG-TERM INCENTIVE PLAN
On January 21, 2002, the Board of Directors adopted the Independent
Bank Corporation Long-Term Incentive Plan (the "Plan"), subject to approval by
the Company's shareholders. If approved, the Plan will succeed the Company's
Employee Stock Option Plan and the Company's Non-employee Director Stock Option
Plan. Only 196,907 shares remain available for issuance for options not yet
granted under these plans. To date, 715,544 shares have been issued as the
result of prior option grants, and 698,272 shares are subject to outstanding but
unexercised options under these plans. The Plan allows the grant of equity-based
compensation awards to key employees of the Company and its subsidiaries, as
well as directors and consultants. As of the close of business on February 27,
2002, the closing sale price of the Company's Common Stock was $27.94. The
following summary of the Plan is subject to the specific provisions contained in
the complete text of the Plan set forth in Appendix B to this Proxy Statement.
4
PURPOSE. The purpose of the Plan is to promote the long-term success of
the Company for the benefit of its shareholders, through stock-based
compensation, by aligning the personal interests of Plan participants with those
of its shareholders. The Plan is designed to allow directors and key employees
of the Company and its subsidiaries, as well as selected consultants, to
participate in the Company's future, as well as to enable the Company to
attract, retain, and reward such individuals.
ADMINISTRATION. The Plan will be administered by the Personnel
Committee of the Board of Directors (the "Committee"). The Committee is composed
of six directors, each of whom is not an employee of the Company. The Committee
has the authority to select participants to whom Awards may be awarded; the type
of Awards (or combination thereof) to be granted; the number of shares of Common
Stock to be covered by each Award; and the terms and conditions of any Award.
The Plan provides for the granting of a variety of stock-based Awards,
described in more detail below, such as Stock Options, including Incentive Stock
Options, as defined in Section 422 of the Internal Revenue Code of 1986, as
amended (the "Code"), Reload Options, Stock Appreciation Rights, Restricted
Stock, Performance Shares, and other Stock-Based Awards. The term of the Plan is
ten (10) years; no Awards may be granted under the Plan after April 1, 2012.
TYPES OF AWARDS. The following types of Awards may be granted under the
Plan:
An "Option" is a contractual right to purchase a number of shares at a
price determined at the date the Option is granted. Options include Incentive
Stock Options, as defined in Section 422 of the Code, as well as Nonqualified
Stock Options. The exercise price included in both Incentive Stock Options and
Nonqualified Stock Options must equal at least 100% of the fair market value of
the stock at the date of grant. Awards of certain Options may also include
Reload Options. A Reload Option is an Option to purchase shares equal to the
number of shares of Common Stock delivered in payment of the exercise price
(including, in the discretion of the Committee, the number of shares tendered to
the Company to satisfy any withholding tax liability arising upon exercise) and
is deemed to be granted upon such delivery without further action by the
Committee. A Reload Option is subject to the same terms as the original option,
including the original term of the Option; however, the exercise price of the
Reload Option must equal the fair market value of the Company's stock on the
date of grant of the Reload Option.
A "Stock Appreciation Right" is an Award of the right to receive stock
or cash of an equivalent value in an amount equal to the difference between the
price specified in the Stock Appreciation Right and the prevailing market price
of the Company's stock at the time of exercise. Stock Appreciation Rights may be
granted only in tandem with Options.
"Restricted Stock" are shares of Common Stock granted for no or nominal
consideration. Title to the shares passes to the participant at the time of the
grant; however, the ability to sell or otherwise dispose of the shares is
subject to restrictions and conditions determined by the Committee.
"Performance Shares" are an Award of the right to receive stock or cash
of an equivalent value at the end of the specified performance period upon the
attainment of specified performance goals.
An "Other Stock-Based Award" is any other Award that may be granted
under the Plan that is valued in whole or in part by reference to or is payable
in or otherwise based on Common Stock.
SHARES SUBJECT TO PLAN. The Company has reserved 575,000 shares of its
Common Stock for use under the Plan. The shares to be offered under the Plan
will be authorized and unissued shares, including shares acquired by the
Company. The number of shares that may be issued under the Plan are subject to
adjustments in the event of a merger, reorganization, consolidation,
recapitalization, dividend (other than ordinary cash dividends), stock splits,
or other change in corporate structure affecting the Common Stock. In addition,
shares from the following sources are added to the number of shares available
for issuance under the Plan, (i) shares surrendered in payment of the exercise
price of options or to pay any tax withholding obligations incurred upon
exercise, (ii) options withheld to pay the exercise price or tax withholding
obligations incurred upon exercise, and (iii) the number of shares repurchased
by the Company in the open market or otherwise having an aggregate purchase
price no greater than the cash proceeds received by the Company from the sale of
shares under the Plan. The Plan prohibits the award of more than 20 percent of
Plan shares to any one participant. In addition, not more than 15 percent of
Plan shares may be issued as restricted stock.
TERMINATION OR AMENDMENT OF THE PLAN. The Board may at any time amend,
discontinue, or terminate all or any part of this Plan; however, unless
otherwise required by law, after shareholder approval, the rights of a
participant may not be impaired without the consent of such participant. In
addition, without the approval of the Company's shareholders, no amendment may
be made which would (i) increase the aggregate number of shares of Common Stock
that may be issued under the Plan (except for the replenishment provisions of
the Plan), (ii) extend the maximum option period under the Plan, or (iii)
decrease the exercise price of any Option to less than 100% of the fair market
value on the date of grant.
ELIGIBILITY. Key employees of the Company and its subsidiaries,
directors of the Company and its subsidiaries, as well as consultants, are
eligible to be granted Awards under the Plan. Eligibility is determined by the
Committee. At present, no persons have been granted Awards or are otherwise
participating in the Plan. It is not possible to predict the number or identity
of future participants or, except as set forth in the Plan, to describe the
restrictions that may be included in Award agreements.
5
PARTICIPATION AND ASSIGNABILITY. Generally, no Award, Option, or other
benefit payable under the Plan may, except as otherwise specifically provided by
law, be subject in any manner to assignment, transfer, or encumbrance. However,
Nonqualified Stock Options may be transferred without consideration to (i) an
immediate family member of the participant, (ii) a trust for the benefit of a
participant or an immediate family member of the participant, or (iii) a
partnership or limited liability company whose only partners or members are the
participant and/or immediate family members, if the option holder satisfies
certain conditions as may be required by the Committee. Neither the Plan nor any
Award agreement granted under the Plan entitles any participant to any right to
continued employment or service by the Company or any subsidiary.
FEDERAL TAX CONSEQUENCES. The following summarizes the consequences of
the grant and acquisition of Awards under the Plan for federal income tax
purposes, based on management's understanding of existing federal income tax
laws. This summary is necessarily general in nature and does not purport to be
complete. Also, State and local income tax consequences are not discussed, and
may vary from locality to locality.
OPTIONS. Plan participants will not recognize taxable income at the
time an Option is granted under the Plan unless the Option has a readily
ascertainable market value at the time of grant. Management understands that
Options to be granted under the Plan will not have a readily ascertainable
market value; therefore, income will not be recognized by participants before
the time of exercise of an Option. For Nonqualified Stock Options, the
difference between the fair market value of the shares at the time an Option is
exercised and the Option price generally will be treated as ordinary income to
the optionee, in which case the Company will be entitled to a deduction equal to
the amount of the optionee's ordinary income.
With respect to Incentive Stock Options (ISOs), participants will not
realize income for federal income tax purposes as a result of the exercise of
such Options. In addition, if the shares acquired as a result of the exercise of
an ISO are disposed of more than two years after the date the Option is granted
and more than one year after the date the Option was exercised, the entire gain,
if any, realized upon disposition of those shares will be treated for federal
income tax purposes as capital gain. Under these circumstances, no deduction
will be allowable to the Company as the result of either the grant or exercise
of an ISO. Exceptions to the general rules apply in the case of a "disqualifying
disposition." If a participant disposes of the shares acquired pursuant to the
exercise of an ISO before the expiration of one year after the date of exercise
or two years after the date of grant, the sale will be treated as a
"disqualifying disposition." As a result, the participant would recognize
ordinary income, and the Company would be entitled to a deduction in the year in
which the disposition occurred.
The amount of the deduction and the ordinary income recognized upon a
disqualifying disposition would generally be equal to the lesser of: (a) the
sale price of the shares sold minus the exercise price, or (b) the fair market
value of the shares at the time of exercise and minus the exercise price. If the
disposition is to a related party (such as a spouse, brother, sister, lienal
descendant, or certain trusts for business entities in which the seller holds a
direct or indirect interest), the ordinary income recognized generally is equal
to the excess of the fair market value of the shares at the time of exercise
over the exercise price. Any additional gain recognized upon disposition, in
excess of the ordinary income, would be taxable as capital gain. In addition,
the exercise of ISOs may result in an alternative minimum tax liability.
RELOAD STOCK OPTIONS. Participants will recognize no income on the
grant of any Reload Option. The tax consequences to the participant and the
Company are the same as that for a Nonqualified Stock Option.
STOCK APPRECIATION RIGHTS. Upon the grant of a Stock Appreciation
Right, the participant will realize no taxable income and the Company will
receive no deduction. A participant will realize income at the time of exercise
if the Award becomes vested and is no longer subject to forfeiture and the
participant is entitled to receive the value of the Award. The Company will
receive a deduction of an equal amount in the same year the participant
recognizes income.
RESTRICTED STOCK. Recipients of shares of Restricted Stock that are not
"transferable" and are subject to "substantial risk of forfeiture" at the time
of grant will not be subject to federal income taxes until the lapse or release
of the restrictions or sale of the shares, unless the recipient files a specific
election under the Code to be taxed at the time of grant. The recipient's income
and the Company's deduction will be equal to the excess of the then fair market
value (or sale price) of the shares less any purchase price.
PERFORMANCE SHARES. Participants are not taxed upon the grant of
Performance Shares. Upon receipt of the underlying shares or cash, a participant
will be taxed at ordinary income tax rates (subject to withholding) on the
amount of cash received and/or the current fair market value of stock received,
and the Company will be entitled to a corresponding deduction. The participant's
basis in any Performance Shares received will be equal to the amount of ordinary
income on which he or she was taxed and, upon subsequent disposition, any gain
or loss will be capital gain or loss.
6
REQUIRED VOTE FOR APPROVAL. The affirmative vote of a majority of the
Company's Common Stock voted at the Annual Meeting, by person or by proxy, is
required to approve the Plan. While broker nonvotes will not be treated as votes
cast on the approval of this Plan, shares voted as abstentions will be counted
as votes cast. Since a majority of the votes cast is required for approval, the
sum of any negative votes and abstentions will necessitate offsetting
affirmative votes to assure approval. Unless otherwise directed by marking the
accompanying proxy, the proxy holders named therein will vote FOR the approval
of the Plan.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE APPROVAL OF THE
PROPOSED PLAN.
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 $2,000 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 2001, each
Non-employee Director received an option to purchase 4,307 shares of Common
Stock at $19.04 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 "Purchase Plan"). The Purchase 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.
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 Purchase 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.
7
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, 2001. The
following information is based on an investment of $100 on January 1, 1997, in
the Common Stock, the Nasdaq Stock Market Index and the Nasdaq Bank Stocks
Index, with dividends reinvested.
December 31,
January 1, --------------------------------------------------------------------
1997 1997 1998 1999 2000 2001
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Independent Bank Corporation................. $100.00 $191.52 $152.72 $118.33 $172.88 $261.16
Nasdaq Stock Market.......................... 100.00 122.48 172.68 320.89 193.01 153.15
Nasdaq Bank Stocks........................... 100.00 167.41 166.33 159.89 182.38 197.44
[GRAPH]
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 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 Banks' respective board of directors. The base salaries of other
executive officers are established by the Company's President and Chief
Executive Officer.
8
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, and if
adopted the Company's Long-Term Incentive Plan. 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, 2001, the Company's executive officers
and the Bank Presidents received cash awards pursuant to the Management
Incentive Compensation Plan that ranged from 35% to 50% of their respective base
salaries.
The EMPLOYEE STOCK OPTION PLAN, and if adopted, the COMPANY'S LONG-TERM
INCENTIVE PLAN, are 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 17, 2001, the
Board of Directors granted options to purchase 120,270 shares of Common Stock to
38 executive officers and senior managers of the Company and the Banks. Each of
the options provides the recipient the right to purchase 3,165 shares of Common
Stock at $19.04 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, 2002, the Board of Directors granted options to purchase
47,625 shares of Common Stock to the Company's executive officers. Options
covering 26,711 shares of 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 $26.95 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 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, 2001, were equal to 6% of the
eligible wages for each of the approximately 700 participants in the ESOP.
9
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 $300,000. 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 2001
totaled $150,000.
CHARLES A. PALMER KEITH E. BAZAIRE ROBERT J. LEPPINK
ARCH V. WRIGHT, JR. THOMAS F. KOHN ROBERT L. HETZLER
10
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 15, 2002.
Amount and
Nature of
Beneficial Percent of
Name Ownership(1) Outstanding
- --------------------------------------------------------------------------------------------------------------
Charles C. Van Loan 156,825(2) 1.30%
Michael M. Magee 40,327 .33
Edward B. Swanson 67,752 .56
Ronald L. Long 23,249 .19
David C. Reglin 32,415 .27
All executive officers and directors 1,423,875(3) 11.82
as a group (consisting of 17 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 713,462 shares, including 642,376 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, 2001.
Long-Term
Compensation Awards
Annual ------------------- All
Compensation Securities Other
-------------------------- Underlying Compen-
Name & Principal Position Year Salary(1) Bonus(2) Options (#)(3) sation(4)
- ------------------------------------------------------------------------------------------------------------------------
Charles C. Van Loan 2001 $300,000 $ 150,000 18,105 $15,300
President and Chief 2000 252,000 126,000 16,648 14,400
Executive Officer 1999 240,000 120,000 22,495 16,295
Michael M. Magee 2001 $190,000 $ 66,500 9,789 $15,300
President and CEO 2000 175,000 61,250 9,720 14,400
Independent Bank 1999 157,500 55,125 12,044 13,970
Edward B. Swanson 2001 $170,000 $ 59,500 9,091 $15,300
President and CEO 2000 157,500 55,125 9,064 14,226
Independent Bank South Michigan 1999 150,000 51,129 11,400 14,029
Ronald L. Long 2001 $170,000 $ 59,500 9,091 $15,300
President and CEO 2000 157,500 55,125 9,064 14,211
Independent Bank East Michigan 1999 146,000 43,860 10,229 12,996
David C. Reglin 2001 $150,000 $ 52,500 10,104 $13,500
President and CEO 2000 130,000 45,500 8,032 11,734
Independent Bank West Michigan 1999 110,000 38,500 9,367 9,900
(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) Includes options granted in 2002 relating to 2001 performance.
(4) 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.
11
OPTION GRANTS IN 2001
The following table provides information on options granted to the Named
Executives during the year ended December 31, 2001.
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 2001 (per share)(2) Date Value(3)
- ------------------------------------------------------------------------------------------------------------------------------------
Charles C. Van Loan 3,165 1.69% $ 19.04 April 17, 2011 $ 37,094
14,940 8.00 26.95 January 21, 2012 225,000
Michael M. Magee 3,165 1.69% $ 19.04 April 17, 2011 $ 37,094
6,624 3.55 26.95 January 21, 2012 99,750
Edward B. Swanson 3,165 1.69% $ 19.04 April 17, 2011 $ 37,094
5,926 3.17 26.95 January 21, 2012 89,250
Ronald L. Long 3,165 1.69% $ 19.04 April 17, 2011 $ 37,094
5,926 3.17 26.95 January 21, 2012 89,250
David C. Reglin 3,165 1.69% $ 19.04 April 17, 2011 $ 37,094
5,229 2.80 26.95 January 21, 2012 78,750
1,710 .92 22.86 January 18, 2010 22,743
(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,
2012 were granted in 2002. Such options relate to 2001 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 17, 2011, were expected volatility of 41.60%, risk-free rate of
return of 5.23%, dividend yield of 3.20% and time to exercise of ten
years. The assumptions employed on options with an expiration date of
January 21, 2012, were expected volatility of 36.56%, risk-free rate of
return of 4.89%, dividend yield of 2.67% and time to exercise of ten
years. The assumptions employed on options with an expiration date of
January 18, 2010, were expected volatility of 41.68%, risk-free rate of
return of 5.43%, dividend yield of 2.67% and time to exercise of 8.7
years.
AGGREGATED STOCK OPTION EXERCISES IN 2001
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, 2001. Options
covering 275,948 shares of Common Stock were exercised in 2001.
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 3,165 $ 30,377 31,991 16,647 $454,959 $150,552
Michael M. Magee 3,165 30,565 21,539 9,720 294,129 87,442
Edward B. Swanson 3,165 30,377 20,895 9,064 284,254 81,464
Ronald L. Long 15,826 154,799 7,065 9,064 108,692 81,464
David C. Reglin 9,480 105,504 12,546 9,744 159,223 80,536
(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, 2001 ($27.80) and the
exercise prices of the options.
12
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 2001. 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 $25,628,000 at December 31, 2001, equal to 19.4% of shareholders'
equity.
One director has financial interests in partnerships, that sold land
contracts to one of the Banks during 2001. Mr. Wright has interests in
partnerships that sold four contracts with an aggregate principal face value of
approximately $286,000. The contracts mature not later than May of 2005 and have
an average rate of approximately 8.8%.
Two executive officers were relocated during 2001 as a result of the
consolidation of two of the Banks. In order to facilitate the relocation, the
Company purchased the primary residences of Mr. Magee and Mr. Shuster during
2001. Mr Magee's residence was purchased for $285,000, equal to 93% of the
average value obtained from two independent appraisals. Mr. Shuster's residence
was purchased for $263,000, equal to 90% of the average value obtained from two
independent appraisals.
13
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 2001.
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 2002. The following table sets forth the aggregate
fees billed to Independent Bank Corporation for the fiscal year ended December
31, 2001, by the Company's principal accounting firm, KPMG LLP:
Audit fees $ 175,000
Financial information systems design and implementation fees 0
All other fees(1)
Corporate tax planning 146,000
Corporate tax returns 72,000
Audit required under Housing and Urban Development loan program 35,000
Benefit plan audits 18,000
----------
$ 446,000
==========
(1) 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. Also, Article III of the
Company's Bylaws contain procedural requirements for shareholder proposals,
generally. A copy of the Company's Articles of Incorporation and Bylaws have
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 2003 Annual Meeting of
Shareholders proxy materials must be received by the Company not later than
November 15, 2002. If the Company receives notice of a shareholder proposal
after January 31, 2003, the persons named as proxies for the 2003 Annual Meeting
of Shareholders will have discretionary voting authority to vote on that
proposal at that meeting.
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 Georgeson Shareholder 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
$5,000, 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/ Robert N. Shuster
Robert N. Shuster
Secretary
Dated: March 15, 2002
14
EXHIBIT A
INDEPENDENT BANK CORPORATION
BOARD OF DIRECTORS' AUDIT COMMITTEE
CHARTER
OBJECTIVE
The objectives of the Audit Committee are to: 1) assist the entire
Board of Directors in fulfilling its fiduciary responsibilities; 2) monitor the
independence and performance of the Company's independent auditors and the
internal audit department; and 3) provide an avenue of communication between
management, the independent auditors, the internal audit department, and the
Board of Directors. The Audit 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 Audit Committee is responsible for providing reasonable assurance
that the Company is maintaining effective systems of internal controls in order
to reduce the risk of loss due to employee errors, internal or external fraud,
and conflicts of interest. The Audit Committee, or its chairperson, will review
with financial management and the independent auditors, the Company's quarterly
financial results prior to the release of earnings and/or the Company's
quarterly financial statements prior to filing or distribution; and will discuss
any significant changes to the Company's accounting principles and any items
required to be communicated in accordance with SAS #61. The Audit Committee will
review the audited financial statements with management, discuss SAS #61 issues,
and recommend to the Board of Directors to include the audited financial
statements in the Company's annual report.
In carrying out these responsibilities, the Audit Committee will:
- Select and evaluate the independent auditors who will audit
the financial statements of the Company and its affiliates.
The Audit Committee also reviews and recommends the selection
or removal of the independent auditors on an annual basis.
- Ensure the independence of the external auditor by requiring
the external auditor to submit a formal written independence
letter, at least annually, and by monitoring the relationships
and services that may impact objectivity and independence,
including the approval of fees and other significant
compensation to be paid to the independent auditors, on an
annual basis.
- Annually review the independent auditors' audit plan and/or
engagement letter.
- Annually review with the Company's counsel any legal matters
that could have significant impact on the organization's
financial statements, the Company's compliance with applicable
laws and regulations, and inquiries received from regulators
or government agencies.
- Provide annually a report to the shareholders, as required by
the SEC, that will be included in the annual proxy statement.
- Publish, every three years, its charter in the Company's proxy
statement.
- 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.
- Review with the internal auditors and the external auditors, 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 and external auditors, 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 members of the
organization. Review the results of employee investigations
involving fraud or embezzlement.
- Meet with the internal auditors and the independent external
auditors in separate executive sessions to discuss any matters
that the committee or groups believe should be discussed with
each other.
15
COMMITTEE MEMBERSHIP
The membership of the Audit Committee shall consist of at least three
independent, non-executive directors who shall serve at the pleasure of the
entire Board of Directors. [NOTE: Independence, as defined by the NASD, excludes
from membership: former employees and family members of former employees who
have been employed by the Company within the past three years; directors who
received more than $60,000 per year in compensation from the Company (excluding
compensation for Board services, benefits under a tax-qualified retirement plan,
or non-discretionary compensation); and directors who are employed by businesses
that receive in excess of $200,000 per year, or 5% of its total revenues from
the Company]. Members of the Audit Committee and the committee chairman shall be
designated by the full Board of Directors. Members appointed to the Audit
Committee shall be able to read and understand fundamental financial statements,
or will be able to do so within a reasonable period of time after his or her
appointment. At least one member of the Audit Committee will have had past
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 Audit Committee shall meet a minimum of four times annually.
Written minutes shall be prepared for each meeting, and a copy forwarded to the
full Board of Directors. The chairperson of the Audit Committee shall prepare
and/or approve an agenda in advance of each meeting. The Audit Committee or its
chairperson should communicate with management and the independent auditors
quarterly to review the Company's financial statements and significant findings
based upon the auditors' limited review procedures.
CHARTER REVIEW
The Audit Committee of Independent Bank Corporation shall review,
update, and approve this charter, at least annually.
16
EXHIBIT B
INDEPENDENT BANK CORPORATION
LONG-TERM INCENTIVE PLAN
ARTICLE 1
ESTABLISHMENT AND PURPOSE OF THE PLAN
1.1 Establishment of the Plan. Independent Bank Corporation, a Michigan
corporation (the "Company"), hereby establishes an incentive compensation plan
to be known as the "Independent Bank Corporation Long-Term Incentive Plan" (the
"Plan"), as set forth in this document. The Plan permits the granting of stock
options, stock appreciation rights, restricted stock, and other stock-based
awards to key employees of the Company and its Subsidiaries, as well as
Directors and Consultants. Upon approval by the Board of Directors of the
Company, subject to ratification by the affirmative vote of holders of a
majority of shares of the Company's Common Stock present and entitled to vote at
the 2002 Annual Meeting of Shareholders, the Plan shall be effective as of April
1, 2002 (the "Effective Date").
1.2 Purpose of the Plan. The purpose of the Plan is to promote the
long-term success of the Company for the benefit of the Company's shareholders,
through stock-based compensation, by aligning the personal interests of Plan
Participants with those of its shareholders. The Plan is designed to allow Plan
Participants to participate in the Company's future, as well as to enable the
Company to attract, retain and award such individuals.
1.3 Term of Plan. No Awards shall be granted pursuant to the Plan on or
after the tenth anniversary of the Effective Date ("Termination Date"), provided
that Awards granted prior to the Termination Date may extend beyond that date.
ARTICLE 2
DEFINITIONS
For purposes of this Plan, the following terms shall have the meanings
set forth below:
2.1 "Administrator" shall mean the Board or any of the Committees
designated to administer the Plan in accordance with Section 3.1 of the Plan.
2.2 "Award" shall mean any award under this Plan of any Options, Stock
Appreciation Rights, Restricted Stock, Performance Shares or Other Stock-Based
Award.
2.3 "Award Agreement" shall mean an agreement evidencing the grant of
an Award under this Plan. Awards under the Plan shall be evidenced by Award
Agreements that set forth the details, conditions and limitations for each
Award, as established by the Administrator and shall be subject to the terms and
conditions of the Plan.
2.4 "Award Date" shall mean the date that an Award is made, as
specified in an Award Agreement.
2.5 "Board" shall mean the Board of Directors of the Company.
2.6 "Code" shall mean the Internal Revenue Code of 1986, as amended.
2.7 "Employee" shall mean any person employed by the Company or a
Subsidiary. Neither service as a Director nor the payment of a Director's fee by
the Company shall be sufficient to constitute employment by the Company.
2.8 "Committee" shall mean one of the Committees, as specified in
Article 3, appointed by the Board to administer the Plan.
2.9 "Common Stock" shall mean the Common Stock, par value $1.00 per
share, of the Company.
2.10 "Consultant" shall mean any person or entity engaged by the
Company or a Subsidiary to render services to the Company or that Subsidiary.
2.11 "Director" shall mean a member of the Board or a member of the
Board of Directors of a Subsidiary.
2.12 "Disability" shall mean permanent and total disability as
determined under the rules and guidelines established by the Committee for
purposes of the Plan.
2.13 "Fair Market Value" shall be the closing sale price of the
Company's Common Stock for such date on the National Association of Securities
Dealers Automated Quotation System or any successor system then in use (NASDAQ).
If no sale of shares of Common Stock is reflected on NASDAQ on a date, "Fair
Market Value" shall be determined according to the closing sale price on the
next preceding day on which there was a sale of shares of Common Stock reflected
on NASDAQ.
2.14 "Incentive Stock Option" or "ISO" shall mean an option to purchase
shares of Common Stock granted under Article 6, which is designated as an
Incentive Stock Option and is intended to meet the requirements of Section 422
of the Code.
2.15 "Insider" shall mean an employee who is an officer (as defined in
Rule 16a-1(f) of the Exchange Act) or Director, or holder of more than ten
percent (10%) of its outstanding shares of the Company's Common Stock.
17
2.16 "Nonemployee Director" shall mean a person who satisfies (1) the
definition of "Nonemployee Director" within the meaning set forth in Rule
16b-3(b)(3), as promulgated by the Securities and Exchange Commission (the
"SEC") under the Securities Exchange Act of 1934 (the "Exchange Act"), or any
successor definition adopted by the SEC, or (2) the definition of "outside
director" within the meaning of Section 162(m) of the Code.
2.17 "Nonqualified Stock Option" or "NQSO" shall mean an option to
purchase shares of Common Stock, granted under Article 6, which is not an
Incentive Stock Option.
2.18 "Option" means an Incentive Stock Option or a Nonqualified Stock
Option.
2.19 "Option Price" shall mean the price at which a share of Common
Stock may be purchased by a Participant pursuant to an Option, as determined by
the Committee.
2.20 "Other Stock-Based Award" shall mean an Award under Article 10 of
this Plan that is valued in whole or in part by reference to, or is payable in
or otherwise based on, Common Stock.
2.21 "Participant" shall mean an employee of the Company or a
Subsidiary, a Director or Consultant who holds an outstanding Award granted
under the Plan.
2.22 "Performance Shares" shall mean an Award granted under Article 9
of this Plan evidencing the right to receive Common Stock or cash of an
equivalent value at the end of a specified performance period.
2.23 "Permitted Transferee" means (i) the spouse, children or
grandchildren of a Participant (each an "Immediate Family Member"), (ii) a trust
or trusts for the exclusive benefit of the Participant and/or one or more
Immediate Family Members, or (iii) a partnership or limited liability company
whose only partners or members are the Participant and/or one or more Immediate
Family Members.
2.24 "Restricted Stock" shall mean an Award granted to a Participant
under Article 8 of this Plan.
2.25 "Retirement" shall mean the termination of a Participant's
employment with the Company or a Subsidiary after the Participant attains the
age of 55.
2.26 "Stock Appreciation Right" or "SAR" shall mean an Award granted to
a Participant under Article 7 of this Plan.
2.27 "Subsidiary" shall mean any corporation in which the Company owns
directly, or indirectly through subsidiaries, at least fifty percent (50%) of
the total combined voting power of all classes of stock, or any other entity
(including, but not limited to, partnerships and joint ventures) in which the
Company owns at least fifty percent (50%) of the combined equity thereof.
2.28 "Termination of Service" shall mean the termination of an
Employee's employment with the Company or a Subsidiary. An Employee employed by
a Subsidiary shall also be deemed to incur a Termination of Service if the
Subsidiary ceases to be a Subsidiary and the Participant does not immediately
thereafter become an employee of the Company or another Subsidiary. With respect
to a Participant that is not an Employee, Termination of Service shall mean the
termination of the person's service as a Director or as a Consultant to the
Company or a Subsidiary.
ARTICLE 3
ADMINISTRATION
3.1 The Committee. The Plan may be administered by different Committees
with respect to different groups of Plan Participants. To the extent that the
Administrator determines it to be desirable to qualify Awards granted hereunder
as "performance-based compensation" within the meaning of Section 162(m) of the
Code, the Plan shall be administered by a committee of two or more Non-Employee
Directors. To the extent desirable to qualify transactions hereunder as exempt
under Rule 16b-3, the transactions contemplated hereunder shall be structured to
satisfy the requirements for exemption under Rule 16b-3. Other than as provided
above, the Plan shall be administered by (a) the Board, or (b) a Committee,
which Committee shall be constituted to satisfy the foregoing conditions.
3.2 Committee Authority. Subject to the Company's Articles of
Incorporation, Bylaws and the provisions of this Plan, the Administrator shall
have full authority to grant Awards to key Employees of the Company or a
Subsidiary, as well as Directors and Consultants, provided that Awards covering
more than twenty percent (20%) of Plan Shares shall not be made to any one
Employee. Awards may be granted singly, in combination, or in tandem. The
authority of the Administrator shall include the following:
(a) To select the key employees of the Company or a
Subsidiary, Directors or Consultants to whom Awards may be granted
under the Plan
(b) To determine whether and to what extent Options, Stock
Appreciation Rights, Restricted Stock, Performance Shares and Other
Stock-Based Awards, or any combination thereof are to be granted under
the Plan;
(c) To determine the number of shares of Common Stock to be
covered by each Award;
(d) To determine the terms and conditions of any Award
Agreement, including, but not limited to, the Option Price, any vesting
restriction or limitation, any vesting schedule or acceleration
thereof, or any forfeiture restrictions or waiver thereof, regarding
any Award and the shares of Common Stock relating thereto, based on
such factors as the Administrator shall determine in its sole
discretion;
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(e) To determine whether, to what extent and under what
circumstances grants of Awards are to operate on a tandem basis and/or
in conjunction with or apart from other cash compensation arrangement
made by the Company other than under the terms of this Plan;
(f) To determine under what circumstances an Award may be
settled in cash, Common Stock, or a combination thereof; and
(g) To determine to what extent and under what circumstances
shares of Common Stock and other amounts payable with respect to an
Award shall be deferred.
The Administrator shall have the authority to adopt, alter and repeal
such administrative rules, guidelines and practices governing the Plan as it
shall, from time to time, deem advisable, to interpret the terms and provisions
of the Plan and any Award issued under the Plan (including any Award Agreement)
and to otherwise supervise the administration of the Plan. A majority of any
Committee shall constitute a quorum, and the acts of a majority of a quorum at
any meeting, or acts reduced to or approved in writing by a majority of the
members of any Committee, shall be the valid acts of any Committee. The
interpretation and construction by any Committee of any provisions of the Plan
or any Award granted under the Plan shall be final and binding upon the Company,
the Board and Participants, including their respective heirs, executors and
assigns. No member of the Board or any Committee shall be liable for any action
or determination made in good faith with respect to the Plan or an Award granted
hereunder. Notwithstanding the foregoing, without the prior approval of the
Company's shareholders, neither the Committee nor the Board of Directors shall
have the authority to lower the option exercise price of previously granted
Awards, whether by means of the amendment of previously granted Awards or the
replacement or regrant, through cancellation, of previously granted Awards.
ARTICLE 4
COMMON STOCK SUBJECT TO THE PLAN
Subject to adjustment as provided in Section 13.1, the maximum
aggregate number of shares of Common Stock which may be issued under this Plan,
which may be either unauthorized and unissued Common Stock or issued Common
Stock reacquired by the Company ("Plan Shares") shall be 575,000 Shares. Not
more than fifteen percent (15%) of the Plan Shares may be issued to Plan
Participants as Restricted Stock.
Determinations as to the number of Plan Shares that remain available
for issuance under the Plan shall be made in accordance with such rules and
procedures as the Administrator shall determine from time to time. If an Award
expires unexercised or is forfeited, cancelled, terminated or settled in cash in
lieu of Common Stock, the shares of Common Stock that were theretofore subject
(or potentially subject) to such Award may again be made subject to an Award
Agreement. In addition, Shares from the following sources shall be added to the
number of Plan Shares available for issuance under the Plan:
(1) Any Shares of the Company's Common Stock surrendered in payment of
the exercise price of Options or to pay the tax withholding obligations incurred
upon the exercise of Options;
(2) Options withheld to pay the exercise price or tax withholding
obligations incurred upon the exercise of Options; and
(3) The number of Shares repurchased by the Company in the open market
or otherwise having an aggregate purchase price no greater than the cash
proceeds received by the Company from the sale of shares of the Company's stock
under the Plan.
ARTICLE 5
ELIGIBILITY
The persons who shall be eligible to receive Awards under the Plan
shall be selected by the Administrator from time to time. In making such
selections, the Administrator shall consider the nature of the services rendered
by such persons, their present and potential contribution to the Company's
success and the success of the particular Subsidiary of the Company by which
they are employed or to whom they provide services, and such other factors as
the Administrator in its discretion shall deem relevant. Participants may hold
more than one Award, but only on the terms and subject to the restrictions set
forth in the Plan and their respective Award Agreements. No Participant may
receive Awards under the Plan covering more than twenty percent (20%) of Plan
Shares.
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ARTICLE 6
STOCK OPTIONS
6.1 Options. Options may be granted alone or in addition to other
Awards granted under this Plan. Each Option granted under this Plan shall be
either an Incentive Stock Option (ISO) or a Nonqualified Stock Option (NQSO).
6.2 Grants. The Administrator shall have the authority to grant to any
Participant one or more Incentive Stock Options, Nonqualified Stock Options, or
both types of Options. To the extent that any Option does not qualify as an
Incentive Stock Option (whether because of its provisions or the time or manner
of its exercise or otherwise), such Option or the portion thereof which does not
qualify shall constitute a separate Nonqualified Stock Option.
6.3 Incentive Stock Options. Anything in the Plan to the contrary
notwithstanding, no term of this Plan relating to Incentive Stock Options shall
be interpreted, amended or altered, nor shall any discretion or authority
granted under the Plan be so exercised, so as to disqualify the Plan under
Section 422 of the Code, or, without the consent of the Participants affected,
to disqualify any Incentive Stock Option under such Section 422. An Incentive
Stock Option shall not be granted to an individual who, on the date of grant,
owns stock possessing more than ten percent (10%) of the total combined voting
power of all classes of stock of the Company. The aggregate Fair Market Value,
determined on the Award Date of the shares of Common Stock with respect to which
one or more Incentive Stock Options (or other incentive stock options within the
meaning of Section 422 of the Code, under all other option plans of the Company)
granted on or after January 1, 1987, that are exercisable for the first time by
a Participant during any calendar year shall not exceed the $100,000 limitation
imposed by Section 422(d) of the Code.
6.4 Terms of Options. Options granted under the Plan shall be evidenced
by Award Agreements in such form as the Administrator shall, from time to time
approve, which Agreement shall comply with and be subject to the following terms
and conditions:
(a) Option Price. The Option Price per share of Common Stock
purchasable under an Option shall be determined by the Committee at the
time of grant but shall be not less than one hundred percent (100%) of
the Fair Market Value of the Common Stock at the Award Date.
(b) Option Term. The term of each Option shall be fixed by the
Administrator, provided that no Option that has been designated as an
Incentive Stock Option shall be exercisable more than ten (10) years
after the date the Option is granted.
(c) Exercisability. Except as provided in Section 13.2, no
Option shall be exercisable either in whole or in part prior to the
first anniversary of the Award Date. Thereafter, an Option shall be
exercisable at such time or times and subject to such terms and
conditions as shall be determined by the Administrator and set forth in
the Award Agreement. If the Administrator provides that any Option is
exercisable only in installments, the Administrator may at any time
waive such installment exercise provisions, in whole or in part, based
on such factors as the Administrator may determine.
(d) Method of Exercise. Subject to whatever installment
exercise and waiting period provisions apply under subsection (c)
above, Options may be exercised in whole or in part at any time during
the term of the Option, by giving written notice of exercise to the
Company specifying the number of shares to be purchased. Such notice
shall be accompanied by payment in full of the purchase price in such
form as the Administrator may accept. Notwithstanding the foregoing, an
Option shall not be exercisable with respect to less than 100 shares of
Common Stock unless the remaining shares covered by an Option are fewer
than 100 shares. If and to the extent determined by the Administrator
in its sole discretion at or after grant, payment in full or in part
may also be made in the form of Common Stock owned by the Participant
(and for which the Participant has good title free and clear of any
liens and encumbrances and with respect to any shares of Common Stock
acquired upon the exercise of an Option, has been held by the Optionee
for a period of at least six (6) consecutive months), or by reduction
in the number of shares issuable upon such exercise based, in each
case, on the Fair Market Value of the Common Stock on the last trading
date preceding payment as determined by the Administrator. No shares of
stock shall be issued until payment has been made. A Participant shall
generally have the rights to dividends or other rights of a shareholder
with respect to shares subject to the Option when the person exercising
such option has given written notice of exercise, has paid for such
shares as provided herein, and, if requested, has given the
representation described in Section 13.1 of the Plan.
(e) Transferability of Options. No Option may be sold,
transferred, pledged, assigned, or otherwise alienated or hypothecated,
other than by will or by the laws of descent and distribution,
provided, however, the Administrator may, in its discretion, authorize
all or a portion of a Nonqualified Stock Option to be granted to an
optionee to be on terms which permit transfer by such optionee to a
Permitted Transferee, provided that (i) there may be no consideration
for any such transfer (other than the receipt of or interest in a
family partnership or limited liability company), (ii) the Award
Agreement pursuant to which such Options are granted must be approved
by the Administrator, and must expressly provide for transferability in
a manner consistent with this Section 6.4(e), and (iii) subsequent
transfers of transferred Options shall be prohibited except those in
accordance with Section 6.4(h). Following transfer, any such Options
shall continue to be subject to the same terms and conditions as were
applicable immediately prior to transfer. The events of termination of
service of Sections 6.4(f), (g) and (h) hereof, and the tax withholding
obligations of Section 14.3 shall continue to be applied
20
with respect to the original optionee, following which the Options
shall be exercisable by the Permitted Transferee only to the extent,
and for the periods specified in Sections 6(f), (g), and (h). The
Company shall not be obligated to notify Permitted Transferee(s) of the
expiration or termination of any Option. Further, all Options shall be
exercisable during the Participant's lifetime only by such Participant
and, in the case of a Nonqualified Stock Option, by a Permitted
Transferee. The designation of a person entitled to exercise an Option
after a person's death will not be deemed a transfer.
(f) Termination of Service for Reasons other than Retirement,
Disability, or Death. Upon termination of Service for any reason other
than Retirement or on account of Disability or death, each Option held
by the Participant shall, to the extent rights to purchase shares under
such Option have accrued at the date of such Termination of Service and
shall not have been fully exercised, be exercisable, in whole or in
part, at any time for a period of no more than three (3) months
following Termination of Service, subject, however, to prior expiration
of the term of such Options and any other limitations on the exercise
of such Options in effect at the date of exercise. Whether an
authorized leave of absence or absence because of military or
governmental service shall constitute Termination of Service for such
purposes shall be determined by the Administrator, which determination
shall be final and conclusive.
(g) Termination of Service for Retirement or Disability. Upon
Termination of Service by reason of Retirement or Disability, each
Option held by such Participant shall, to the extent rights to purchase
shares under the Option have accrued at the date of such Retirement or
Disability and shall not have been fully exercised, remain exercisable
in whole or in part during the original term of such Options held by
that Participant.
(h) Termination of Service for Death. Upon Termination of
Service due to death, each Option held by such Participant or Permitted
Transferee shall, to the extent rights to purchase shares under the
Options have accrued at the date of death and shall not have been fully
exercised, be exercisable, in whole or in part, by the personal
representative of the estate of the Participant or Permitted Transferee
or by any person or persons who shall have acquired the Option directly
from the Participant or Permitted Transferee by bequest or inheritance
at any time during the twelve (12) month period following death,
subject, however, in any case, to the prior expiration of the term of
the Option and any other limitation on the exercise of such Option in
effect at the date of exercise.
(i) Termination of Options. Any Option that is not exercised
within whichever of the exercise periods specified in Sections 6.4(f),
(g) or (h) is applicable shall terminate upon expiration of such
exercise period.
(j) Purchase and Settlement Provisions. The Administrator may
at any time offer to purchase an Option previously granted, based on
such terms and conditions as the Administrator shall establish and
communicate to the Participant at the time that such offer is made. In
addition, if an Award Agreement so provides at the Award Date or is
thereafter amended to so provide, the Administrator may require that
all or part of the shares of Common Stock to be issued with respect to
the exercise of an Option, in an amount not greater than the Fair
Market Value of the shares that is in excess of the aggregate Option
Price, take the form of Performance Shares, which shall be valued on
the date of exercise on the basis of the Fair Market Value of such
Performance Shares determined without regard to the deferral
limitations and/or forfeiture restrictions involved.
6.5 Reload Options. Without in any way limiting the authority of the
Committee to make grants hereunder, and in order to induce employees to retain
ownership of shares of Common Stock, the Committee shall have the authority (but
not an obligation) to include within any Award Agreement a provision entitling
the Participant to a further Option (a "Reload Option") if the Participant
exercises the Option evidenced by the Award Agreement, in whole or in part, by
surrendering shares of Common Stock previously owned by the Participant, in
accordance with this Plan and the terms and conditions of the Award Agreement. A
Reload Option shall entitle a Participant to purchase a number of shares of
Common Stock equal to the number of such shares so delivered upon exercise of
the original Option and, in the discretion of the Committee, the number of
shares, if any, tendered to the Company to satisfy any withholding tax liability
arising in connection with the exercise of the original Option. A Reload Option
shall: (a) have an Option Price of not less than one hundred percent (100%) of
the per share Fair Market Value of the Common Stock on the date of grant of such
Reload Option; (b) have a term not longer than the remaining term of the
original Option at the time of exercise thereof; (c) become exercisable if the
shares acquired upon exercise of the original Option are held for a minimum
period of time established by the Committee; and (d) be subject to such other
terms and conditions as the Committee may determine.
ARTICLE 7
STOCK APPRECIATION RIGHTS
7.1 Grant of SARs. The Administrator may approve the grant of Stock
Appreciation Rights ("SARs") that are related to Options only. An SAR may be
granted only at the time of grant of the related Option. An SAR will entitle the
holder of the related Option, upon exercise of the SAR, to surrender such
Option, or any portion thereof to the extent unexercised, with respect to the
number of shares as to which such SAR is exercised, and to receive payment of an
amount computed pursuant to Section 7.2. Such Option will, to the extent
surrendered, then cease to be exercisable. Subject to Section 6.4, an SAR
granted hereunder will be exercisable at such time or times, and only to the
extent that a related Option is exercisable, and will not be transferable except
to the extent that such related Option may be transferable.
21
7.2 Payment of SAR Amount. Upon the exercise of an SAR, a Participant
shall be entitled to receive payment from the Company in an amount determined by
multiplying (i) the difference between the Fair Market Value of a share of
Common Stock on the date of exercise over the Option Price, by (ii) the number
of shares of Common Stock with respect to which the SAR is exercised. At the
discretion of the Committee, the payment upon SAR exercise may be in cash, in
shares of Common Stock of equivalent value, or in some combination thereof.
7.3 Nontransferability. No SAR may be sold, transferred, pledged,
assigned, or otherwise alienated or hypothecated, other than by will or by the
laws of descent and distribution. Further, all SARs shall be exercisable, during
the Participant's lifetime, only by such Participant.
ARTICLE 8
RESTRICTED STOCK
8.1 Awards of Restricted Stock. Shares of Restricted Stock may be
issued either alone or in addition to other Awards granted under the Plan. The
Administrator shall determine the eligible persons to whom, and the time or
times at which, grants of Restricted Stock will be made, the number of shares to
be awarded, the price (if any) to be paid by the Participant, the time or times
within which such Awards may be subject to forfeiture, the vesting schedule and
rights to acceleration thereof, and all other terms and conditions of the
Awards. The Administrator may condition the grant of Restricted Stock upon the
achievement of specific business objectives, measurements of individual or
business unit or Company performances, or such other factors as the
Administrator may determine. The provisions of Restricted Stock awards need not
be the same with respect to each Participant, and such Awards to individual
Participants need not be the same in subsequent years.
8.2 Awards and Certificates. A Participant selected to receive a
Restricted Stock Award shall not have any rights with respect to such Award,
unless and until such Participant has executed an Award Agreement evidencing the
Award and has delivered a fully executed copy thereof to the Company, and has
otherwise complied with the applicable terms and conditions of such Award.
Further, such Award shall be subject to the following conditions:
(a) Acceptance. Awards of Restricted Stock must be accepted
within a period of thirty (30) days (or such shorter period as the
Committee may specify at grant) after the Award Date, by executing an
Award Agreement and by paying whatever price (if any) the Committee has
designated for such shares of Restricted Stock.
(b) Legend. Each Participant receiving a Restricted Stock
Award shall be issued a stock certificate in respect of such shares of
Restricted Stock. Such certificate shall be registered in the name of
such Participant, and shall bear an appropriate legend referring to the
terms, conditions, and restrictions applicable to such Award,
substantially in the following form:
"The transferability of this certificate and the
shares of stock represented hereby are subject to the terms
and conditions (including forfeiture) of the Independent Bank
Corporation Long-Term Incentive Plan and related Award
Agreement entered into between the registered owner and the
Company, dated . Copies of such Plan and Agreement
are on file in the offices of the Company, 230 West Main
Street, Ionia, Michigan 48846."
(c) Custody. The Committee may require that the stock
certificates evidencing such shares be held in custody by the Company
until the restrictions thereon shall have lapsed, and that, as a
condition of any award of Restricted Stock, the Participant shall have
delivered a duly signed stock power, endorsed in blank, relating to the
Common Stock covered by such Award.
8.3 Restrictions and Conditions. The shares of Restricted Stock awarded
pursuant to this Plan shall be subject to the following restrictions and
conditions:
(a) Restriction Period. Subject to the provisions of this Plan
and the Award Agreement, during a period set by the Administrator
commencing with the Award Date (the "Restriction Period"), the
Participant shall not be permitted to sell, transfer, pledge, or assign
shares of Restricted Stock awarded under this Plan. Subject to these
limits, the Administrator, in its sole discretion, may provide for the
lapse of such restrictions in installments and may accelerate or waive
such restrictions in whole or in part, based on service, performance
and/or such other factors or criteria as the Administrator may
determine.
(b) Rights as Shareholder. Except as provided in this
subsection (b) and subsection (a) above, the Participant shall have,
with respect to the shares of Restricted Stock, all of the rights of a
holder of shares of Common Stock of the Company including the right to
receive any dividends. The Administrator, in its sole discretion, as
determined at the time of Award, may permit or require the payment of
dividends to be deferred. If any dividends or other distributions are
paid in shares of Common Stock, such shares shall be subject to the
same restrictions on transferability and forfeitability as the shares
of Restricted Stock with respect to which they were paid.
(c) Termination of Service. Subject to the applicable
provisions of the Award Agreement and this Article 8, upon Termination
of Service for any reason during the Restriction Period, all Restricted
Shares still subject to restriction will vest or be forfeited in
accordance with the terms and conditions established by the Committee
as specified in the Award Agreement.
(d) Lapse of Restrictions. If and when the Restriction Period
expires without a prior forfeiture of the Restricted Stock, the
certificates for such shares shall be delivered to the Participant.
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ARTICLE 9
PERFORMANCE SHARES
9.1 Award of Performance Shares. Performance Shares may be awarded
either alone or in addition to other Awards granted under this Plan. The
Administrator shall determine the eligible persons to whom and the time or times
at which Performance Shares shall be awarded, the number of Performance Shares
to be awarded to any person, the duration of the period (the "Performance
Period") during which, and the conditions under which, receipt of the
Performance Shares will be deferred, and the other terms and conditions of the
Award in addition to those set forth in Section 9.2, as specified in the Award
Agreement. The Administrator may condition the grant of Performance Shares upon
the achievement of specific business objectives, measurements of individual or
business unit or Company performance, or such other factors or criteria as the
Administrator shall determine. The provisions of the award of Performance Shares
need not be the same with respect to each Participant, and such Awards to
individual Participants need not be the same in subsequent years.
9.2 Terms and Conditions. Performance Shares awarded pursuant to this
Article 9 shall be subject to the following terms and conditions:
(a) Nontransferability. Subject to the provisions of this Plan
and the related Award Agreement, Performance Shares may not be sold,
assigned, transferred, pledged or otherwise encumbered during the
Performance Period. At the expiration of the Performance Period, share
certificates or cash of an equivalent value (as the Administrator may
determine in its sole discretion) shall be delivered to the
Participant, or his legal representative, in a number equal to the
shares covered by the Award Agreement.
(b) Dividends. Unless otherwise determined by the
Administrator at the time of Award, amounts equal to any cash dividends
declared during the Performance Period with respect to the number of
shares of Common Stock covered by a Performance Share Award will not be
paid to the Participant.
(c) Termination of Employment. Subject to the provisions of
the Award Agreement and this Article 9, upon Termination of Service for
any reason during the Performance Period for a given Award, the
Performance Shares in question will vest or be forfeited in accordance
with the terms and conditions established by the Administrator at or
after grant.
(d) Accelerated Vesting. Based on service, performance and/or
such other factors or criteria as the Administrator may determine and
set forth in the Award Agreement, the Administrator may, at or after
grant, accelerate the vesting of all or any part of any award of
Performance Shares and/or waive the deferral limitations for all or any
part of such Award.
ARTICLE 10
OTHER STOCK-BASED AWARDS
10.1 Other Awards. Other Awards of Common Stock and other Awards that
are valued in whole or in part by reference to, or are payable in or otherwise
based on, Common Stock ("Other Stock-Based Awards"), may be granted either alone
or in addition to or in tandem with Options, SARs, or Performance Shares.
Subject to the provisions of this Plan, the Administrator shall have authority
to determine the persons to whom and the time or times at which such Awards
shall be made, the number of shares of Common Stock to be awarded pursuant to
such awards, and all other conditions of the Awards. The Administrator may also
provide for the grant of Common Stock under such Awards upon the completion of a
specified performance period. The provisions of Other Stock-Based Awards need
not be the same with respect to each Participant and such Awards to individual
Participants need not be the same in subsequent years.
10.2 Terms and Conditions. Other Stock-Based Awards made pursuant to
this Article 10 shall be set forth in an Award Agreement and shall be subject to
the following terms and conditions:
(a) Nontransferability. Subject to the provisions of this Plan
and the Award Agreement, shares of Common Stock subject to Awards made
under this Article 10 may not be sold, assigned, transferred, pledged,
or otherwise encumbered prior to the date on which the shares are
issued, or, if later, the date on which any applicable restriction,
performance or deferral period lapses.
(b) Dividends. Unless otherwise determined by the
Administrator at the time of Award, subject to the provisions of this
Plan and the Award Agreement, the recipient of an Award under this
Article 10 shall be entitled to receive, currently or on a deferred
stock basis, dividends or other distributions with respect to the
number of shares of Common Stock covered by the Award.
(c) Vesting. Any Award under this Article 10 and any Common
Stock covered by any such Award shall vest or be forfeited to the
extent so provided in the Award Agreement, as determined by the
Administrator, in its sole discretion.
(d) Waiver of Limitation. In the event of the Participant's
Retirement, Disability or death, or in cases of special circumstances,
the Administrator may, in its sole discretion, waive in whole or in
part any or all of the limitations imposed hereunder (if any) with
respect to any or all of an Award under this Article 10.
(e) Price. Common Stock issued or sold under this Article 10
may be issued or sold for no cash consideration or such consideration
as the Administrator shall determine and specify in the Award
Agreement.
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ARTICLE 11
TERMINATION OR AMENDMENT OF THE PLAN
The Board may at any time amend, discontinue or terminate this Plan or
any part thereof (including any amendment deemed necessary to ensure that the
Company may comply with any applicable regulatory requirement); provided,
however, that, unless otherwise required by law, the rights of a Participant
with respect to Awards granted prior to such amendment, discontinuance or
termination, may not be impaired without the consent of such Participant and,
provided further, without the approval of the Company's shareholders, no
amendment may be made which would (i) increase the aggregate number of shares of
Common Stock that may be issued under this Plan (except by operation of Article
4 or of Section 13.1); (ii) decrease the option price of any Option to less than
one hundred percent (100%) of the Fair Market Value on the date of grant for an
Option; or (iii) extend the maximum option period under Section 6.4(b) of the
Plan. The Administrator may amend the terms of any Award theretofore granted,
prospectively or retroactively, but, subject to Section 13.2, no such amendment
or other action by the Administrator shall impair the rights of any Participant
without the Participant's consent. Awards may not be granted under the Plan
after the Termination Date, but Awards granted prior to such date shall remain
in effect or become exercisable pursuant to their respective terms and the terms
of this Plan.
ARTICLE 12
UNFUNDED PLAN
This Plan is intended to constitute an "unfunded" plan for incentive
and deferred compensation. With respect to any payment not yet made to a
Participant by the Company, nothing contained herein shall give any such
Participant any rights that are greater than those of a general creditor of the
Company.
ARTICLE 13
ADJUSTMENT PROVISIONS
13.1 Antidilution. Subject to the provisions of this Article 13, if the
outstanding shares of Common Stock are increased, decreased, or exchanged for a
different number or kind of shares or other securities, or if additional shares
or new or different shares or other securities are distributed with respect to
such shares of Common Stock or other securities, through merger, consolidation,
sale of all or substantially all of the assets of the Company, reorganization,
recapitalization, reclassification, stock dividend, stock split, reverse stock
split or other distribution with respect to such shares of Common Stock or other
securities, an appropriate and proportionate adjustment may be made in (i) the
maximum number and kind of shares provided in Article 4 of the Plan, (ii) the
number and kind of shares or other securities subject to the then outstanding
Awards, and (iii) the price for each share or other unit of any other securities
subject to the then outstanding Awards.
13.2 Change in Control. Notwithstanding Section 13.1, upon dissolution
or liquidation of the Company, or upon a reorganization, merger, or
consolidation of the Company with one or more corporations as a result of which
the Company is not the surviving corporation, or upon the sale of all or
substantially all the assets of the Company, all Awards then outstanding under
the Plan will be fully vested and exercisable and all restrictions will
immediately cease, unless provisions are made in connection with such
transaction for the continuance of the Plan and the assumption of or the
substitution for such Awards of new Awards covering the stock of a successor
employer corporation, or a parent or subsidiary thereof, with appropriate
adjustments as to the number and kind of shares and prices.
13.3 Adjustments by Administrator. Any adjustments pursuant to this
Article 13 will be made by the Administrator, whose determination as to what
adjustments will be made and the extent thereof will be final, binding, and
conclusive. No fractional interest will be issued under the Plan on account of
any such adjustments. Only cash payments will be made in lieu of fractional
shares.
ARTICLE 14
GENERAL PROVISIONS
14.1 Legend. The Administrator may require each person purchasing
shares pursuant to an Award under the Plan to represent to and agree with the
Company in writing that the Participant is acquiring the shares without a view
to distribution thereof. In addition to any legend required by this Plan, the
certificates for such shares may include any legend which the Administrator
deems appropriate to reflect any restrictions on transfer.
All certificates for shares of Common Stock delivered under the Plan
shall be subject to such stock transfer orders and other restrictions as the
Administrator may deem advisable under the rules, regulations and other
requirements of the Securities and Exchange Commission, any stock exchange upon
which the Stock is then listed, any applicable Federal or state securities law,
and any applicable corporate law, and the Administrator may cause a legend or
legends to be put on any such certificates to make appropriate reference to such
restrictions.
24
14.2 No Right to Employment. Neither this Plan nor the grant of any
Award hereunder shall give any Participant or other employee any right with
respect to continuance of employment by the Company or any Subsidiary, nor shall
there be a limitation in any way on the right of the Company or any Subsidiary
by which an employee is employed to terminate his or her employment at any time.
14.3 Withholding of Taxes. The Company shall have the right to deduct
from any payment to be made pursuant to this Plan, or to otherwise require,
prior to the issuance or delivery of any shares of Common Stock or the payment
of any cash hereunder, payment by the Participant of, any Federal, state or
local taxes required by law to be withheld. Unless otherwise prohibited by the
Administrator, each Participant may satisfy any such withholding tax obligation
by any of the following means or by a combination of such means: (a) tendering a
cash payment; (b) authorizing the Company to withhold from the shares otherwise
issuable to the Participant a number of shares having a Fair Market Value as of
the "Tax Date," less than or equal to the amount of the withholding tax
obligation; or (c) delivering to the Company unencumbered shares owned by the
Participant having a Fair Market Value, as of the Tax Date, less than or equal
to the amount of the withholding tax obligation. The "Tax Date" shall be the
date that the amount of tax to be withheld is determined.
14.4 No Assignment of Benefits. No Award or other benefit payable under
this Plan shall, except as otherwise specifically provided by law, be subject in
any manner to anticipation, alienation, attachment, sale, transfer, assignment,
pledge, encumbrance or charge, and any attempt to anticipate, alienate, attach,
sell, transfer, assign, pledge, encumber or charge, any such benefits shall be
void, and any such benefit shall not in any manner be liable for or subject to
the debts, contracts, liabilities, engagements or torts of any person who shall
be entitled to such benefit, nor shall it be subject to attachment or legal
process for or against such person.
14.5 Governing Law. This Plan and actions taken in connection herewith
shall be governed and construed in accordance with the laws and in the courts of
the State of Michigan.
14.6 Application of Funds. The proceeds received by the Company from
the sale of shares of Common Stock pursuant to Awards granted under this Plan
will be used for general corporate purposes.
14.7 Rights as a Shareholder. Except as otherwise provided in an Award
Agreement, a Participant shall have no rights as a shareholder of the Company
until he or she becomes the holder of record of Common Stock.
25
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26
APPENDIX C
Independent Bank Corporation is an Ionia, Michigan-based bank holding
company with assets totaling nearly $2 billion. Its four subsidiary banks (the
"Banks") principally serve suburban and rural communities located across
Michigan's Lower Peninsula through 92 offices.
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 its management
while providing financial incentives to align the interests of such management
with those of its shareholders.
To support the Banks' service and sales efforts, while providing the
controls that are consistent with its decentralized decision-making structure,
the Company has consolidated many operational and administrative functions and
provides these services to the Banks on a centralized basis.
CONTENTS
Management's Discussion and Analysis .............................. A-2
Selected Consolidated Financial Data .............................. A-13
Independent Auditors' Report ...................................... A-14
Consolidated Financial Statements ................................. A-15
Notes to Consolidated Financial Statements ........................ A-19
Quarterly Data .................................................... A-35
Shareholder Information ........................................... A-36
Executive Officers and Directors .................................. A-36
A-1
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management's discussion and analysis of financial condition and results
of operations may contain forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. Forward-looking statements
include expressions such as "expects," "intends," "believes" and "should" which
are necessarily statements of belief as to the expected outcomes of future
events. Actual results could differ materially from those contained in, or
implied by such forward-looking statements. The Company undertakes no obligation
to release revisions to these forward-looking statements or reflect events or
circumstances after the date of this report.
The following section presents additional information to assess the
financial condition and results of operations of the Company and its subsidiary
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 $24.4 million in 2001 compared to $20.0
million in 2000 and $8.7 million in 1999. 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.
The increase in net income in 2001 is primarily a result of increases
in net interest income, service charges on deposit accounts and net gains on the
sale of real estate mortgage loans, partially offset by increases in
non-interest expense and federal income taxes. The increase in the Company's net
income in 2000 principally reflects increases in net interest income and service
charges on deposit accounts and a decline in non-interest expense.
KEY PERFORMANCE RATIOS Year ended December 31,
2001 2000 1999
- -----------------------------------------------------------------------------------------------------------------------------
Net income to
Average equity ............................................................... 18.52% 16.59% 7.26%
Average assets ............................................................... 1.35 1.15 .52
Net income per share
Basic ........................................................................ $ 2.03 $ 1.62 $ .69
Diluted ...................................................................... 2.00 1.61 .68
NET INTEREST INCOME. Tax equivalent net interest income totaled $82.7
million during 2001, compared to $74.3 million and $69.2 million during 2000 and
1999, respectively. The 11% increase during 2001 reflects an increase in tax
equivalent net interest income as a percent of average earning assets ("Net
Yield") and a $72.0 million or 4.4% increase in the amount of average earning
assets. The increase in Net Yield during 2001 is primarily due to a 47 basis
point decline in the cost of interest bearing liabilities, generally the result
of falling short-term interest rates. The decline in the cost of interest
bearing liabilities was partially offset by a 20 basis point decline in the
yield on interest earning assets as falling interest rates in 2001 resulted in
the prepayment of higher yielding loans, the repricing of variable rate loans
and the origination of new loans at lower relative interest rates. A continued
decline in the cost of interest bearing liabilities is dependent, in part, upon
external factors that include the slope of the yield curve, availability of
credit, and customer preferences that may result in changes in the mix or amount
of the Banks' deposits.
The 7.3% increase in tax equivalent net interest income during 2000
principally reflects an $85.0 million or 5.5% increase in the amount of average
earning assets.
A-2
2001 2000 1999
-----------------------------------------------------------------------------------------------------
AVERAGE
BALANCES AND TAX Average Average Average
EQUIVALENT RATES Balance Interest Rate Balance Interest Rate Balance Interest Rate
- ------------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
Assets
Taxable loans(1,2) .......... $1,415,136 $ 123,859 8.75% $ 1,341,926 $ 120,110 8.95% $ 1,222,564 $ 106,233 8.69%
Tax-exempt loans(1,3) ....... 13,058 1,127 8.63 10,433 910 8.72 8,793 770 8.76
Taxable securities .......... 137,085 9,334 6.81 144,231 9,960 6.91 215,550 12,808 5.94
Tax-exempt securities(3) .... 119,282 9,333 7.82 116,697 9,558 8.19 81,392 6,564 8.06
Other investments ........... 20,348 1,513 7.44 19,612 1,620 8.26 19,627 1,577 8.03
---------- --------- 8.51 ----------- --------- 8.71 ----------- --------- 8.27
Interest earning assets ... 1,704,909 145,166 1,632,899 142,158 1,547,926 127,952
Cash and due from banks ..... 38,602 --------- 37,288 --------- 44,910 ---------
Other assets, net ........... 66,383 72,225 73,660
---------- ----------- -----------
Total assets ............ $1,809,894 $ 1,742,412 $ 1,666,496
=========== =========== ===========
LIABILITIES
Savings and NOW ............. $ 583,817 11,484 1.97 $ 574,556 14,800 2.58 $ 576,194 13,704 2.38
Time deposits ............... 623,657 33,127 5.31 655,591 36,973 5.64 578,294 30,402 5.26
Long-term debt .............. 371 26 7.01 2,247 162 7.21 4,245 268 6.31
Other borrowings ............ 304,973 17,823 5.84 243,118 15,930 6.55 243,519 14,356 5.90
---------- --------- ----------- --------- ----------- ---------
Interest bearing
liabilities ............. 1,512,818 62,460 4.13 1,475,512 67,865 4.60 1,402,252 58,730 4.19
--------- --------- ---------
Demand deposits ............. 138,200 126,596 125,936
Other liabilities ........... 27,162 19,704 18,937
Shareholders' equity ........ 131,714 120,600 119,371
---------- ----------- -----------
Total liabilities and
shareholders' equity ... $1,809,894 $ 1,742,412 $ 1,666,496
=========== =========== ===========
Net interest income ..... $ 82,706 $ 74,293 $ 69,222
========= ========= =========
Net interest income
as a percent of
earning assets ......... 4.85% 4.55% 4.47%
==== ==== ====
(1) All domestic
(2) Interest on loans includes fees totaling $7.9 million, $6.6 million and $6.3
million in 2001, 2000 and 1999, respectively.
(3) Interest on tax-exempt loans and securities is presented on a fully tax
equivalent basis assuming a marginal tax rate of 35%.
CHANGE IN TAX EQUIVALENT 2001 compared to 2000 2000 compared to 1999
NET INTEREST INCOME Volume Rate Net Volume Rate Net
- ------------------------------------------------------------------------------------------------------------------------------------
(in thousands)
Increase (decrease) in interest income(1)
Taxable loans(2) .............................................. $ 6,450 $(2,701) $ 3,749 $ 10,610 $ 3,267 $ 13,877
Tax-exempt loans(2,3) ......................................... 227 (10) 217 143 (3) 140
Taxable securities ............................................ (488) (138) (626) (4,699) 1,851 (2,848)
Tax-exempt securities(3) ...................................... 209 (434) (225) 2,898 96 2,994
Other investments ............................................. 59 (166) (107) (1) 44 43
---------------------------------------------------------------
Total interest income ....................................... 6,457 (3,449) 3,008 8,951 5,255 14,206
---------------------------------------------------------------
Increase (decrease) in interest expense(1)
Savings and NOW ............................................... 235 (3,551) (3,316) (39) 1,135 1,096
Time deposits ................................................. (1,753) (2,093) (3,846) 4,255 2,316 6,571
Long-term debt ................................................ (132) (4) (136) (140) 34 (106)
Other borrowings .............................................. 3,746 (1,853) 1,893 (24) 1,598 1,574
---------------------------------------------------------------
Total interest expense ...................................... 2,096 (7,501) (5,405) 4,052 5,083 9,135
---------------------------------------------------------------
Net interest income ....................................... $ 4,361 $ 4,052 $ 8,413 $ 4,899 $ 172 $ 5,071
===============================================================
(1) The change in interest due to changes in both balance and rate has been
allocated to change due to balance and change due to rate in proportion to
the relationship of the absolute dollar amounts of change in each.
(2) All domestic.
(3) Interest on tax-exempt loans and securities is presented on a fully tax
equivalent basis assuming a marginal tax rate of 35%.
A-3
COMPOSITION OF AVERAGE EARNING ASSETS Year Ended December 31,
AND INTEREST BEARING LIABILITIES 2001 2000 1999
- ------------------------------------------------------------------------------------------------------------------------------------
As a percent of average earning assets
Loans--all domestic .............................................................. 83.8% 82.2% 79.0%
Other earning assets ............................................................. 16.2 17.8 21.0
----------------------------------------
Average earning assets ....................................................... 100.0% 100.0% 100.0%
========================================
Savings and NOW .................................................................. 34.2% 35.2% 37.2%
Time deposits .................................................................... 27.5 29.3 33.0
Brokered CDs ..................................................................... 9.1 10.9 4.4
Other borrowings and long-term debt .............................................. 17.9 15.0 16.0
----------------------------------------
Average interest bearing liabilities ......................................... 88.7% 90.4% 90.6%
========================================
Earning asset ratio ................................................................. 94.2% 93.7% 92.9%
Free-funds ratio .................................................................... 11.3 9.6 9.4
PROVISION FOR LOAN LOSSES. The provision for loan losses was $3.7
million during 2001 compared to $3.3 million and $2.7 million during 2000 and
1999, respectively. The increase in the provision during 2001 reflects
Management's assessment of the allowance for loan losses relative to overall
growth and change in mix of loans, excluding loans held for sale ("Portfolio
Loans"), the internal classification of certain commercial real estate mortgage
loans into higher risk categories and subjective factors associated with
weakening economic conditions. The increase in the provision during 2000
compared to 1999 again reflects Management's assessment of the allowance for
loan losses, including the impact of losses which relate to a default by a land
development company on loans totaling $2.2 million. 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. (See "Portfolio loans and
asset quality.")
NON-INTEREST INCOME. Non-interest income totaled $27.1 million during
2001 compared to $19.0 million and $17.3 million during 2000 and 1999,
respectively. Excluding net gains and losses on asset sales, non-interest income
grew by 21% to $20.3 million during 2001 and by 20% to $16.7 million during 2000
from each comparable prior year. Increases in service charges on deposit
accounts, title insurance fees and other non-interest income account for the
majority of the increase in total non-interest income during 2001 and 2000. The
increases in 2001 were partially offset by declines in mutual fund and annuity
commissions and real estate mortgage loan servicing fees.
NON-INTEREST INCOME Year Ended December 31,
2001 2000 1999
- -----------------------------------------------------------------------------------------------------------------------------------
(in thousands)
Service charges on deposit accounts ...................................... $ 9,936 $ 6,857 $ 5,696
Net gains (losses) on asset sales
Real estate mortgage loans ............................................ 6,306 2,209 4,247
Securities ............................................................ 522 9 (912)
Manufactured home loan origination fees and commissions .................. 2,258 2,144 2,009
Title insurance fees ..................................................... 1,874 912 844
Mutual fund and annuity commissions ...................................... 798 1,199 1,370
Real estate mortgage loan servicing fees, net ............................ 833 1,490 1,300
Other .................................................................... 4,558 4,141 2,769
-------------------------------------------
Total non-interest income ......................................... $27,085 $18,961 $ 17,323
===========================================
Service charges on deposit accounts totaled $9.9 million during 2001,
compared to $6.9 million and $5.7 million during 2000 and 1999, respectively.
The increases in such service charges principally relate to growth in checking
accounts as a result of deposit account promotions, including direct mail
solicitations and increases in certain fees on retail and commercial checking
accounts that were implemented in the second quarter of 2001. The Banks opened
24,000 new checking accounts in 2001 compared to 22,000 in 2000 and 15,000 in
1999. (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 $6.3
million on the sale of such loans during 2001, compared to $2.2 million and $4.3
million during 2000 and 1999, respectively. The volume of loans sold is
dependent upon the Banks' ability to originate real estate mortgage loans, which
is particularly sensitive to the level of interest rates. In 2001, approximately
63% of the $680.7 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
NET GAINS ON THE SALE OF REAL ESTATE Year ended December 31,
MORTGAGE LOANS 2001 2000 1999
- ------------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
Real estate mortgage loans originated ..................................... $ 680,702 $345,400 $ 508,700
Real estate mortgage loans sold ........................................... 410,998 153,800 271,100
Real estate mortgage loans sold with servicing rights released ............ 282,240 36,000 20,800
Net gains on the sale of real estate mortgage loans ....................... 6,306 2,209 4,247
Net gains as a percent of real estate mortgage loans sold ................. 1.53% 1.44% 1.57%
The volume of loans sold is dependent upon the Banks' ability to
originate real estate mortgage loans as well as 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 $18.9 million during 2001 compared to $22.3 million and $112.9
million during 2000 and 1999, respectively. (See "Securities.")
REALIZED GAINS AND LOSSES ON THE SALE OF SECURITIES Year ended December 31,
Proceeds Gains Losses Net
- ------------------------------------------------------------------------------------------------------------------------------------
(in thousands)
2001 ........................................................ $ 18,925 $ 524 $ 2 $ 522
2000 ........................................................ 22,319 94 85 9
1999(A) ..................................................... 112,871 23 935 (912)
(A) Approximately $0.8 million of the net losses in 1999 relates to balance
sheet restructuring efforts at MSB. (See "Securities.")
Title insurance fees increased to $1.9 million in 2001 compared to $0.9
million in 2000 and $0.8 million in 1999. The increase in title insurance fees
is primarily a function of the increased level of real estate mortgage loans
originated as well as the Company's title insurance agency acquiring an
increasing share of the Banks' business. Mutual fund and annuity commissions
declined in 2001 and 2000 compared to 1999. The decline in these commissions is
attributable to lower sales volume, due in part to a more difficult environment
for selling equity-based investments over the past two years. Real estate
mortgage loan servicing fees, net, declined to $0.8 million in 2001 from $1.5
million in 2000. This decline is due to an increase in the amortization of
capitalized originated mortgage servicing rights of $0.5 million in 2001 as a
result of a rise in the prepayment of real estate mortgage loans serviced for
others as well as an $88 million decline in the average balance of real estate
mortgage loans serviced for others during 2001. During the first 10 months of
2001 the Banks sold a majority of real estate mortgage loans on a
"service-released basis." As a result, the Banks were retaining less servicing
rights, as compared to prior periods, during the first 10 months of 2001. During
the last two months of 2001, the Banks began to retain the servicing on real
estate mortgage loans sold primarily because of declines in the price being paid
for mortgage loan servicing.
NON-INTEREST EXPENSE. Non-interest expense totaled $68.5 million during
2001, compared to $58.9 million and $69.5 million during 2000 and 1999,
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.
A-5
NON-INTEREST EXPENSE Year ended December 31,
2001 2000 1999
- ------------------------------------------------------------------------------------------------------------------------------------
(in thousands)
Salaries ............................................................ $26,126 $23,577 $23,788
Performance-based compensation and benefits ......................... 5,853 4,774 5,166
Other benefits ...................................................... 5,927 5,162 5,335
-------------------------------------------
Salaries and benefits ............................................ 37,906 33,513 34,289
Occupancy, net ...................................................... 4,966 4,653 4,607
Furniture and fixtures .............................................. 4,371 4,382 4,230
Loan and collection ................................................. 2,748 1,463 1,348
Data processing ..................................................... 2,558 2,467 3,356
Advertising ......................................................... 2,490 2,129 2,545
Communications ...................................................... 2,275 2,128 2,257
Supplies ............................................................ 1,938 1,530 1,661
Amortization of intangible assets ................................... 1,704 1,728 1,742
FDIC insurance ...................................................... 287 285 1,392
Merger-related ...................................................... 5,203
Litigation settlement ............................................... 2,025
Other ............................................................... 7,283 4,671 4,825
-------------------------------------------
Total non-interest expense ................................... $68,526 $58,949 $69,480
===========================================
The increase in salaries and benefits during 2001 compared to 2000 is
primarily attributable to merit pay increases and staffing level increases
associated with the growth and expansion of the organization as well as
increases in certain employee benefit costs such as health care insurance. Based
on current conditions, Management expects health care insurance costs to
continue to rise at levels significantly above the general rate of inflation.
Salaries and benefits declined in 2000 compared to 1999 primarily due to
staffing reductions associated with the acquisition of MSB.
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. Stock
options granted during 2001, 2000 and 1999 did not require the recognition of
any expense in the Company's consolidated statements of operations during those
periods. Management believes that these equity-based plans help align the
interests of the Company's officers and employees with those of its
shareholders.
Loan and collection expense increased to $2.7 million in 2001 compared
to $1.5 million in 2000. This is partially attributable to a $0.5 million
increase in expenses related to the holding or disposal of other real estate.
The amortization of intangible assets totaled $1.7 million during 2001,
2000 and 1999. It is expected that the amortization of intangible assets will
decline in future periods as the result of implementation of Statement of
Financial Accounting Standards #142, "Goodwill and Other Intangible Assets."
(See "Statements of Financial Accounting Standards.")
FDIC insurance assessments totaled $0.3 million during 2001 and 2000,
compared to $1.4 million in 1999. 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. Future deposit
insurance assessments are subject to determination by the FDIC and may not be
within the control of Management.
Other non-interest expense increased to $7.3 million in 2001 compared
to $4.7 million in 2000. This increase is partially attributable to a $0.9
million loss related to de-designating certain cash flow hedges and $0.3 million
in expense related to the prepayment of FHLB advances (See "Deposits and
borrowings"). Expenses relating to title insurance agency operations, checking
account losses and the consolidation of two subsidiary banks also contributed to
the increase in other expense. In December 2001 the Company terminated the cash
flow hedging relationships relating to $26 million of notional value fixed pay
interest-rate swaps. Pursuant to Statement of Financial Accounting Standards,
No. 133, "Accounting for Derivative Instruments and Hedging Activities," ("SFAS
#133"), the Company reclassified a $0.9 million charge from accumulated other
comprehensive income to earnings.
FINANCIAL CONDITION
SUMMARY. Portfolio Loans totaled $1.385 billion at December 31, 2001,
compared to $1.380 billion at December 31, 2000. Commercial loans grew by $101.0
million to $482.0 million while real estate mortgage loans declined by $110.8
million to $661.5 million. (See "Portfolio loans and asset quality.") Securities
increased by $52.8 million and loans held for sale increased by $56.4 million in
2001.
Deposits totaled $1.387 billion at December 31, 2001. The decrease from
$1.390 billion a year earlier reflects a decline in brokered certificates of
deposit ("Brokered CDs") that was largely offset by increases in checking,
savings and money market deposit accounts. Brokered CDs decreased by $48.7
million to $163.3 million at December 31, 2001, from $212.0 million at December
31, 2000. Other borrowings increased by $92.0 million to $288.0 million at
December 31, 2001 from $196.0 million at December 31, 2000. (See "Deposits and
borrowings.")
A-6
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. Management believes the unrealized losses on securities available
for sale are temporary in nature and due primarily to changes in interest rates
and not a result of credit related issues. Management also believes it has the
ability to hold these securities with unrealized losses to maturity or until
such time as the unrealized losses reverse. (See "Non-interest income" and
"Asset/liability management.")
SECURITIES Amortized Unrealized Fair
Cost Gains Losses Value
- ------------------------------------------------------------------------------------------------------------------------------------
(in thousands)
Securities available for sale
December 31, 2001 ................................................ $ 286,571 $ 5,789 $ 2,057 $ 290,303
December 31, 2000 ................................................ 214,526 3,486 565 217,447
Securities held to maturity
December 31, 2001 ................................................
December 31, 2000 ................................................ $ 20,098 $ 200 $ 187 $ 20,111
There were no securities held to maturity at December 31, 2001 compared
to $20.1 million at December 31, 2000. As permitted by SFAS #133, securities
that were previously designated as held to maturity were reclassified to
available for sale as of January 1, 2001. Securities available for sale
increased by $72.9 million during 2001 to $290.3 million at December 31, 2001.
This increase was primarily the result of the addition of approximately $50.1
million in seasoned 15-year Federal Home Loan Mortgage Corporation ("FHLMC")
mortgage-backed securities ("MBS") with a weighted-average coupon of 6.29%
during the third quarter of 2001. These 15-year FHLMC MBS were created from the
securitization of existing real estate mortgage loans previously originated by
one of the Banks. The balance of the increase in securities available for sale
was primarily due to purchases of municipal securities and corporate 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,
2001 2000
- ------------------------------------------------------------------------------------------------------------------------------------
(in thousands)
Real estate(1)
Residential first mortgages .................................................................... $ 511,019 $ 597,472
Residential home equity and other junior mortgages ............................................. 181,905 177,343
Construction and land development .............................................................. 185,004 144,401
Other(2) ....................................................................................... 292,548 262,246
Consumer .......................................................................................... 134,367 111,147
Commercial ........................................................................................ 65,275 66,574
Agricultural ...................................................................................... 14,566 20,481
----------------------------
Total loans ................................................................................ $ 1,384,684 $1,379,664
============================
(1) Includes both residential and non-residential commercial loans secured by
real estate.
(2) Includes loans secured by multi-family residential and non-farm,
non-residential property.
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.")
A-7
The increase in construction and land development and other real estate
loans reflects Management's emphasis on lending opportunities within these
categories, particularly within the Grand Rapids and Lansing, Michigan markets.
The increase in consumer loans is primarily due to growth in automobile and
recreational vehicle indirect lending. The decline in residential first mortgage
loans is primarily due to a significant increase in prepayments due to refinance
activity associated with lower interest rates and the securitization of
approximately $50.1 million of existing seasoned residential mortgage loans into
FHLMC MBS. (See "Securities.") Construction and land development loans, other
commercial real estate loans and indirect consumer loans are generally thought
to expose the Company to a higher risk of loss than residential mortgage lending
or direct consumer lending. Continued growth and changes in the mix of Portfolio
Loans is dependent upon Management's assessment of risks and opportunities in
its future lending activities as well as a variety of competitive and economic
factors.
NON-PERFORMING ASSETS December 31,
2001 2000 1999
- ------------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
Non-accrual loans ............................................................ $ 5,990 $5,200 $2,980
Loans 90 days or more past due and still accruing interest ................... 2,771 1,571 2,029
Restructured loans ........................................................... 285 260 270
--------------------------------------------
Total non-performing loans ................................................ 9,046 7,031 5,279
Other real estate ............................................................ 1,610 2,174 1,315
--------------------------------------------
Total non-performing assets ........................................... $10,656 $9,205 $6,594
============================================
As a percent of Portfolio Loans
Non-performing loans ...................................................... .65% .51% .41%
Non-performing assets ..................................................... .77 .67 .51
Allowance for loan losses ................................................. 1.17 1.01 1.01
Allowance for loan losses as a percent of non-performing loans ............... 179 199 246
Non-performing loans totaled $9.0 million, or 0.65% of total Portfolio
Loans at December 31, 2001, a $2.0 million increase from December 31, 2000. The
increase is attributable to an increase in non-performing commercial loans. The
increase in non-performing commercial loans in 2001 is primarily the result of
one commercial real estate loan totaling $1.3 million at December 31, 2001. This
loan is secured by an office building in the Lansing area with an original
appraised value of approximately $1.6 million. However, due to the current
vacancy level in the building, a specific valuation allowance of approximately
$0.5 million has been established on this loan at December 31, 2001. In
addition, several other commercial loans with balances generally between $0.2
million and $0.3 million were non-performing as of December 31, 2001. These
increases were offset by the liquidation during 2001 of a $1.2 million loan to a
land development company discussed below. The $0.6 million decline in other real
estate during 2001 is primarily due to the sale of such properties.
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 had been
charged against the allowance for loan losses during 2000. The remaining balance
of $1.2 million, which represented the anticipated liquidation value of the
residential real estate developments that secured the loans, had been designated
as non-accrual. One to four family residential real estate loans also
contributed to the increase in both non-performing loans and other real estate
during 2000.
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES December 31,
2001 2000 1999
- ------------------------------------------------------------------------------------------------------------------------------------
(in thousands)
Specific allocations ................................................... $ 500 $ 100 $ 400
Other adversely rated loans ............................................ 6,463 3,166 2,739
Historical loss allocations ............................................ 2,837 4,717 4,063
Additional allocations based on subjective factors ..................... 6,367 5,999 5,783
-----------------------------------------------
Total ........................................................... $16,167 $13,982 $12,985
===============================================
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, mix 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.
A-8
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 which is based upon a historical analysis of losses
incurred. The lower the rating assigned to a loan or category, the greater the
allocation percentage that is applied.
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, mix and the general
terms of the loan portfolios. (See "Provision for loan losses.")
ALLOWANCE FOR LOAN LOSSES Year ended December 31,
2001 2000 1999
- ------------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
Balance at beginning of period .............................................. $13,982 $ 12,985 $11,557
Provision charged to operating expense ................................... 3,737 3,287 2,661
Recoveries credited to allowance ......................................... 644 678 746
Loans charged against allowance .......................................... (2,196) (2,968) (1,979)
----------------------------------------------
Balance at end of period .................................................... $16,167 $ 13,982 $12,985
==============================================
Net loans charged against the allowance
to average Portfolio Loans ............................................... .11% .17% .10%
Loans charged against the allowance for loan losses, net of recoveries,
were equal to .11% of average loans during 2001, compared to .17% and .10%
during 2000 and 1999, respectively. The increase in net loans charged against
the allowance during 2000 relates to the default on a land development loan
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.
To attract new core depositors, the Banks have implemented a
high-performance checking program that utilizes a combination of direct mail
solicitations, in-branch merchandising, gifts for customers opening new checking
accounts or referring business to the Banks and branch staff sales training.
This program has generated significant increases in customer relationships as
well as deposit service charges. Management believes that the new relationships
which result from these marketing and sales efforts provide valuable
opportunities to cross sell related financial products and services.
ALTERNATE SOURCES OF FUNDS December 31,
2001 2000
------------------------------------------------------------------------------------
Average Average
Amount Maturity Rate Amount Maturity Rate
- ------------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
Brokered CDs(1) ........................... $ 163,315 1.7 years 3.83% $ 212,010 3.5 years 6.73%
Fixed-rate FHLB advances(1,2) ............. 129,084 4.1 years 4.08 68,743 7.9 years 6.33
Variable-rate FHLB advances(1) ............ 93,000 0.4 years 1.83 114,345 0.2 years 6.69
Securities sold under agreements to
repurchase(1) .......................... 54,963 0.2 years 1.94
Federal funds purchased ................... 35,100 1 day 1.86 27,550 1 day 6.85
---------------------------------------------------------------------------------
Total .............................. $ 475,462 1.8 years 3.15% $ 422,648 3.1 years 6.67%
=================================================================================
(1) Certain of these items have had their average maturity and rate altered
through the use of derivative instruments, including pay-fixed and
pay-variable interest rate swaps.
(2) Advances totaling $10 million, at December 31, 2001 and 2000, have
provisions that allow the FHLB to convert fixed-rate advances to adjustable
rates prior to stated maturity.
A-9
The Banks have implemented strategies that incorporate federal funds
purchased, other borrowings and Brokered CDs to fund a portion of the increases
in securities available for sale and 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") and securities sold under agreements to repurchase
("Repurchase Agreements"), totaled $288.0 million at December 31, 2001, compared
to $196.0 million a year earlier. The $92.0 million increase in other borrowed
funds principally reflects an increase in FHLB advances used to fund the decline
in Brokered CDs as well as Management's efforts to diversify the Banks' funding
sources by utilizing additional borrowing sources such as Repurchase Agreements.
The increase in other borrowings funded the decline in Brokered CDs. The Banks
were generally able to obtain more favorable pricing on FHLB borrowings and
Repurchase Agreements during much of 2001 as Brokered CD rates lagged the
general decline in market interest rates. The balance of the increase in other
borrowings was utilized to fund the increases in securities available for sale
and loans held for sale.
Derivative financial instruments are employed to manage the Banks'
exposure to changes in interest rates. At December 31, 2001, the Banks employed
interest-rate caps, floors and collars with an aggregate notional amount of
$67.0 million. The Banks also employed interest-rate swaps with an aggregate
notional amount of $225.0 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.")
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,
2001 2000
- ------------------------------------------------------------------------------------------------------------------------------------
(in thousands)
Unsecured debt ..................................................................................... $ 10,500 $ 11,500
-----------------------
Guaranteed preferred beneficial interests in Company's subordinated debentures ..................... 17,250 17,250
=======================
Shareholders' equity
Common stock .................................................................................... 11,865 11,610
Capital surplus ................................................................................. 82,512 77,255
Retained earnings ............................................................................... 39,355 37,544
Accumulated other comprehensive income (loss) ................................................... (1,829) 1,927
-----------------------
Total shareholders' equity .................................................................... 131,903 128,336
-----------------------
Total capitalization ........................................................................ $159,653 $ 157,086
=======================
Management has supplemented its balance-sheet management activities
with open market purchases of the Company's common stock. The Company
repurchased 536,000 shares of its common stock at an average price of $24.55 per
share in 2001 compared to 223,000 shares at an average price of $16.46 per share
in 2000.
The Company repurchased shares of common stock under two separate
repurchase plans during 2001. The first plan was adopted during 2000,
authorizing the repurchase of 500,000 shares of common stock. The purchase of
such shares was completed during the third quarter of 2001. On July 17, 2001,
the Company adopted a plan authorizing the repurchase of an additional 500,000
shares of common stock. At December 31, 2001, the Company had purchased 203,000
shares of common stock under that plan. Management anticipates that open market
purchases of the Company's common stock will continue in the foreseeable future.
Shareholders' equity totaled $131.9 million at December 31, 2001. The
increase from $128.3 million at December 31, 2000 reflects the retention of
earnings and the issuance of common stock pursuant to various equity-based
incentive compensation plans partially offset by an increase in unrealized
losses on derivative financial instruments. Shareholders' equity was equal to
6.98% of total assets at December 31, 2001, compared to 7.19% a year earlier.
CAPITAL RATIOS December 31,
2001 2000
- ------------------------------------------------------------------------------------------------------------------------------------
Equity capital .......................................................................................... 6.98% 7.19%
Average shareholders' equity to average assets .......................................................... 7.28 6.92
Tier 1 capital to average assets ........................................................................ 7.46 7.31
Tier 1 risk-based capital ............................................................................... 9.82 9.68
Total risk-based capital ................................................................................ 10.98 10.74
A-10
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, 2001
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 ............................................. $ 109,200 (32.17)% $ 79,300 (5.48)%
300 basis point rise ............................................. 125,900 (21.80) 81,000 (3.46)
200 basis point rise ............................................. 141,800 (11.93) 82,400 (1.79)
100 basis point rise ............................................. 154,100 (4.29) 83,100 (.95)
Base-rate scenario ............................................... 161,000 83,900
100 basis point decline .......................................... 162,400 .87 84,300 .48
200 basis point decline .......................................... 161,100 .06 83,300 (.72)
300 basis point decline .......................................... 162,100 .68 78,600 (6.32)
400 basis point decline .......................................... 168,000 4.35 74,200 (11.56)
(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.
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 (4.0 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 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.
A-11
STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS
On July 20, 2001, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 141, "Business Combinations,"
("SFAS #141") and Statement of Financial Accounting Standards No. 142, "Goodwill
and Other Intangible Assets," ("SFAS #142"). These two Statements will have a
profound effect on how organizations account for business combinations and for
the purchased goodwill and intangible assets that arise from those combinations
or are acquired otherwise. SFAS #141 is effective for all business combinations
initiated after June 30, 2001, and for all purchase method business combinations
completed after June 30, 2001, and requires that such combinations be accounted
for using the purchase method of accounting. SFAS #142 is effective for fiscal
years beginning after December 15, 2001 and requires that the amortization of
goodwill cease and that goodwill instead only be reviewed for impairment. The
Company is currently amortizing approximately $0.7 million, net of tax, of
goodwill annually. It is expected that the amortization of goodwill will cease
upon adoption of SFAS #142 on January 1, 2002. Other intangible assets,
primarily relating to core deposits, will continue to be amortized. Management
is currently evaluating impairment of goodwill which is not expected to have a
material impact on the Company's financial condition or results of operations.
Emerging Issues Task Force ("EITF") 99-20, "Recognition of Interest
Income and Impairment of Purchased and Retained Beneficial Interest in
Securitized Financial Assets," ("EITF 99-20") was effective for the Company's
quarter ended June 30, 2001. The adoption of EITF 99-20 did not have a material
impact on the Company's financial condition or results of operations.
On October 3, 2001, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," ("SFAS #144") which addresses
financial accounting and reporting for the impairment or disposal of long-lived
assets. SFAS #144 is effective for fiscal years beginning after December 15,
2001. The adoption of SFAS #144 is not expected to have a material impact on the
Company's financial condition or results of operations.
A-12
SELECTED CONSOLIDATED FINANCIAL DATA
Year Ended December 31,
2001 2000 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands, except per share amounts)
SUMMARY OF OPERATIONS
Interest income ................................. $ 141,359 $ 138,415 $ 125,510 $ 125,908 $ 119,911
Interest expense ................................ 62,460 67,865 58,730 64,667 66,018
---------------------------------------------------------------------------
Net interest income ........................... 78,899 70,550 66,780 61,241 53,893
Provision for loan losses ....................... 3,737 3,287 2,661 3,628 1,975
Net gains on the sale of real estate
mortgage loans ................................ 6,306 2,209 4,247 7,052 2,899
Other non-interest income ....................... 20,779 16,752 13,848 12,066 9,389
Merger-related securities losses, charges
and litigation settlements 8,000 9,650
Other non-interest expenses ..................... 68,526 58,949 62,252 59,726 51,152
---------------------------------------------------------------------------
Income before federal income tax expense ...... 33,721 27,275 11,962 17,005 3,404
Federal income tax expense ...................... 9,288 7,266 3,293 5,056 1,935
---------------------------------------------------------------------------
Net income before cumulative effect
of change in accounting principle ........... 24,433 20,009 8,669 11,949 1,469
Cumulative effect of change in accounting
principle, net of related tax effect(1) ....... (35)
---------------------------------------------------------------------------
Net income ................................ $ 24,398 $ 20,009 $ 8,669 $ 11,949 $ 1,469
===========================================================================
PER COMMON SHARE DATA(2)
Net income before cumulative effect of
change in accounting principle
Basic ......................................... $ 2.03 $ 1.62 $ .69 $ .96 $ .12
Diluted ....................................... 2.00 1.61 .68 .95 .12
Net income
Basic ......................................... $ 2.03 $ 1.62 $ .69 $ .96 $ .12
Diluted ....................................... 2.00 1.61 .68 .95 .12
Cash dividends declared ......................... .64 .55 .41 .30 .27
Book value ...................................... 11.12 10.53 9.18 9.35 8.48
SELECTED BALANCES
Assets .......................................... $1,888,457 $ 1,783,791 $1,725,205 $ 1,660,893 $ 1,640,879
Loans ........................................... 1,384,684 1,379,664 1,290,641 1,152,139 1,061,252
Allowance for loan losses ....................... 16,167 13,982 12,985 11,557 9,693
Deposits ........................................ 1,387,367 1,389,900 1,310,602 1,255,544 1,121,298
Shareholders' equity ............................ 131,903 128,336 113,746 117,042 104,625
Long-term debt .................................. 1,000 3,000 5,000
SELECTED RATIOS
Tax equivalent net interest income
to average earning assets ..................... 4.85% 4.55% 4.47% 4.08% 3.66%
Net income to
Average equity ................................ 18.52 16.59 7.26 10.72 1.37
Average assets ................................ 1.35 1.15 .52 .72 .09
Average shareholders' equity to
average assets ................................ 7.28 6.92 7.16 6.76 6.69
Tier 1 capital to average assets ................ 7.46 7.31 6.56 6.38 6.13
Non-performing loans to Portfolio Loans ......... .65 .51 .41 .59 .53
(1) Effect of the implementation of SFAS #133. (See note #14 to the consolidated
financial statements.)
(2) 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-13
INDEPENDENT AUDITORS' 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,
2001 and 2000, 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, 2001. 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, 2001 and 2000, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2001, in conformity with accounting
principles generally accepted in the United States of America.
As discussed in notes 1, 4 and 14 to the consolidated financial
statements, Independent Bank Corporation changed its method of accounting for
derivative financial instruments and hedging activities in 2001.
/s/KPMG LLP
KPMG LLP
Detroit, Michigan
February 1, 2002
A-14
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
December 31,
2001 2000
- ------------------------------------------------------------------------------------------------------------------------------------
(in thousands)
ASSETS
Cash and due from banks ................................................................ $ 50,525 $ 58,149
Securities available for sale .......................................................... 290,303 217,447
Securities held to maturity (fair value of $20.1 million at December 31, 2000) ......... 20,098
Federal Home Loan Bank stock, at cost .................................................. 21,266 19,612
Loans held for sale .................................................................... 77,220 20,817
Loans
Commercial ........................................................................... 482,046 381,066
Real estate mortgage ................................................................. 661,462 772,223
Installment .......................................................................... 241,176 226,375
-----------------------------
Total Loans ........................................................................ 1,384,684 1,379,664
Allowance for loan losses ............................................................ (16,167) (13,982)
-----------------------------
Net Loans .......................................................................... 1,368,517 1,365,682
Property and equipment, net ............................................................ 35,944 34,757
Accrued income and other assets ........................................................ 44,682 47,229
-----------------------------
Total Assets ..................................................................... $1,888,457 $ 1,783,791
=============================
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Non-interest bearing ................................................................. $ 160,598 $ 140,945
Savings and NOW ...................................................................... 601,949 576,621
Time ................................................................................. 624,820 672,334
-----------------------------
Total Deposits ..................................................................... 1,387,367 1,389,900
Federal funds purchased ................................................................ 35,100 27,550
Other borrowings ....................................................................... 288,010 196,032
Guaranteed preferred beneficial interests in Company's subordinated debentures ......... 17,250 17,250
Accrued expenses and other liabilities ................................................. 28,827 24,723
-----------------------------
Total Liabilities .................................................................. 1,756,554 1,655,455
-----------------------------
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: 11,864,876 shares at December 31, 2001 and 11,609,524 shares
at December 31, 2000 ............................................................... 11,865 11,610
Capital surplus ...................................................................... 82,512 77,255
Retained earnings .................................................................... 39,355 37,544
Accumulated other comprehensive income (loss) ........................................ (1,829) 1,927
-----------------------------
Total Shareholders' Equity ......................................................... 131,903 128,336
-----------------------------
Total Liabilities and Shareholders' Equity ....................................... $1,888,457 $ 1,783,791
=============================
See accompanying notes to consolidated financial statements
A-15
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended December 31,
2001 2000 1999
- ------------------------------------------------------------------------------------------------------------------------------------
(in thousands, except per share amounts)
INTEREST INCOME
Interest and fees on loans ..................................................... $124,592 $ 120,702 $ 106,733
Securities available for sale
Taxable ...................................................................... 9,334 7,625 6,680
Tax-exempt ................................................................... 5,920 5,587 3,566
Securities held to maturity
Taxable ...................................................................... 2,335 6,127
Tax-exempt ................................................................... 546 827
Other investments .............................................................. 1,513 1,620 1,577
--------------------------------------------
Total Interest Income ........................................................ 141,359 138,415 125,510
--------------------------------------------
INTEREST EXPENSE
Deposits ....................................................................... 44,611 51,773 44,106
Other borrowings ............................................................... 17,849 16,092 14,624
--------------------------------------------
Total Interest Expense ....................................................... 62,460 67,865 58,730
--------------------------------------------
Net Interest Income .......................................................... 78,899 70,550 66,780
Provision for loan losses ......................................................... 3,737 3,287 2,661
--------------------------------------------
Net Interest Income After Provision for Loan Losses .......................... 75,162 67,263 64,119
--------------------------------------------
NON-INTEREST INCOME
Service charges on deposit accounts ............................................ 9,936 6,857 5,696
Net gains (losses) on asset sales
Real estate mortgage loans ................................................... 6,306 2,209 4,247
Securities ................................................................... 522 9 (912)
Other income ................................................................... 10,321 9,886 8,292
--------------------------------------------
Total Non-interest Income .................................................... 27,085 18,961 17,323
--------------------------------------------
NON-INTEREST EXPENSE
Salaries and employee benefits ................................................. 37,906 33,513 34,289
Occupancy, net ................................................................. 4,966 4,653 4,607
Furniture and fixtures ......................................................... 4,371 4,382 4,230
Merger-related 5,203
Settlement of lawsuit 2,025
Other expenses ................................................................. 21,283 16,401 19,126
--------------------------------------------
Total Non-interest Expense ................................................... 68,526 58,949 69,480
--------------------------------------------
Income Before Federal Income Tax ............................................. 33,721 27,275 11,962
Federal income tax expense ........................................................ 9,288 7,266 3,293
--------------------------------------------
Net income before cumulative effect of change in accounting principle ........ 24,433 20,009 8,669
Cumulative effect of change in accounting principle, net of related tax effect .... (35)
--------------------------------------------
Net Income ................................................................. $ 24,398 $ 20,009 $ 8,669
============================================
Net income per share before cumulative effect of change in accounting
principle
Basic .......................................................................... $ 2.03 $ 1.62 $ .69
============================================
Diluted ........................................................................ $ 2.00 $ 1.61 $ .68
============================================
Net income per share
Basic .......................................................................... $ 2.03 $ 1.62 $ .69
============================================
Diluted ........................................................................ $ 2.00 $ 1.61 $ .68
============================================
Cash dividends declared per common share .......................................... $ .64 $ .55 $ .41
============================================
See accompanying notes to consolidated financial statements
A-16
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, 1999 .................. $ 10,815 $ 66,406 $ 38,639 $ 1,981 $ (799) $117,042
Net income for 1999 .......................... 8,669 8,669
Cash dividends declared, $.41 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 and retirement 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, $.55 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 and retirement 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
Net income for 2001 .......................... 24,398 24,398
Cash dividends declared, $.64 per share ...... (7,636) (7,636)
5% stock dividend ............................ 567 14,365 (14,951) (19)
Issuance of 223,832 shares of common stock ... 224 3,524 3,748
Repurchase and retirement of 536,417 shares
of common stock ........................... (536) (12,632) (13,168)
Net change in accumulated other
comprehensive income (loss), net of
$2.0 million of related tax effect ........ (3,756) (3,756)
----------------------------------------------------------------------------------
Balances at December 31, 2001 ......... $ 11,865 $ 82,512 $ 39,355 $(1,829) $ 0 $131,903
==================================================================================
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
2001 2000 1999
- ------------------------------------------------------------------------------------------------------------------------------------
(in thousands)
Net income .............................................................................. $24,398 $20,009 $ 8,669
Other comprehensive income
Net change in unrealized gain (loss) on securities available for sale,
net of related tax effect .......................................................... 499 4,210 (4,264)
Cumulative effect of change in accounting principle, net of related tax effect ....... (720)
Net change in unrealized loss on derivative instruments, net of related tax effect ... (3,535)
--------------------------------------
Comprehensive Income ............................................................. $20,642 $24,219 $ 4,405
======================================
See accompanying notes to consolidated financial statements
A-17
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
2001 2000 1999
- ------------------------------------------------------------------------------------------------------------------------------------
(in thousands)
Net Income ................................................................... $ 24,398 $ 20,009 $ 8,669
-------------------------------------------------
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH
FROM OPERATING ACTIVITIES
Proceeds from sales of loans held for sale ................................ 417,304 155,999 275,364
Disbursements for loans held for sale ..................................... (467,401) (161,657) (238,368)
Provision for loan losses ................................................. 3,737 3,287 2,661
Deferred federal income tax expense (credit) .............................. (1,086) 937 913
Deferred loan fees ........................................................ 324 (327) 443
Depreciation, amortization of intangible assets and premiums and
accretion of discounts on securities and loans .......................... 6,559 6,540 6,134
Net gains on sales of real estate mortgage loans .......................... (6,306) (2,209) (4,247)
Net (gains) losses on sales of securities ................................. (522) (9) 912
(Increase) decrease in accrued income and other assets .................... 843 3,388 (6,133)
Increase (decrease) in accrued expenses and other liabilities ............. 1,234 4,853 (109)
-------------------------------------------------
Total Adjustments ....................................................... (45,314) 10,802 37,570
-------------------------------------------------
Net Cash Provided by (Used in) Operating Activities ..................... (20,916) 30,811 46,239
-------------------------------------------------
CASH FLOW FROM INVESTING ACTIVITIES
Proceeds from the sale of securities available for sale ................... 18,925 22,319 86,136
Proceeds from the maturity of securities available for sale ............... 21,987 2,065 35,045
Proceeds from the sale of securities held to maturity ..................... 26,735
Proceeds from the maturity of securities held to maturity ................. 8,631 572,356
Principal received on securities available for sale ....................... 25,644 8,991 16,628
Principal received on securities held to maturity ......................... 43,318 5,690
Purchases of securities available for sale ................................ (120,037) (49,903) (187,255)
Purchases of securities held to maturity .................................. (500) (512,330)
Portfolio loans originated, net of principal payments ..................... 10,342 (94,827) (142,250)
Portfolio loans purchased ................................................. (36,480)
Principal received on portfolio loans purchased ........................... 19,242 3,840 2,073
Capital expenditures ...................................................... (5,640) (1,645) (6,542)
-------------------------------------------------
Net Cash Used in Investing Activities ................................... (66,017) (57,711) (103,714)
-------------------------------------------------
CASH FLOW FROM FINANCING ACTIVITIES
Net increase (decrease) in total deposits ................................. (2,533) 79,298 55,058
Net increase (decrease) in other borrowings ............................... 61,532 (33,778) 8,693
Proceeds from Federal Home Loan Bank advances ............................. 995,750 274,211 236,751
Payments of Federal Home Loan Bank advances ............................... (956,754) (281,771) (228,423)
Retirement of long-term debt .............................................. (1,000) (2,000) (2,000)
Dividends paid ............................................................ (7,236) (6,615) (4,587)
Repurchase of common stock ................................................ (13,168) (3,674) (4,331)
Proceeds from issuance of common stock .................................... 2,718 732 1,017
-------------------------------------------------
Net Cash Provided by Financing Activities ............................... 79,309 26,403 62,178
-------------------------------------------------
Net Increase (Decrease) in Cash and Cash Equivalents .................... (7,624) (497) 4,703
Cash and Cash Equivalents at Beginning of Year ............................... 58,149 58,646 53,943
-------------------------------------------------
Cash and Cash Equivalents at End of Year ............................ $ 50,525 $ 58,149 $ 58,646
================================================
Cash paid during the year for
Interest .................................................................. $ 64,255 $ 64,250 $ 58,627
Income taxes .............................................................. 9,746 3,000 2,600
Transfer of loans to other real estate ....................................... 2,318 3,051 1,534
Transfer of securities held to maturity to available for sale ................ 20,098
Real estate loans securitized ................................................ 50,100
See accompanying notes to consolidated financial statements
A-18
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, 2001, 85% of the Banks' loan portfolios were secured by real
estate.
Management is required to make estimates and assumptions in the
preparation of the consolidated 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 and derivative instruments. The net change in
unrealized gain or loss on securities available for sale in 2001 and 2000
reflect net realized gains of $0.5 million and $9,000, respectively, and reflect
net realized losses of $0.9 million in 1999. The net change in unrealized loss
on derivative instruments in 2001 reflects an expense reclassified into earnings
totaling $0.9 million. The reclassification of these amounts from comprehensive
income resulted in a federal income tax benefit of $0.1 million and $0.3 million
in 2001 and 1999, respectively, and a federal income tax expense of $3,000 in
2000.
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. The Company did not have any securities held to maturity at December 31,
2001. 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-19
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 $1.6 million and $2.2 million at December
31, 2001 and 2000, 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 $6.8 million and $7.6 million as of December 31, 2001
and 2000, 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 $6.8 million and $7.7
million as of December 31, 2001 and 2000, 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 - The Company adopted Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities," ("SFAS #133") on January 1, 2001. SFAS #133, which was
subsequently amended by SFAS #138, requires companies to record derivatives on
the balance sheet as assets and liabilities measured at their fair value. The
accounting for increases and decreases in the value of derivatives depends upon
the use of derivatives and whether the derivatives qualify for hedge accounting.
Upon adoption of SFAS #133, the Company recorded the fair value of
cash-flow hedging instruments ("Cash Flow Hedges") in accrued expenses and other
liabilities. On an ongoing basis, the Banks adjust their balance sheets to
reflect the then current fair value of the Cash Flow Hedges. The related gains
or losses are reported in other comprehensive income and are subsequently
reclassified into earnings, as a yield adjustment in the same period in which
the related interest on the hedged items (primarily fixed-rate debt obligations)
affect earnings. It is anticipated that approximately $4.3 million, net of tax,
of unrealized losses on Cash Flow Hedges at December 31, 2001, will be
reclassified to earnings over the next twelve months. To the extent that the
Cash Flow Hedges are not effective, the ineffective portion of the Cash Flow
Hedges are immediately recognized as interest expense. The maximum term of any
Cash Flow Hedge at December 31, 2001 is 5.8 years.
Also upon adoption of SFAS #133, the Company recorded fair-value
hedging instruments ("Fair Value Hedges") at fair value in accrued expenses and
other liabilities. The hedged items (primarily variable-rate debt obligations)
were also recorded at fair value through the statement of operations, which
offsets the adjustment to the Fair Value Hedges. On an ongoing basis, the Banks
adjust their respective balance sheets to reflect the then current fair value of
both the Fair Value Hedges and the respective hedged items. To the extent that
the change in value of the Fair Value Hedges do not offset the change in the
value of the hedged items, the ineffective portion is immediately recognized as
interest expense.
Certain derivative financial instruments are not designated as hedges.
The fair value of these derivative financial instruments have been recorded on
the Company's balance sheet and are adjusted on an ongoing basis to reflect
their then current fair value. The changes in the fair value of derivative
financial instruments not designated as hedges, are recognized currently as
interest expense.
A-20
When hedge accounting is discontinued because it is determined that a
derivative financial instrument no longer qualifies as a fair-value hedge, the
Company continues to carry the derivative financial instrument on the balance
sheet at its fair value, and no longer adjusts the hedged item for changes in
fair value. The adjustment of the carrying amount of the previously hedged item
is accounted for in the same manner as other components of similar instruments.
When hedge accounting is discontinued because it is probable that a forecasted
transaction will not occur, the Company continues to carry the derivative
financial instrument on the balance sheet at its fair value, and gains and
losses that were included in accumulated other comprehensive income are
recognized immediately in other non-interest expense. In all other situations in
which hedge accounting is discontinued, the Company continues to carry the
derivative financial instrument at its fair value on the balance sheet and
recognizes any changes in its fair value in interest expense.
For the year ended December 31, 2000, prior to the adoption of SFAS
#133, derivative financial instruments were employed to reduce the cost of
certain liabilities as well as to manage interest-rate risk. Such instruments
included interest-rate swaps, collars, floors and caps. These instruments were
accounted for on an accrual basis. Any net interest differential, including
premiums paid, was recognized as an adjustment to interest expense of the
related liability. The Company considered its interest-rate swaps to be
synthetic alterations of the related liability as long as (i) a specific
liability was designated; (ii) there was a high correlation with the changes in
interest expense generated by the liability; and (iii) the notional amount was
less than or equal to the principal amount of the designated liability. If these
criteria were not met, the swap was no longer considered a synthetic alteration
and changes in fair value were included in other income in the consolidated
financial statements. The criteria for consideration of a collar, floor or cap
as a synthetic alteration were similar to those for a swap arrangement.
If a synthetic alteration was terminated before maturity, the net
proceeds received or paid were 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 was sold or matured,
the synthetic alteration was marked to market and the gain or loss was included
with the gain or loss on the sale/maturity of the designated liability.
COMMON STOCK - At December 31, 2001, 318,418 shares of common stock
were reserved for issuance under the dividend reinvestment plan and 947,671
shares of common stock were reserved for issuance under stock option plans.
RECLASSIFICATION - Certain amounts in the 2000 and 1999 consolidated
financial statements have been reclassified to conform with the 2001
presentation.
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 4.0
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 consolidated 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
- ---------------------------------------------------------------------------------------------------------------------------
(in thousands)
Net interest income after provision for loan losses
Independent Bank Corporation ............................................................................... $ 55,212
Mutual Savings Bank, f.s.b.(1) ............................................................................. 8,907
---------
Total .................................................................................................. $ 64,119
=========
Net income
Independent Bank Corporation ............................................................................... $ 7,035
Mutual Savings Bank, f.s.b.(1)(2) .......................................................................... 1,634
---------
Total .................................................................................................. $ 8,669
=========
(1) Amounts are through the acquisition date of September 15, 1999.
(2) Federal income tax expense has been adjusted to reflect the estimated tax
expense that would have been recognized by Mutual Savings Bank, f.s.b., if
no deferred tax asset valuation allowance had been recognized during the
period 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
consolidated financial statements. Such costs included data-processing and
related costs, legal and professional, severance and write-off of duplicate
fixed assets.
NOTE 3 - RESTRICTIONS ON CASH AND DUE FROM BANKS
The Banks' legal reserve requirements were satisfied by average vault
cash and non-interest earning balances with the Federal Reserve Bank of $13.3
million and $14.3 million during 2001 and 2000, respectively. The Banks do not
maintain compensating balances with correspondent banks.
A-21
NOTE 4 - SECURITIES
Securities available for sale consist of the following at December 31:
Amortized Unrealized Fair
Cost Gains Losses Value
- ------------------------------------------------------------------------------------------------------------------------------------
(in thousands)
2001
U.S. Treasury ............................................ $ 10,282 $ 10,282
Mortgage-backed .......................................... 76,503 $ 2,509 $ 6 79,006
Obligations of states and political subdivisions ......... 131,120 2,345 1,671 131,794
Trust preferred .......................................... 31,150 723 66 31,807
Preferred stock .......................................... 19,669 1 34 19,636
Corporate ................................................ 17,151 211 280 17,082
Other .................................................... 696 696
----------------------------------------------------------------
Total ................................................ $ 286,571 $ 5,789 $ 2,057 $ 290,303
================================================================
2000
U.S. Treasury ............................................ $ 302 $ 1 $ 303
U.S. Government agencies ................................. 2,000 $ 18 1,982
Mortgage-backed .......................................... 50,505 949 109 51,345
Obligations of states and political subdivisions ......... 100,560 2,045 354 102,251
Trust preferred .......................................... 31,568 455 32 31,991
Preferred stock .......................................... 23,094 45 23,049
Corporate ................................................ 5,993 36 7 6,022
Other .................................................... 504 504
----------------------------------------------------------------
Total ................................................ $ 214,526 $ 3,486 $ 565 $ 217,447
================================================================
Securities held to maturity consist of the following at December 31,
2000:
Amortized Unrealized Fair
Cost Gains Losses Value
- ------------------------------------------------------------------------------------------------------------------------------------
(in thousands)
Mortgage-backed .......................................... $ 11,972 $ 1 $ 186 $ 11,787
Obligations of states and political subdivisions ......... 7,626 199 1 7,824
Other .................................................... 500 500
----------------------------------------------------------------
Total ................................................ $ 20,098 $ 200 $ 187 $ 20,111
================================================================
Securities held to maturity with book values and market values of $20.1
million were transferred to available for sale upon adoption of SFAS #133.
The amortized cost and fair value of securities at December 31, 2001,
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
Amortized Fair
Cost Value
- ----------------------------------------------------------------------------------------------------------------------------------
(in thousands)
Maturing within one year ......................................................................... $ 5,768 $ 5,853
Maturing after one year but within five years .................................................... 40,413 40,803
Maturing after five years but within ten years ................................................... 39,056 39,926
Maturing after ten years ......................................................................... 124,135 124,019
---------------------------
209,372 210,601
Mortgage-backed .................................................................................. 76,503 79,006
Other ............................................................................................ 696 696
---------------------------
Total ..................................................................................... $286,571 $290,303
===========================
A-22
A summary of proceeds from the sale of securities and realized gains
and losses follows:
Realized
Proceeds Gains Losses
- ------------------------------------------------------------------------------------------------------------------------------------
(in thousands)
2001 ................................................................... $ 18,925 $ 524 $ 2
2000 ................................................................... 22,319 94 85
1999 ................................................................... 112,871 23 935
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 $123.4 million and $34.6 million at
December 31, 2001 and 2000, 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, 2001 or 2000.
NOTE 5 - LOANS
An analysis of the allowance for loan losses for the years ended
December 31 follows:
2001 2000 1999
- ------------------------------------------------------------------------------------------------------------------------------------
(in thousands)
Balance at beginning of period .......................................... $ 13,982 $ 12,985 $ 11,557
Provision charged to operating expense ............................... 3,737 3,287 2,661
Recoveries credited to allowance ..................................... 644 678 746
Loans charged against allowance ...................................... (2,196) (2,968) (1,979)
-------------------------------------------------
Balance at end of period ................................................ $ 16,167 $ 13,982 $ 12,985
=================================================
Loans are presented net of deferred fees of $2.0 million at December
31, 2001, and $1.7 million at December 31, 2000.
Loans on non-accrual status, 90 days or more past due and still
accruing interest, or restructured amounted to $9.0 million, $7.0 million and
$5.3 million at December 31, 2001, 2000 and 1999, respectively. If these loans
had continued to accrue interest in accordance with their original terms,
approximately $0.6 million, $0.5 million, and $0.6 million of interest income
would have been realized in 2001, 2000 and 1999, respectively. Interest income
realized on these loans was approximately $0.2 million, $0.2 million and $0.3
million in 2001, 2000 and 1999, respectively.
Impaired loans totaled approximately $5.1 million, $3.7 million and
$3.4 million at December 31, 2001, 2000 and 1999, respectively. The Banks'
average investment in impaired loans was approximately $4.1 million, $3.7
million and $3.3 million in 2001, 2000 and 1999, 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 $0.1
million in 2001 and $0.2 million in 2000 and 1999. Certain impaired loans with a
balance of approximately $1.4 million, $0.3 million and $1.2 million had
specific allocations of the allowance for loan losses totaling approximately
$0.5 million, $0.1 million and $0.4 million at December 31, 2001, 2000 and 1999,
respectively.
The Banks capitalized approximately $1.4 million, $1.0 million and $2.0
million of servicing rights relating to loans that were originated and sold
during the years ended December 31, 2001, 2000 and 1999, respectively.
Amortization of capitalized servicing rights during those years was $1.6
million, $1.1 million and $1.2 million, respectively. The book value of
capitalized mortgage servicing rights was $4.3 million at December 31, 2001 and
is included on the consolidated statement of financial position in other assets.
The fair value of capitalized servicing rights at that same date was
approximately $6.2 million, and therefore, no valuation allowance was considered
necessary. The capitalized servicing rights relate to approximately $670.8
million of loans sold and serviced at December 31, 2001.
At December 31, 2001, 2000 and 1999, the Banks serviced loans totaling
$845.5 million, $995.0 million and $995.3 million, respectively, for the benefit
of third parties.
A-23
NOTE 6 - PROPERTY AND EQUIPMENT
A summary of property and equipment at December 31 follows:
2001 2000
- -------------------------------------------------------------------------------------------------------------
(in thousands)
Land .................................................................. $ 7,255 $ 5,781
Buildings ............................................................. 33,713 32,972
Equipment ............................................................. 30,863 27,840
-----------------------------
71,831 66,593
Accumulated depreciation and amortization ............................. (35,887) (31,836)
-----------------------------
Property and equipment, net .................................... $ 35,944 $ 34,757
=============================
NOTE 7 - DEPOSITS
A summary of interest expense on deposits for the years ended December
31 follows:
2001 2000 1999
- -----------------------------------------------------------------------------------------------------------
(in thousands)
Savings and NOW ........................................ $ 11,484 $ 14,800 $ 13,704
Time deposits under $100,000 ........................... 20,705 21,444 22,227
Time deposits of $100,000 or more ...................... 12,422 15,529 8,175
-----------------------------------------------
Total ........................................... $ 44,611 $51,773 $ 44,106
===============================================
Aggregate certificates of deposit and other time deposits in
denominations of $100,000 or more amounted to $239.0 million, $278.0 million,
and $182.1 million at December 31, 2001, 2000 and 1999, respectively.
A summary of the maturity of certificates of deposit at December 31,
2001, follows:
(in thousands)
2002 ......................................................................................... $ 434,032
2003 ......................................................................................... 112,984
2004 ......................................................................................... 28,441
2005 ......................................................................................... 14,892
2006 ......................................................................................... 13,508
2007 and thereafter .......................................................................... 20,963
----------
Total ................................................................................. $ 624,820
==========
NOTE 8 - OTHER BORROWINGS
A summary of other borrowings at December 31 follows:
2001 2000
- ------------------------------------------------------------------------------------------------------------
(in thousands)
Advances from Federal Home Loan Bank ....................................... $ 222,084 $ 183,088
Repurchase agreements ...................................................... 54,963
Notes payable .............................................................. 10,500 11,500
U.S. Treasury demand notes ................................................. 438 1,414
Other ...................................................................... 25 30
---------------------------
Total ............................................................... $ 288,010 $ 196,032
===========================
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. As of December 31,
2001, the banks had unused borrowing capacity with the FHLB of $182.2 million.
Interest expense on advances amounted to $11.7 million, $11.3 million and $9.0
million for the years ended December 31, 2001, 2000 and 1999, 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, 2001, 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, 2001, advances totaling $10 million, with a stated maturity of 2008 are
convertible in 2003.
A-24
The maturity and weighted average interest rates of FHLB advances at
December 31 follow:
2001 2000
Amount Rate Amount Rate
- ------------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
Fixed-rate advances
2001 ........................................... $ 13,230 6.28%
2002 ........................................... $ 70,270 2.51% 2,770 6.87
2003 ........................................... 12,515 4.69 9,515 5.36
2004 ........................................... 2,000 3.80
2005 ........................................... 2,100 5.05 1,100 5.72
2007 and thereafter ............................ 42,199 6.32 42,128 6.55
---------------------------------------------------------------------------
Total fixed-rate advances .................... 129,084 4.03 68,743 6.33
---------------------------------------------------------------------------
Variable-rate advances
2001 ........................................... 114,345 6.69
2002 ........................................... 93,000 1.83
---------------------------------------------------------------------------
Total variable-rate advances ................. 93,000 1.83 114,345 6.69
---------------------------------------------------------------------------
Total advances ............................. $ 222,084 3.11% $ 183,088 6.55%
===========================================================================
Repurchase agreements are secured by U.S. Treasury and mortgage-backed
securities with a book value of approximately $59.4 million at December 31,
2001. There were no repurchase agreements outstanding at December 31, 2000.
Repurchase agreements averaged $13.7 million and $3.3 million during
2001 and 2000, respectively. The maximum amounts outstanding at any month end
during 2001 and 2000 were $55.0 million and $20.0 million, respectively.
Interest expense on repurchase agreements totaled $0.3 million, $0.2 million and
$2.4 million for the years ended 2001, 2000 and 1999, respectively.
The Company has established an unsecured credit facility comprised of a
$15.0 million revolving credit agreement. At December 31, 2001, the revolving
credit facility had an unpaid principal balance of $10.5 million. The revolving
credit facility accrues interest at federal funds, plus 0.75%. Under the
revolving credit agreement, the Company is subject to certain restrictive
covenants. As of December 31, 2001, the Company is in compliance with all
convenants.
NOTE 9 - GUARANTEED PREFERRED BENEFICIAL INTERESTS IN COMPANY'S SUBORDINATED
DEBENTURES
IBC Capital Finance, a consolidated 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 or results of operations 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.
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 and standby letters of
credit. 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-25
A summary of financial instruments with off-balance sheet risk at
December 31 follows:
2001 2000
- ------------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
Financial instruments whose risk is represented by contract amounts
Commitments to extend credit .................................................................... $143,682 $ 141,964
Standby letters of credit ....................................................................... 26,467 26,841
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.
NOTE 11 - EARNINGS PER SHARE
A reconciliation of basic and diluted earnings per share for the years
ended December 31 follows:
2001 2000 1999
- ------------------------------------------------------------------------------------------------------------------------------------
(in thousands, except per share amounts)
Net income before cumulative effect of change in accounting principle .......... $ 24,433 $20,009 $ 8,669
=============================================
Net income ..................................................................... $ 24,398 $20,009 $ 8,669
=============================================
Shares outstanding(1) .......................................................... 12,030 12,321 12,587
ESOP shares not committed to be released .................................... (36)
---------------------------------------------
Shares outstanding for calculation of basic earnings per share ............ 12,030 12,321 12,551
Effect of stock options ..................................................... 192 103 138
---------------------------------------------
Shares outstanding for calculation of diluted earnings per share(1) ....... 12,222 12,424 12,689
=============================================
Net income per share before cumulative effect of change in accounting
principle
Basic ....................................................................... $ 2.03 $ 1.62 $ .69
=============================================
Diluted ..................................................................... $ 2.00 $ 1.61 $ .68
=============================================
Net income per share
Basic ....................................................................... $ 2.03 $ 1.62 $ .69
=============================================
Diluted ..................................................................... $ 2.00 $ 1.61 $ .68
=============================================
(1) Shares outstanding have been adjusted for 5% stock dividends in each year.
NOTE 12 - FEDERAL INCOME TAX
The composition of federal income tax expense (benefit) for the years
ended December 31 follows:
2001 2000 1999
- ------------------------------------------------------------------------------------------------------------------------------------
(in thousands)
Current ........................................................................ $ 10,374 $6,329 $ 2,380
Deferred ....................................................................... (1,086) 937 913
---------------------------------------------
Federal income tax expense .............................................. $ 9,288 $7,266 $ 3,293
=============================================
A-26
A reconciliation of federal income tax expense to the amount computed
by applying the statutory federal income tax rate of 35% in 2001, 2000 and 1999
to income before federal income tax for the years ended December 31 follows:
2001 2000 1999
- ------------------------------------------------------------------------------------------------------------------------------------
(in thousands)
Statutory rate applied to income before federal income tax ..................... $ 11,802 $ 9,546 $ 4,187
Tax-exempt interest income ..................................................... (2,387) (2,318) (1,506)
Amortization of goodwill ....................................................... 256 262 265
Non-deductible litigation settlement costs ..................................... 466
Other, net ..................................................................... (383) (224) (119)
---------------------------------------------
Federal income tax expense .............................................. $ 9,288 $ 7,266 $ 3,293
=============================================
The deferred federal income tax benefit of $1.1 million in 2001 and the
deferred federal income tax expense of $0.9 million in 2000 and 1999, resulted
from the tax effect of temporary differences. Federal income tax expense in 2001
includes a benefit of $0.4 million resulting from an adjustment of net deferred
tax assets associated with an increase in the Company's tax rate from 34% to
35%.
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:
2001 2000
- ------------------------------------------------------------------------------------------------------------------------
(in thousands)
Deferred tax assets
Net operating loss carryforward ................................................... $ 9,211 $10,219
Allowance for loan losses ......................................................... 5,658 4,893
Unrealized loss on derivative financial instruments ............................... 2,709
Deferred compensation ............................................................. 511 601
Loans held for sale ............................................................... 346 74
Deferred credit life premiums ..................................................... 334 388
Purchase discounts ................................................................ 269 225
Other ............................................................................. 471 355
--------------------------
Gross deferred tax assets ....................................................... 19,509 16,755
--------------------------
Deferred tax liabilities
Mortgage servicing rights ......................................................... 1,421 1,606
Unrealized gain on securities available for sale .................................. 1,306 994
Deferred loan fees ................................................................ 660 854
Fixed assets ...................................................................... 244
--------------------------
Gross deferred tax liabilities .................................................. 3,387 3,698
--------------------------
Net deferred tax assets ....................................................... $16,122 $13,057
==========================
At December 31, 2001, the Company had a net operating loss ("NOL")
carryforward of approximately $26.3 million which, if not used against taxable
income, will expire as follows:
(in thousands)
2008 ................................................................................................................. $14,679
2009 ................................................................................................................. 81
2010 ................................................................................................................. 6,779
2011 ................................................................................................................. 929
2012 ................................................................................................................. 411
2018 ................................................................................................................. 3,437
-------
Total ......................................................................................................... $26,316
=======
The use of the $26.3 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-27
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 1.6
million shares of common stock has been authorized for issuance under the plans
since 1992. 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:
2001 2000 1999
- ------------------------------------------------------------------------------------------------------------------------------------
Expected dividend yield .............................................................. 3.17% 4.46% 3.35%
Risk-free interest rate .............................................................. 5.22 6.22 5.04
Expected life (in years) ............................................................. 10 10 5
Expected volatility .................................................................. 41.62% 27.94% 40.83%
Per share weighted-average fair value ................................................ $11.74 $6.53 $6.27
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:
2001 2000 1999
- ------------------------------------------------------------------------------------------------------------------------------------
(in thousands, except per share amounts)
Net income
As reported .................................................................... $24,398 $20,009 $8,669
Pro-forma ...................................................................... 22,713 19,123 8,151
Income per share
Basic
As reported .................................................................. $ 2.03 $ 1.62 $ .69
Pro-forma .................................................................... 1.89 1.55 .65
Diluted
As reported .................................................................. $ 2.00 $ 1.61 $ .68
Pro-forma .................................................................... 1.86 1.54 .64
A summary of outstanding stock option grants and transactions follows:
Number Average
of Exercise
Shares Price
- ------------------------------------------------------------------------------------------------------------------------------------
Outstanding at January 1, 1999 .................................................................. 695,760 $12.49
Granted ...................................................................................... 127,116 14.47
Exercised .................................................................................... (99,094) 5.61
------------------------
Outstanding at December 31, 1999 ................................................................ 723,782 13.78
Granted ...................................................................................... 207,925 11.98
Exercised .................................................................................... (135,924) 6.74
Forfeited .................................................................................... (29,346) 19.65
------------------------
Outstanding at December 31, 2000 ................................................................ 766,437 14.22
Granted ...................................................................................... 220,778 19.21
Exercised .................................................................................... (275,948) 13.01
Forfeited .................................................................................... (8,128) 17.76
------------------------
Outstanding at December 31, 2001 ................................................................ 703,139 $16.25
========================
A-28
A summary of stock options outstanding at December 31, 2001 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
- -----------------------------------------------------------------------------------------------------------------------------------
$4.59 to $7.39 ................................ 20,198 3.03 $ 5.63 20,198 3.03 $ 5.63
$7.40 to $12.32 ............................... 111,685 8.20 11.61 111,685 8.20 11.61
$12.33 to $17.25 .............................. 226,518 3.29 13.72 226,518 3.29 13.72
$17.26 to $19.72 .............................. 207,045 9.20 18.97
$19.73 to $21.67 .............................. 137,693 2.08 21.67 123,960 1.50 21.53
--------------------------------------------------------------------------------
703,139 5.56 $16.25 482,361 3.95 $14.90
================================================================================
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. Contributions to the
employee stock ownership plan are determined annually and require approval of
the Company's Board of Directors. During 2001, 2000 and 1999, $1.8 million, $1.9
million and $1.4 million respectively, was expensed for these retirement plans.
Officers of the Company and its subsidiaries participate in various
performance-based compensation plans. Amounts expensed for all incentive plans
totaled $2.2 million, $2.0 million, and $1.9 million, in 2001, 2000 and 1999,
respectively.
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.
NOTE 14 - DERIVATIVE FINANCIAL INSTRUMENTS
The Company's derivative financial instruments according to the type of
hedge in which they are designated under SFAS #133 follow:
December 31, 2001
Average
Notional Maturity Fair
Amount (years) Value
- -----------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
Fair Value Hedge - pay variable interest-rate swap agreements ......................... $ 24,000 6.4 $ (442)
===================================
Cash Flow Hedge
Pay fixed interest-rate swap agreements ............................................ $ 175,000 2.0 $ (6,108)
Interest-rate collar agreements .................................................... 10,000 1.9 (458)
-----------------------------------
Total .......................................................................... $ 185,000 2.0 $ (6,566)
===================================
No hedge designation
Pay fixed interest-rate swap agreements ............................................ $ 26,000 .8 $ (848)
Interest-rate cap agreements ....................................................... 47,000 .5 0
Interest-rate floor agreements ..................................................... 10,000 .8 0
Rate-lock real estate mortgage loan commitments .................................... 39,000 .1 (1,625)
Mandatory commitments to sell real estate mortgage loans ........................... 114,000 .1 2,553
-----------------------------------
Total .......................................................................... $ 236,000 .3 $ 80
===================================
The Banks have established risk management objectives and strategies
which include interest-rate risk parameters for maximum fluctuations in net
interest income and market value of portfolio equity. Management monitors the
Banks' interest rate risk position via simulation modeling reports. The goal of
the Banks' asset/liability management efforts is to maintain profitable
financial leverage within established risk parameters.
The Banks use variable rate and short-term fixed-rate (less than 12
months) debt obligations to fund a portion of their balance sheets, which expose
the Banks to variability in interest rates. To meet their objectives, the Banks
may periodically enter into derivative financial instruments to mitigate
exposure to fluctuations in cash flows resulting from changes in interest rates.
Cash Flow Hedges currently include certain pay-fixed interest-rate swaps and
interest-rate collars.
Pay-fixed interest-rate swaps convert the variable-rate cash flows on
debt obligations to fixed-rates. Under interest-rate collars, the Banks will
receive cash if interest rates rise above a predetermined level while the Banks
will make cash payments if interest rates fall below a predetermined level. The
Banks effectively have variable rate debt with an established maximum and
minimum rate.
A-29
The Banks also use long-term, fixed-rate brokered CDs to fund a portion
of their balance sheets. These instruments expose the Banks to variability in
fair value due to changes in interest rates. To meet their objectives, the Banks
may enter into derivative financial instruments to mitigate exposure to
fluctuations in fair values of such fixed-rate debt instruments. Fair Value
Hedges currently include pay-variable interest rate swaps.
Certain financial derivative instruments, discussed in the following
paragraphs, have not been designated as hedges.
Interest rate caps are used to help manage fluctuations in cash flows
resulting from interest rate risk on certain short-term debt obligations. Under
these agreements, the Banks will receive cash if interest rates rise above a
predetermined level. Pay-fixed interest-rate swaps are also used to manage
fluctuations in cash flows resulting from changes in interest rates on certain
short-term debt obligations.
In the ordinary course of business, the Banks enter into rate-lock real
estate mortgage loan commitments with customers ("Rate Lock Commitments"). These
commitments expose the Banks to interest rate risk. The Banks also enter into
mandatory commitments to sell real estate mortgage loans ("Mandatory
Commitments") to hedge price fluctuations of mortgage loans held for sale and
Rate Lock Commitments. Mandatory Commitments help protect the Banks' loan sale
profit margin from fluctuations in interest rates. The changes in the fair value
of Rate Lock Commitments and Mandatory Commitments are recognized currently as
part of gains on the sale of real estate mortgage loans. Interest expense and
net gains on the sale of real estate mortgage loans, as well as net income may
be more volatile as a result of derivative instruments, which are not designated
as hedges.
The impact of adopting SFAS #133 on net income and other comprehensive
income is as follows:
Income (Expense)
-------------------------------------
Other
Comprehensive
Net Income Income Total
- -----------------------------------------------------------------------------------------------------------------------------------
(in thousands)
Cumulative effect of change in accounting principle
Fair value adjustments of option contracts not designated as hedges .................. $ (215) $ (215)
Interest rate swap agreements not designated as hedges ............................... 310 310
Fair value hedges .................................................................... (39) (39)
Cash flow hedges ..................................................................... (110) $(1,107) (1,217)
----------------------------------
Total .............................................................................. (54) (1,107) (1,161)
Federal income tax ................................................................... (19) (387) (406)
----------------------------------
Total, net of federal income tax ................................................. $ (35) $ (720) $ (755)
==================================
Change in fair value during the year
Option contracts not designated as hedges ............................................ $ 26 $ 26
Interest rate swap agreements not designated as hedges ............................... (310) (310)
Rate-lock real estate mortgage loan commitments ...................................... (1,625) (1,625)
Mandatory commitments to sell real estate mortgage loans ............................. 2,553 2,553
Fair value hedges .................................................................... 16 16
Ineffectiveness of cash flow hedges .................................................. (53) (53)
Cash flow hedges ..................................................................... 26 $(9,010) (8,984)
Reclassification adjustment .......................................................... 3,571 3,571
----------------------------------
Total .............................................................................. 633 (5,439) (4,806)
Federal income tax ................................................................... 222 (1,904) (1,682)
----------------------------------
Total, net of federal income tax ................................................. $ 411 $(3,535) $ (3,124)
==================================
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 2001 and 2000.
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:
2001 2000
- -----------------------------------------------------------------------------------------------------------------------------------
(in thousands)
Balance at beginning of year .......................................................................... $ 17,591 $ 16,829
New loans and advances ............................................................................. 21,411 9,823
Repayments ......................................................................................... (13,374) (9,061)
---------------------
Balance at end of year ................................................................................ $ 25,628 $ 17,591
=====================
A-30
NOTE 16 - OTHER NON-INTEREST EXPENSES
Other non-interest expenses for the years ended December 31 follow:
2001 2000 1999
- -----------------------------------------------------------------------------------------------------------------------------------
(in thousands)
Loan and collection .............................................................. $ 2,748 $ 1,463 $ 1,348
Data processing .................................................................. 2,558 2,467 3,356
Advertising ...................................................................... 2,490 2,129 2,545
Communications ................................................................... 2,275 2,128 2,257
Supplies ......................................................................... 1,938 1,530 1,661
Amortization of intangible assets ................................................ 1,704 1,728 1,742
FDIC insurance ................................................................... 287 285 1,392
Other ............................................................................ 7,283 4,671 4,825
------------------------------------------
Total non-interest expense ................................................ $21,283 $16,401 $ 19,126
==========================================
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, 2001, 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 $44.0 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 consolidated financial statements. Under capital adequacy guidelines,
the Company and the Banks must meet specific capital requirements that involve
quantitative measures as well as qualitative judgments by the regulators. The
most recent notification from the FDIC categorized each of the Banks as well
capitalized.
Actual capital amounts and ratios for the Company and the Banks at
December 31, 2001 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 .................................. $ 153,794 10.98% 8.00% 10.00%
Independent Bank .............................. 69,034 10.97 8.00 10.00
Independent Bank West Michigan ................ 31,959 10.54 8.00 10.00
Independent Bank South Michigan ............... 24,110 10.60 8.00 10.00
Independent Bank East Michigan ................ 25,372 10.77 8.00 10.00
Tier 1 capital to risk-weighted assets
Consolidated .................................. $ 137,627 9.82% 4.00% 6.00%
Independent Bank .............................. 62,038 9.86 4.00 6.00
Independent Bank West Michigan ................ 28,245 9.31 4.00 6.00
Independent Bank South Michigan ............... 21,504 9.46 4.00 6.00
Independent Bank East Michigan ................ 22,521 9.56 4.00 6.00
Tier 1 capital to average assets
Consolidated .................................. $ 137,627 7.46% 4.00% 5.00%
Independent Bank .............................. 62,038 7.33 4.00 5.00
Independent Bank West Michigan ................ 28,245 7.66 4.00 5.00
Independent Bank South Michigan ............... 21,504 7.43 4.00 5.00
Independent Bank East Michigan ................ 22,521 7.01 4.00 5.00
A-31
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 estimates
are subjective in nature, involving uncertainties and matters of judgment, and
therefore, fair values cannot be determined with precision. Changes in
assumptions could significantly affect the estimates.
Estimated fair values have been determined using available data and
methodologies that are considered suitable for each category of financial
instrument. For instruments with adjustable-interest rates which reprice
frequently and without significant credit risk, it is presumed that estimated
fair values approximate the recorded book balances.
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 and accrued interest.
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 instrument liabilities 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.
Derivative financial instruments have principally been valued based on
discounted value of contractual cash flows using a discount rate approximating
current market rates.
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.
The estimated fair values and recorded book balances at December 31
follow:
2001 2000
Estimated Recorded Estimated Recorded
Fair Book Fair Book
Value Balance Value Balance
- -----------------------------------------------------------------------------------------------------------------------------------
(in thousands)
ASSETS
Cash and due from banks ..................................... $ 50,500 $ 50,500 $ 58,100 $ 58,100
Securities available for sale ............................... 290,300 290,300 217,400 217,400
Securities held to maturity ................................. 20,100 20,100
Net loans and loans held for sale ........................... 1,465,000 1,445,700 1,402,800 1,386,500
Accrued interest receivable ................................. 9,200 9,200 9,100 9,100
LIABILITIES
Deposits with no stated maturity ............................ $ 762,500 $ 762,500 $ 717,600 $ 717,600
Deposits with stated maturity ............................... 632,000 624,800 673,400 672,300
Other borrowings ............................................ 345,900 340,400 243,000 240,800
Accrued interest payable .................................... 4,700 4,700 6,000 6,000
Derivative financial instruments ............................ 6,900 6,900 2,600
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-32
NOTE 19 - OPERATING SEGMENTS
The Company's reportable segments are based upon legal entities. The
Company has four reportable segments: Independent Bank ("IB"), Independent Bank
West Michigan ("IBWM"), Independent Bank South Michigan ("IBSM") and Independent
Bank East Michigan ("IBEM"). 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 Other(1) Total
- -----------------------------------------------------------------------------------------------------------------------------------
(in thousands)
2001
Total assets .......................... $878,664 $ 387,607 $ 295,683 $ 321,628 $ 4,875 $1,888,457
Interest income ....................... 67,584 31,411 18,844 23,489 31 141,359
Net interest income ................... 35,781 20,187 10,957 14,057 (2,083) 78,899
Provision for loan losses ............. 1,547 850 510 830 3,737
Income (loss) before
income tax .......................... 16,581 10,050 5,210 5,561 (3,681) 33,721
Net income (loss) ..................... 11,894 6,804 3,829 4,356 (2,485) 24,398
2000
Total assets .......................... $898,284 $ 353,556 $ 213,014 $ 313,536 $ 5,401 $1,783,791
Interest income ....................... 67,741 30,074 17,206 23,369 25 138,415
Net interest income ................... 32,602 17,542 9,590 13,297 (2,481) 70,550
Provision for loan losses ............. 1,887 540 380 480 3,287
Income (loss) before
income tax .......................... 13,811 8,225 4,306 5,036 (4,103) 27,275
Net income (loss) ..................... 10,104 5,644 3,252 3,930 (2,921) 20,009
1999
Total assets .......................... $886,219 $ 323,847 $ 196,665 $ 308,733 $ 9,741 $1,725,205
Interest income ....................... 65,495 25,958 13,562 20,470 25 125,510
Net interest income ................... 32,051 16,182 8,203 12,495 (2,151) 66,780
Provision for loan losses ............. 1,286 540 220 615 2,661
Income (loss) before
income tax .......................... 2,469 6,069 3,074 3,944 (3,594) 11,962
Net income (loss) ..................... 1,674 4,198 2,345 3,040 (2,588) 8,669
(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,
2001 2000
- -----------------------------------------------------------------------------------------------------------------------------------
(in thousands)
ASSETS
Cash and due from banks ....................................................................... $ 10,292 $ 7,496
Investment in subsidiaries .................................................................... 145,857 147,210
Other assets .................................................................................. 8,075 6,771
-------------------------
Total Assets .............................................................................. $ 164,224 $161,477
=========================
LIABILITIES AND SHAREHOLDERS' EQUITY
Notes payable ................................................................................. $ 10,500 $ 11,500
Subordinated debentures ....................................................................... 17,783 17,783
Other liabilities ............................................................................. 4,038 3,858
Shareholders' equity .......................................................................... 131,903 128,336
-------------------------
Total Liabilities and Shareholders' Equity ................................................ $ 164,224 $161,477
=========================
A-33
CONDENSED STATEMENTS OF OPERATIONS Year Ended December 31,
2001 2000 1999
- -----------------------------------------------------------------------------------------------------------------------------------
(in thousands)
OPERATING INCOME
Dividends from subsidiaries .............................................. $ 23,100 $ 15,400 $ 9,100
Management fees from subsidiaries and other income ....................... 14,944 12,905 10,242
----------------------------------------------
Total Operating Income ................................................. 38,044 28,305 19,342
----------------------------------------------
OPERATING EXPENSES
Interest expense ......................................................... 2,114 2,506 2,176
Administrative and other expenses ........................................ 16,764 14,281 12,078
----------------------------------------------
Total Operating Expenses ............................................... 18,878 16,787 14,254
----------------------------------------------
Income Before Federal Income Tax and Undistributed Net Income
of Subsidiaries ...................................................... 19,166 11,518 5,088
Federal income tax credit ................................................... 1,449 1,175 1,209
----------------------------------------------
Income Before Equity in Undistributed Net Income of Subsidiaries ....... 20,615 12,693 6,297
Equity in undistributed net income of subsidiaries .......................... 3,783 7,316 2,372
----------------------------------------------
Net Income ........................................................... $ 24,398 $ 20,009 $ 8,669
==============================================
CONDENSED STATEMENTS OF CASH FLOWS Year Ended December 31,
2001 2000 1999
- -----------------------------------------------------------------------------------------------------------------------------------
(in thousands)
Net Income .................................................................. $ 24,398 $ 20,009 $ 8,669
----------------------------------------------
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 ..................... 1,005 977 787
(Increase) decrease in other assets ...................................... (529) 2,150 993
Increase in other liabilities ............................................ 819 581 213
Equity in undistributed net income of subsidiaries ....................... (3,783) (7,316) (2,372)
----------------------------------------------
Total Adjustments ...................................................... (2,488) (3,608) (379)
----------------------------------------------
Net Cash from Operating Activities ..................................... 21,910 16,401 8,290
----------------------------------------------
CASH FLOW FROM INVESTING ACTIVITIES
Purchase of securities available for sale ................................ (100)
Maturity of securities available for sale ................................ 100
Capital expenditures ..................................................... (328) (616) (2,264)
----------------------------------------------
Net Cash Used in Investing Activities .................................. (428) (616) (2,164)
----------------------------------------------
CASH FLOW FROM FINANCING ACTIVITIES
Proceeds from short-term borrowings ...................................... 1,000 4,500
Retirement of long-term debt ............................................. (1,000) (2,000) (2,000)
Dividends paid ........................................................... (7,236) (6,615) (4,587)
Repurchase of common stock ............................................... (13,168) (3,674) (4,331)
Proceeds from issuance of common stock ................................... 2,718 732 1,017
----------------------------------------------
Net Cash Used in Financing Activities .................................. (18,686) (10,557) (5,401)
----------------------------------------------
Net Increase in Cash and Cash Equivalents .............................. 2,796 5,228 725
Cash and Cash Equivalents at Beginning of Year .............................. 7,496 2,268 1,543
----------------------------------------------
Cash and Cash Equivalents at End of Year ............................. $ 10,292 $ 7,496 $ 2,268
==============================================
A-34
QUARTERLY SUMMARY
Reported Sale Prices of Common Shares Cash Dividends
2001 2000 Declared
--------------------------------------------------------------
High Low Close High Low Close 2001 2000
- -----------------------------------------------------------------------------------------------------------------------------------
First quarter ............................. $20.24 $17.31 $19.22 $13.15 $ 9.42 $11.56 $ .15 $ .14
Second quarter ............................ 24.86 18.57 23.38 13.15 11.33 12.30 .15 .14
Third quarter ............................. 28.10 21.50 24.86 17.42 12.19 15.56 .15 .14
Fourth quarter ............................ 29.10 24.31 27.80 18.93 15.00 18.81 .18 .14
The Company has approximately 2,200 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)
2001
Interest income ............................................ $ 35,252 $35,405 $35,920 $ 34,782
Net interest income ........................................ 18,136 19,189 20,312 21,262
Provision for loan losses .................................. 633 1,261 1,061 782
Income before income tax expense ........................... 7,386 8,219 8,731 9,385
Net income before cumulative effect of change in
accounting principle ..................................... 5,293 6,249 6,245 6,646
Net income ................................................. 5,258 6,249 6,245 6,646
Income per share before cumulative effect of change in
accounting principle
Basic .................................................... $ .44 $ .52 $ .52 $ .56
Diluted .................................................. .43 .51 .51 .55
Net income
Basic .................................................... $ .43 $ .52 $ .52 $ .56
Diluted .................................................. .43 .51 .51 .55
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 .................................................... $ .36 $ .38 $ .44 $ .44
Diluted .................................................. .36 .37 .44 .44
A-35
SHAREHOLDER INFORMATION
HOW TO ORDER FORM 10-K
Shareholders may obtain, without charge, a copy of Form 10-K, the 2001
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 16, 2002, in the Ionia Theater located at 205 West Main Street, Ionia,
Michigan, 48846.
TRANSFER AGENT AND REGISTRAR
EquiServe Trust Company, N.A., P.O. Box 43011, Providence, RI
02940-3011, 800/426-5523, 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
Edward B. Swanson, President and Chief Executive Officer, Independent Bank South Michigan
Robert N. Shuster, 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
James J. Twarozynski, Senior Vice President and Controller, 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, C.P.A.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-36
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A-37
INDEPENDENT BANK CORPORATION
P.O. Box 491, 230 West Main Street
Ionia, Michigan 48846
616-527-9450
INPCO-PS-02
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 16, 2002.
Thank you in advance for your prompt consideration of these matters.
Sincerely,
The Board of Directors
INDEPENDENT BANK CORPORATION
DETACH HERE
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 16, 2002
The undersigned hereby appoints Charles C. Van Loan and Robert N. Shuster 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 16,
2002 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 AND "FOR" APPROVAL OF THE LONG-TERM
INCENTIVE PLAN.
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
C/O EQUISERVE
P.O. BOX 9398
BOSTON, MA 02205-9398
Vote by Telephone Vote by Internet
It's fast, convenient, and immediate! It's fast, convenient, and your vote is immediately
Call Toll-Free on a Touch-Tone Phone confirmed and posted.
1-877-PRX-VOTE (1-877-779-8683).
Follow these four easy steps: Follow these four easy steps:
1. Read the accompanying Proxy Statement and 1. Read the accompanying Proxy Statement and
Proxy Card. Proxy Card.
2. Call the toll-free number 2. Go to the Website
1-877-PRX-VOTE (1-877-779-8683). http://www.eproxyvote.com/ibcp
3. Enter your Voter Control Number located on 3. Enter your Voter Control Number located on
your Proxy Card above your name. your Proxy Card above your name.
4. Follow the recorded instructions. 4. Follow the instructions provided.
Your vote is important! Your vote is important!
Call 1-877-PRX-VOTE anytime! Go to http://www.eproxyvote.com/ibcp anytime!
Do not return your Proxy Card if you are voting by Telephone or Internet
DETACH HERE
/X/ Please mark
votes as in
this example.
- -----------------------------------------
INDEPENDENT BANK CORPORATION
- -----------------------------------------
FOR AGAINST ABSTAIN
1. Election of two Directors for terms expiring in 2005. 2. To approve the Long-Term Incentive Plan / / / / / /
Nominees: (01) Terry L. Haske and (02) Thomas F. Kohn
FOR / / / / WITHHELD
ALL FROM ALL 3. To transact such other business that may properly come before
NOMINEES NOMINEES the meeting or at any adjournments thereof.
/ /
-----------------------------------------------
For all nominees except as noted above
Mark box at right if an address change or comment has been / /
noted on the reverse side of this card.
Please be sure to sign and date this Proxy.
Signature: Date: Signature: Date:
------------------------------- ------------ ---------------------------- -------------