1
EXHIBIT 13
APPENDIX
Independent Bank Corporation is a bank holding company with total assets of
nearly $1.1 billion and a market capitalization of approximately $170 million.
Its four subsidiary banks (the "Banks") principally serve rural and suburban
communities located across Michigan's Lower Peninsula.
The Banks emphasize service and convenience as the principal means of
competing in the delivery of financial services. Accordingly, the Company's
community banking philosophy vests discretion and authority in the Banks'
management while providing financial incentives to align the interests of such
managers with those of its shareholders.
To support the Banks' service and sales efforts, while providing the
internal controls that are consistent with its decentralized structure, the
Company has consolidated the Banks' operations and provides administrative and
operation services to the Banks.
CONTENTS
Management's Discussion and Analysis ............................ A-2
Independent Auditor's Report .................................... A-11
Consolidated Financial Statements ............................... A-12
Notes to Consolidated Financial Statements....................... A-16
Quarterly Data .................................................. A-31
Selected Consolidated Financial Data ............................ A-32
Shareholder Information ......................................... A-33
Executive Officers and Directors ................................ A-33
A-1
2
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management's discussion and analysis of financial condition and results of
operations contains forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. Actual results could differ materially
from those projected in such forward-looking statements.
The following section presents additional information to assess the
financial condition and results of operations of the Company and the Banks. This
section should be read in conjunction with the consolidated financial statements
and the supplemental financial data contained elsewhere in this appendix.
RESULTS OF OPERATION
SUMMARY OF RESULTS. Net income increased by 14.5% to $10,221,000 in 1998. A
year earlier, net income increased by 13.7% to $8,924,000 from $7,852,000 in
1996. The double-digit increases in earnings are principally the result of
increases in net interest income and non-interest income. These increases in the
Company's revenue were, however, partially offset by increases in non-interest
expense, the provision for loan losses and federal income tax expense.
KEY PERFORMANCE RATIOS YEAR ENDED DECEMBER 31,
1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------
Net income to
Average equity....................................................... 15.60% 16.01% 15.74%
Average assets....................................................... 1.00 .95 1.11
Income per share
Basic................................................................ $1.39 $1.24 $1.11
Diluted.............................................................. 1.38 1.22 1.10
The Company's stable return on average equity, relative to the decline in
its return on average assets since 1996, principally reflects implementation of
the Bank's balance sheet management strategies as well as Management's efforts
to maintain an efficient capital structure. (See "Asset/liability management"
and "Capital resources.") The decline in the Company's return on assets in 1997
largely reflects the 1996 Acquisitions and related financing activity. (See
"Acquisitions.")
TAX EQUIVALENT NET INTEREST INCOME. Double-digit increases in the Company's
tax equivalent net interest income principally reflect increases in average
earning assets. Tax equivalent net interest income increased by 15% to
$50,784,000 in 1998 and by 23% to $44,047,000 in 1997 from $35,779,000 in 1996.
Average earning assets increased by 9% to $947,387,000 in 1998 and by 31% to
$869,496,000 in 1997 from $664,718,000 in 1996. The Banks' balance sheet
management strategies account for the majority of the $77,891,000 increase in
average earning assets during 1998. Approximately 80% of the $204,778,000
increase in average earning assets one year earlier was a result of the 1996
Acquisitions.
Tax equivalent net interest income was equal to 5.36% of average earning
assets during 1998 compared to 5.07% and 5.38% in 1997 and 1996, respectively.
The increase from 1997 was principally the result of an increase in loan
origination fees. (See "Non-interest income.") Net loan origination fees totaled
$6,312,000 in 1998 compared to $4,001,000 and $3,331,000 in 1997 and 1996,
respectively. Excluding the impact of such loan fees during 1998, tax equivalent
net interest income as a percent of average earning assets would have been
largely unchanged from 1997. Management attributes the majority of the 1997
decline in tax equivalent net interest income as a percent of average earning
assets to the 1996 Acquisitions and the cost of the related non-equity
financing. (See "Capital resources.")
A-2
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1998 1997 1996
------------------------------------------------------------------------------------------------
AVERAGE BALANCES AND TAX AVERAGE AVERAGE AVERAGE
EQUIVALENT RATES BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
- ---------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
ASSETS
Loans--all domestic(1,2) $ 804,217 $ 76,792 9.55% $ 689,166 $ 65,478 9.50% $ 510,434 $ 49,478 9.69%
Taxable securities 75,309 5,136 6.82 115,046 7,922 6.89 100,945 6,710 6.65
Tax-exempt securities(2) 55,056 4,665 8.47 52,139 4,423 8.48 39,393 3,433 8.72
Other investments 12,805 1,031 8.05 13,145 999 7.60 13,946 971 6.96
----------- -------- --------- -------- --------- ---------
Interest earning assets 947,387 87,624 9.25 869,496 78,822 9.07 664,718 60,592 9.12
-------- -------- ---------
Cash and due from banks 27,995 26,251 21,573
Other assets, net 44,177 41,395 21,038
----------- --------- ---------
Total assets $ 1,019,559 $ 937,142 $ 707,329
=========== ========= =========
LIABILITIES
Savings and NOW $ 354,690 8,743 2.46 $ 331,959 8,480 2.55 $ 250,977 6,116 2.44
Time deposits 303,183 16,354 5.39 263,046 14,134 5.37 187,117 10,022 5.36
Long-term debt 6,749 457 6.77 8,245 602 7.30 4,875 335 6.87
Other borrowings 182,209 11,286 6.19 187,519 11,559 6.16 144,703 8,340 5.76
----------- -------- --------- -------- --------- ---------
Interest bearing
liabilities 846,831 36,840 4.35 790,769 34,775 4.40 587,672 24,813 4.22
-------- -------- ---------
Demand deposits 95,167 81,191 61,161
Other liabilities 12,058 9,444 8,597
Shareholders' equity 65,503 55,738 49,899
----------- --------- ---------
Total liabilities and
shareholders' equity $ 1,019,559 $ 937,142 $ 707,329
=========== ========= =========
Net interest income $ 50,784 $ 44,047 $ 35,779
======== ======== =========
Net interest income
as a percent of
earning assets 5.36% 5.07% 5.38%
==== ==== ====
(1) Interest on loans includes net origination fees totaling $6,312,000,
$4,001,000 and $3,331,000 in 1998, 1997 and 1996, respectively.
(2) Interest on tax-exempt securities has been adjusted to reflect preferential
taxation. The adjustment assumes a marginal tax rate of 35% in 1998 and 1997
and 34% in 1996. For purposes of analysis, tax-exempt loans are included in
tax-exempt securities.
CHANGE IN TAX EQUIVALENT 1998 COMPARED TO 1997 1997 COMPARED TO 1996
NET INTEREST INCOME VOLUME RATE NET VOLUME RATE NET
- -----------------------------------------------------------------------------------------------------------------------------
(in thousands)
Increase (decrease) in interest income(1)
Loans--all domestic ................... $ 10,984 $ 330 $ 11,314 $ 17,000 $(1,000) $ 16,000
Taxable securities .................... (2,711) (75) (2,786) 964 248 1,212
Tax-exempt securities(2) .............. 247 (5) 242 1,083 (93) 990
Other investments ..................... (26) 58 32 (58) 86 28
------------------------------------------------------------------------------
Total interest income ............... 8,494 308 8,802 18,989 (759) 18,230
------------------------------------------------------------------------------
Increase (decrease) in interest expense(1)
Savings and NOW ....................... 567 (304) 263 2,056 308 2,364
Time deposits ......................... 2,165 55 2,220 4,080 32 4,112
Long-term debt ........................ (104) (41) (145) 245 22 267
Other borrowings ...................... (329) 56 (273) 2,607 612 3,219
------------------------------------------------------------------------------
Total interest expense .............. 2,299 (234) 2,065 8,988 974 9,962
------------------------------------------------------------------------------
Net interest income ............... $ 6,195 $ 542 $ 6,737 $ 10,001 $ (1,733) $ 8,268
==============================================================================
(1) The change in interest due to changes in both balance and rate has been
allocated to change due to balance and change due to rate in proportion to
the relationship of the absolute dollar amounts of change in each.
(2) Interest on tax-exempt securities has been adjusted to reflect preferential
taxation. The adjustment assumes a marginal tax rate of 35% in 1998 and 1997
and 34% in 1996.
The marginal cost of funds employed by the Banks to implement the balance
sheet management strategies have an adverse impact on tax equivalent net
interest income as a percent of average earning assets. (See "Deposits and
borrowings.") Increases in loans as a percent of average earning assets have,
however, partially offset the impact of the marginal funding costs. Loans
comprised 85% of earning assets during 1998 compared to 79% and 77% during 1997
and 1996.
A-3
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COMPOSITION OF AVERAGE EARNING ASSETS YEAR ENDED DECEMBER 31,
AND INTEREST PAYING LIABILITIES 1998 1997 1996
- ------------------------------------------------------------------------------------------------
As a percent of average earning assets
Loans--all domestic ........................................ 84.89% 79.26% 76.79%
Other earning assets ....................................... 15.11 20.74 23.21
------ ------ ------
Average earning assets ................................. 100.00% 100.00% 100.00%
====== ====== ======
Savings and NOW ............................................ 37.44% 38.18% 37.76%
Time deposits .............................................. 28.33 29.78 28.15
Brokered CDs ............................................... 3.67 0.47
Other borrowings and long-term debt ........................ 19.95 22.51 22.50
------ ------ ------
Average interest bearing liabilities ................... 89.39% 90.94% 88.41%
====== ====== ======
Earning asset ratio ........................................... 92.92% 92.78% 93.98%
Free-funds ratio .............................................. 10.61 9.06 11.59
PROVISION FOR LOAN LOSSES. Management's assessment of the allowance for loan
losses is based on the aggregate amount and composition of total loans,
excluding loans held for sale ("Portfolio Loans"), as well as an evaluation of
specific commercial and agricultural loans, historical loss experience and the
level of non-performing and impaired loans.
The provision for loan losses totaled $3,043,000 in 1998 compared to
$1,750,000 and $1,233,000 in 1997 and 1996, respectively. Increases in the
provision for loan losses principally reflect increases in Portfolio Loans.
(See "Portfolio Loans.")
NON-INTEREST INCOME. Non-interest income totaled $13,845,000 in 1998
compared to $8,515,000 and $5,552,000 in 1997 and 1996, respectively. An
increase in net gains on the sale of real estate mortgage loans accounts for 48%
of the $5,330,000 increase in non-interest income during 1998. Revenues
associated with deposit account promotions, the Banks' title insurance agency
and First Home Financial, Inc. also contributed to the increase in non-interest
income during 1998. (See "Acquisitions.")
A year earlier, approximately 32% and 28% of the increase in non-interest
income related to the 1996 Acquisitions and net gains on asset sales,
respectively. Revenues associated with deposit account promotions and the Banks'
title insurance agency also contributed to the increase in non-interest income
during 1997.
NON-INTEREST INCOME YEAR ENDED DECEMBER 31,
1998 1997 1996
- -------------------------------------------------------------------------------------------------------
Service charges on deposit accounts ................... $ 3,959,000 $ 3,128,000 $ 2,267,000
Net gains (losses) on asset sales
Real estate mortgage loans ......................... 4,815,000 2,270,000 1,871,000
Securities ......................................... 267,000 273,000 (162,000)
First Home Financial .................................. 1,304,000
Title insurance fees .................................. 872,000 585,000 40,000
Real estate mortgage loan servicing ................... 515,000 532,000 412,000
PrimeVest commissions ................................. 288,000 72,000 103,000
Other ................................................. 1,825,000 1,655,000 1,021,000
----------- ----------- -----------
Total non-interest income ...................... $13,845,000 $ 8,515,000 $ 5,552,000
=========== =========== ===========
The Banks realized net gains totaling $4,815,000 on the sale of real estate
mortgage loans during 1998 compared to $2,270,000 and $1,871,000 in 1997 and
1996, respectively. The $2,545,000 increase in such net gains during 1998
reflect the $183,100,000 increase in real estate mortgage loans sold. The
decline in net gains as a percent of loans sold during that year is attributed
to a decrease in the proportion of loans sold that have been underwritten
pursuant to government guarantees. A year earlier, Management attributed the
increase in net gains as a percent of loans sold to an increase in the
capitalization of the related mortgage servicing rights as well as an increase
in government guaranteed loans.
NET GAINS ON THE SALE OF REAL ESTATE YEAR ENDED DECEMBER 31,
MORTGAGE LOANS 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------------
Real estate mortgage loans originated ................................... $506,500,000 $272,200,000 $ 227,600,000
Real estate mortgage loans sold ......................................... 297,600,000 114,500,000 108,700,000
Real estate mortgage loan servicing rights sold ......................... 56,200,000 24,200,000 37,900,000
Net gains on the sale of real estate mortgage loans ..................... 4,815,000 2,270,000 1,871,000
Net gains as a percent of real estate mortgage loans sold ............... 1.62% 1.98% 1.72%
A-4
5
The volume of loans sold is dependent upon the Banks' ability to originate
real estate mortgage loans. Approximately 62% of the $506,500,000 real estate
mortgage loans originated during 1998 was the result of refinancing activity
and, accordingly, the volume of loans sold may be dependent upon the absolute
level of interest rates. Management estimates that refinancing activity
accounted for 41% of the $272,200,000 of loans originated during 1997.
The volume of loans sold is also a function of the relative demand for
fixed-rate obligations and other loans that the Banks cannot profitably fund
within established interest-rate risk parameters. (See "Asset/liability
management.") Net gains on real estate mortgage loans are also contingent upon
economic and competitive factors as well as the Banks' ability to effectively
manage exposure to changes in interest rates.
The Banks realized net gains on the sale of securities available for sale
totaling $267,000 during 1998 compared to net gains of $273,000 in 1997 and net
losses of $162,000 in 1996. Future gains and losses will be dependent upon the
Banks' asset/liability needs as well as the slope of the yield curve, the level
of interest rates and other pertinent factors. (See "Asset/liability
management.")
NON-INTEREST EXPENSE. Non-interest expense totaled $45,688,000 in 1998
compared to $36,845,000 and $27,861,000 in 1997 and 1996, respectively. Salaries
and benefits, the largest component of non-interest expense, totaled $25,974,000
in 1998 compared to $20,280,000 in 1997 and $15,685,000 in 1996.
NON-INTEREST EXPENSE YEAR ENDED DECEMBER 31,
1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
Salaries ............................................................... $16,699,000 $13,409,000 $10,280,000
Performance-based compensation and benefits ............................ 5,507,000 3,877,000 3,106,000
Other benefits ......................................................... 3,768,000 2,994,000 2,299,000
----------- ----------- ----------
Salaries and benefits ............................................... 25,974,000 20,280,000 15,685,000
Occupancy, net ......................................................... 3,093,000 2,786,000 2,042,000
Furniture and fixtures ................................................. 2,649,000 2,245,000 1,864,000
Computer processing .................................................... 1,853,000 1,340,000 1,063,000
Amortization of intangible assets ...................................... 1,692,000 1,523,000 583,000
Communications ......................................................... 1,634,000 1,280,000 1,007,000
Advertising ............................................................ 1,577,000 1,329,000 827,000
Supplies ............................................................... 1,300,000 1,019,000 804,000
Loan and collection .................................................... 1,244,000 939,000 663,000
Other .................................................................. 4,672,000 4,104,000 3,323,000
----------- ----------- -----------
Total non-interest expense ...................................... $45,688,000 $36,845,000 $27,861,000
=========== =========== ===========
The Company and each of the Banks maintain compensation plans that provide
incentives for superior performance. In addition to commissions and cash
incentive awards, performance-based compensation plans include the Employee
Stock Ownership Plan, the Employee Stock Option Plan and the Incentive Share
Grant Plan. Management believes that these equity-based plans help align the
interests of the Company's employees with those of its shareholders. Increases
in performance-based compensation account for approximately 29% and 17% of the
increases in salaries and benefits during 1998 and 1997, respectively.
Management attributes approximately 27% of the $8,843,000 increase in
non-interest expense during 1998 to commissions and other costs associated with
the increased volumes of real estate mortgage lending. The operation of the
Banks' title insurance agency and First Home Financial, Inc. accounts for
approximately 15% of the increase in non-interest expense during 1998.
A year earlier, Management estimated that the 1996 Acquisitions accounted
for approximately 55% of the $4,595,000 increase in salaries and benefits and
approximately 60% of the $8,984,000 increase in total non-interest expense
during 1997.
FINANCIAL CONDITION
SUMMARY. Assets totaled $1,085.3 million at December 31, 1998. The $101.5
million increase from $983.8 million at December 31, 1997, reflects increases in
Portfolio Loans and loans held for sale. (See "Non-interest income.") The
increase in total assets was principally funded by increases in deposits and
shareholders' equity.
Portfolio Loans totaled $822.6 million at December 31, 1998. Increases in
residential first mortgages as well as construction and land development loans
account for the majority of the increase in Portfolio Loans. The increase in
construction and land development loans may be partially attributed to customer
dislocation associated with the consolidation of competing banks with larger
regional banking holding companies.
Deposits totaled $830.5 million and $700.5 million at December 31, 1998 and
1997, respectively. The increase in deposits principally reflects an increase in
brokered certificates of deposit ("Brokered CDs") as well as the purchase of two
offices from Great Lakes National Bank during 1998. (See "Deposits and
borrowings" and "Acquisitions.")
A-5
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SECURITIES. The Banks maintain diversified securities portfolios that
include obligations of the U.S. Treasury and government- sponsored agencies as
well as securities issued by states and political subdivisions, corporate notes
and mortgage-backed securities. Management continually evaluates the Banks'
asset/liability management needs and attempts to maintain a portfolio structure
that provides sufficient liquidity and cash flow. (See "Asset/liability
management.")
SECURITIES AMORTIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
Securities available for sale
December 31, 1998 .................................... $ 96,614,000 $ 2,948,000 $ 47,000 $ 99,515,000
December 31, 1997 .................................... 108,231,000 2,775,000 237,000 110,769,000
Securities held to maturity
December 31, 1998 .................................... $ 18,349,000 $ 688,000 $ 8,000 $ 19,029,000
December 31, 1997 .................................... 22,525,000 838,000 9,000 23,354,000
The sale of securities available for sale is dependent upon Management's
assessment of reinvestment opportunities and the Banks' asset/liability
management needs. As a result of ongoing evaluations, the Banks sold securities
with an aggregate market value of approximately $11.3 million during 1998,
compared to $59.7 million during 1997. The Banks realized net gains on the sale
of such securities totaling $267,000 and $273,000 during 1998 and 1997,
respectively. A portion of the proceeds from the sale or maturity of securities
has been utilized to fund increases in Portfolio Loans.
PORTFOLIO LOANS. Management believes that the Company's decentralized
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 purchase residential real estate mortgage loans from third-party
originators.
LOAN PORTFOLIO COMPOSITION DECEMBER 31,
1998 1997
- --------------------------------------------------------------------------------------------------------
Real estate
Residential first mortgages ...................................... $376,736,000 $328,968,000
Residential home equity and other junior mortgages ............... 63,711,000 55,987,000
Construction and land development ................................ 92,639,000 62,721,000
Other ............................................................ 128,314,000 134,058,000
Consumer ............................................................ 88,337,000 91,723,000
Commercial .......................................................... 51,274,000 48,576,000
Agricultural ........................................................ 21,593,000 22,145,000
------------ ------------
Total loans .................................................. $822,604,000 $744,178,000
============ ============
Although each of the Banks has adopted uniform underwriting standards,
Management and the Board of Directors of each Bank retain authority and
responsibility for credit decisions. The Company's loan committee and the
centralization of commercial loan credit services as well as loan review
functions promote compliance with such established underwriting standards.
Further, the centralization of retail loan services provides for consistent
service quality and facilitates compliance with consumer protection laws and
regulations.
NON-PERFORMING ASSETS DECEMBER 31,
1998 1997 1996
- --------------------------------------------------------------------------------------------------------------
Non-accrual loans ............................................... $4,106,000 $3,298,000 $1,711,000
Loans 90 days or more past due and still accruing interest ...... 2,240,000 1,904,000 1,994,000
Restructured loans .............................................. 295,000 184,000 197,000
---------- ---------- ----------
Total non-performing loans ................................... 6,641,000 5,386,000 3,902,000
Other real estate ............................................... 936,000 331,000 730,000
---------- ---------- ----------
Total non-performing assets .............................. $7,577,000 $5,717,000 $4,632,000
========== ========== ==========
As a percent of Portfolio Loans
Non-performing loans ......................................... .81% .72% .64%
Non-performing assets ........................................ .92 .77 .76
Allowance for loan losses .................................... 1.18 1.03 1.14
Allowance for loan losses as a percent of non-performing loans .. 146 142 178
A-6
7
Non-performing loans totaled $6,641,000 at December 31, 1998, compared to
$5,386,000 and $3,902,000 at December 31, 1997 and 1996, respectively.
Residential real estate mortgage loans account for the increase in
non-performing loans and Management does not believe that the increase in
non-performing loans reflects a significant increase in the credit risk
associated with the Portfolio Loans.
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES DECEMBER 31,
1998 1997 1996
- ---------------------------------------------------------------------------------------------------
Commercial and agricultural ....................... $3,146,000 $2,200,000 $2,176,000
Real estate mortgage .............................. 312,000 322,000 257,000
Installment ....................................... 875,000 892,000 834,000
Unallocated ....................................... 5,381,000 4,256,000 3,693,000
------------------------------------------
Total ...................................... $9,714,000 $7,670,000 $6,960,000
==========================================
Allocated allowance as a percent of total allowance 44.6% 44.5% 46.9%
The allowance for loan losses in maintained at a level that Management
considers appropriate based upon its assessment of relevant circumstances. (See
"Provision for loan losses.") In performing its assessment, Management allocates
portions of the allowance to specific loans and loan portfolios. At December 31,
1998, the unallocated portion of the allowance for loan losses was equal to
55.4% of the total allowance compared to 55.5% and 53.1% at December 31, 1997
and 1996, respectively.
ALLOWANCE FOR LOAN LOSSES YEAR ENDED DECEMBER 31,
1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------
Balance at beginning of period ................................... $ 7,670,000 $ 6,960,000 $ 5,243,000
Allowance on loans acquired ................................... 1,180,000
Provision charged to operating expense ........................ 3,043,000 1,750,000 1,233,000
Recoveries credited to allowance .............................. 641,000 585,000 440,000
Loans charged against allowance ............................... (1,640,000) (1,625,000) (1,136,000)
-----------------------------------------------
Balance at end of period ......................................... $ 9,714,000 $ 7,670,000 $ 6,960,000
===============================================
Net loans charged against the allowance to average Portfolio Loans .12% .15% .14%
Loans charged against the allowance for loan losses, net of recoveries,
totaled $999,000 during 1998, compared to $1,040,000 and $696,000 during 1997
and 1996, respectively. Net loan losses were equal to .12% of average loans
during 1998 compared to .15% and .14% during 1997 and 1996, respectively.
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, Management employs pricing tactics that are intended to enhance the
value of core deposits and the Banks' have implemented funding strategies that
incorporate other borrowings and Brokered CDs to fund increases in the Portfolio
Loans. The use of such alternate sources of funds complements the Banks' stable
base of core deposits and is an integral part of the Banks' asset/liability
management efforts.
ALTERNATE SOURCES OF FUNDS DECEMBER 31,
1998 1997
------------------------------------------------------------------------------
AVERAGE AVERAGE
AMOUNT MATURITY RATE AMOUNT MATURITY RATE
- ---------------------------------------------------------------------------------------------------------------------------------
Brokered CDs ............................... $54,885,000 4.4 years 5.64% $14,375,000 .1 years 5.91%
Fixed-rate FHLB advances (1) ............... 50,569,000 3.5 5.75 94,954,000 1.3 5.93
Variable-rate FHLB advances ................ 68,500,000 .5 5.21 51,000,000 1.0 5.75
(1) Advances totaling $18 million have provisions that allow the FHLB to convert
fixed-rate advances to adjustable rates prior to stated maturity.
Other borrowed funds, principally advances from the Federal Home Loan Bank
(the "FHLB"), totaled $131.0 million and $167.2 million at December 31, 1998 and
1997, respectively. On those respective dates, federal funds purchased totaled
$22.7 million and $28.0 million. The decline in these funding sources reflects
an effort to diversify the Banks' funding sources and the increased reliance on
Broker CDs.
A-7
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INTEREST-RATE DERIVATIVE FINANCIAL INSTRUMENTS DECEMBER 31, 1998
SWAPS
------------------------------
CAPS COLLARS PAY FIXED PAY VARIABLE
- ------------------------------------------------------------------------------------------------------------------------------------
Notional amount ......................................... $ 26,000,000 $ 28,000,000 $ 54,500,000 $ 25,000,000
Weighted-average maturity ............................... 1.2 years 1.7 years 2.7 years 9.0 years
Cap strike .............................................. 6.69% 6.42%
Floor strike ............................................ 5.71
Rate paying ............................................. 5.28% 5.10%
Rate receiving .......................................... 5.27 5.89
Premium paid ............................................ $ 246,000
Annual cost ............................................. .26%
Amortized cost .......................................... $ 70,000
Fair value .............................................. 10,000 $ (137,000) $ (401,000) $ (118,000)
Derivative financial instruments are employed to reduce the cost of
alternate funding sources while managing the Banks' exposure to changes in
interest rates. Pay fixed interest-rate swaps effectively fix the cost of
variable-rate debt at 5.28% while pay variable interest-rate swaps effectively
convert fixed-rate Brokered CD's to variable rates. Interest-rate caps establish
a maximum cost of 6.69% on the associated short-term and variable-rate
borrowings, while allowing borrowing costs to decline if market rates decrease.
Interest-rate collars establish minimum and maximum costs of 5.71% and 6.42%,
respectively, on the associated short-term or variable-rate debt.
LIQUIDITY AND CAPITAL RESOURCES. An efficient capital structure is a
critical element to Management's mission to create value for the Company's
shareholders. To maintain financial leverage and profitably deploy capital
within existing markets, the Banks have implemented balance sheet management
strategies that combine effective loan origination efforts with disciplined
funding strategies. (See "Asset/liability management.") The Company's cost of
capital is also an important factor in creating shareholder value. Accordingly,
the Company's capital structure includes unsecured debt and trust preferred
securities, which are presented within the consolidated balance sheets as
guaranteed preferred beneficial interests in Company's subordinated debentures.
CAPITALIZATION DECEMBER 31,
1998 1997
- -------------------------------------------------------------------------------------------------------------
Unsecured debt.......................................................... $ 10,000,000 $ 12,000,000
Trust preferred securities ............................................. 17,250,000 17,250,000
Shareholders' Equity
Preferred stock, no par value .......................................
Common stock, par value $1.00 ....................................... 7,383,000 4,587,000
Capital surplus ..................................................... 37,658,000 30,011,000
Retained earnings ................................................... 22,749,000 23,243,000
Accumulated other comprehensive income .............................. 1,915,000 1,675,000
------------------------------
Total shareholders' equity ...................................... 69,705,000 59,516,000
------------------------------
Total capitalization ............................................ $ 96,955,000 $ 88,766,000
==============================
Shareholders' equity totaled $69.7 million at December 31, 1998. In addition
to the retention of earnings, the $10.2 million increase from $59.5 million a
year earlier reflects the issuance of common stock in conjunction with the
purchase of First Home Financial, Inc. as well as various equity-based incentive
compensation plans. (See "Acquisitions.")
CAPITAL RATIOS DECEMBER 31,
1998 1997
- ------------------------------------------------------------------------------------------------
Equity capital ........................................................... 6.42% 6.05%
Average shareholders' equity to average assets ........................... 6.42 5.95
Tier 1 leverage (tangible equity capital) ................................ 6.23 6.02
Tier 1 risk-based capital ................................................ 8.72 8.76
Total risk-based capital ................................................. 9.97 9.91
ASSET/LIABILITY MANAGEMENT. Interest-rate risk is created by differences in
the cash flow characteristics of financial 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
A-8
9
parameters. Management's evaluation 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 alternative 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 relevant factors.
Simulation analyses are employed to monitor the Banks' interest-rate risk
profiles and assess potential changes in net interest income and the net present
value of portfolio equity that may result from changes in interest rates. The
purpose of the 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 pricing relationships remain
constant. The simulations further incorporate assumptions relating to changes in
the prepayment rates of certain assets and liabilities. Factors that could cause
actual results to vary materially from simulation estimates include non-parallel
changes in interest rates, changes in current pricing relationships and
deviations in estimated prepayment speeds.
Each of the Banks has established parameters for interest-rate risk
exposure. Management continually monitors the Banks' interest-rate risk profile
and reports quarterly to the respective Bank's board of directors. The Banks
were in compliance with the interest-rate risk parameters throughout 1998.
Simulation analyses of changes in the net present value of the Company's
assets and liabilities under parallel shifts in interest rates are calculated by
discounting estimated future cash flows using a discount rate approximating
current market rates. Cash flow estimates incorporate prepayment speeds and
other embedded options. Simulation analyses of changes in net interest income
under parallel shifts in interest rates cover the next 12 months, are based on
a static balance sheet, and do not consider loan fees.
CHANGES IN MARKET VALUE OF PORTFOLIO EQUITY AND NET INTEREST INCOME
MARKET VALUE OF PERCENT NET INTEREST PERCENT
CHANGE IN INTEREST RATES PORTFOLIO EQUITY CHANGE INCOME CHANGE
- -----------------------------------------------------------------------------------------------------------------------------------
400 basis point rise ......................................... $ 83,200,000 (20.84)% $ 43,000,000 (6.32)%
300 basis point rise ......................................... 89,300,000 (15.03) 44,400,000 (3.27)
200 basis point rise ......................................... 96,200,000 (8.47) 45,500,000 (.87)
100 basis point rise ......................................... 102,100,000 (2.85) 45,900,000
Base rate scenario ........................................... 105,100,000 45,900,000
100 basis point decline ...................................... 104,300,000 (.76) 45,600,000 (.65)
200 basis point decline ...................................... 101,700,000 (3.24) 45,800,000 (.22)
300 basis point decline ...................................... 100,700,000 (4.19) 46,000,000 .22
400 basis point decline ...................................... 101,500,000 (3.43) 46,300,000 .87
Management has determined that the retention of 15- and 30-year fixed-rate
mortgages is generally inconsistent with its goal to maintain profitable
leverage or the Banks' interest-rate risk profiles. Accordingly, the majority of
such loans are sold to mitigate exposure to changing interest rates. Generally,
adjustable-rate and balloon real estate mortgage loans may be profitably funded
within established risk parameters and retention of such loans has been a
principal focus of the Banks' balance sheet management strategies. (See
"Non-interest income.")
ACQUISITIONS
On April 17, 1998, the Company purchased the outstanding capital stock of
First Home Financial, Inc. ("FHF"), an originator of manufactured home loans.
Aggregate consideration consisted of 72,000 shares of common stock with an
aggregate value of $1.8 million. Goodwill totaled approximately $2.0 million and
is being amortized over 15 years. FHF operates as a subsidiary of one the Banks
and the majority of the loans originated by FHF are being sold to non-affiliated
banks and finance companies.
On June 12, 1998, one of the Banks purchased two branches from Great Lakes
National Bank (the "GLNB Offices"). On that date, the GLNB Offices had deposits
totaling $18.3 million and the Bank recorded an intangible asset of $1.3
million. The Bank also purchased certain real and personal property. Net cash
proceeds from the transaction totaled $16.2 million.
During 1996, the Company acquired North Bank Corporation ("NBC") and one of
the Banks purchased eight branch offices of First of America Bank -- Michigan,
N.A. ("FoA Offices"). These transactions (the "1996 Acquisitions") were financed
with an unsecured credit facility and the issuance of non-convertible,
cumulative trust preferred securities. (See "Capital resources.")
NBC was acquired for cash consideration totaling $15.8 million. On the
effective date of the transaction, NBC's assets and shareholders' equity totaled
$152.0 million and $9.5 million, respectively, and the Company recorded $7.5
million of goodwill. The FoA Offices had deposits totaling $121.9 million, and
the acquiring Bank recorded intangible assets of $8.8 million. The Bank
purchased loans totaling $22.1 million and other real and personal property in
conjunction with the transaction. Net cash proceeds totaled $90.5 million.
A-9
10
YEAR 2000
The Year 2000 issue refers to computer-based operating systems that were
originally designed to recognize calendar years by their last two digits ("Year
2000"). If not corrected, many computer applications may fail or produce
erroneous data relating to 2000 and beyond.
The Company began preparing its computer-based operating systems for 2000
during 1997 and formed a committee to address such issues. The Year 2000
committee has implemented a Year 2000 plan (the "Plan") and reports its progress
to the board of directors quarterly. The Plan contains requirements for
assessing the impact of the Year 2000 on critical computer-based operating
systems and for modifying, replacing and testing such systems so that they will
function properly with respect to dates in 2000 and thereafter. Additionally,
the Banks have initiated discussion with certain commercial loan customers to
determine the extent to which their computer-based operating systems are Year
2000 compliant. Further, the Banks have developed contingency funding strategies
to mitigate unforseen liquidity issues.
A significant portion of the Company's Year 2000 issue relates to its core
data processing applications which are provided by a third party service
provider, M&I Data Services. The Company has completed its conversion to M&I
Data Services Year 2000 compliant application software.
The Company has not identified any non-compliant systems for which a
solution is not available and which would impair the Company's business
operations. All material non-compliant operating systems have been identified
and are in the process of being replaced. It is anticipated that the replacement
and testing of non-compliant operating systems will be completed during the
first quarter of 1999. Costs incurred to date have not been material and relate
primarily to the replacement of fully depreciated non-compliant personal
computer equipment. Furthermore, Management does not anticipate that the costs
to make the Company's operating systems Year 2000 compliant will have a material
impact on the consolidated financial statements. Management estimates that such
costs will not exceed $1.6 million. A significant portion of these costs
represent an acceleration of expenditures to replace or upgrade systems that
will become obsolete or otherwise inadequate to meet the Company's growing
technology needs.
While the Company is not aware of any Year 2000 problems for which a
solution is not available, other unanticipated issues could arise. These
unanticipated issues may include the ability to identify and correct all
relevant computer code, the availability and cost of trained personnel, the
impact of Year 2000 on our customers and other uncertainties.
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS
The Financial Accounting Standards Board adopted Statement of Financial
Accounting Standards, No. 133, "Accounting for Derivative Instruments and
Hedging Activities," ("SFAS #133") in June 1998.
SFAS #133 requires companies to record derivatives on the balance sheet as
assets and liabilities measured at fair value. The accounting for changes in the
value of derivatives will depend upon the use of those derivatives and whether
they qualify for hedge accounting.
This statement is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999, with earlier application allowed and is to be
applied prospectively. The adoption of this statement is not expected to have a
material impact on the Company's financial statements.
A-10
11
INDEPENDENT AUDITOR'S REPORT
BOARD OF DIRECTORS AND SHAREHOLDERS
INDEPENDENT BANK CORPORATION
IONIA, MICHIGAN
We have audited the accompanying consolidated statements of financial
condition of Independent Bank Corporation and subsidiaries as of December 31,
1998 and 1997, 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, 1998. 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 generally accepted auditing
standards. 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, 1998 and 1997, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1998, in conformity with generally accepted
accounting principles.
/s/ KPMG LLP
KPMG LLP
Lansing, Michigan
February 1, 1999
A-11
12
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31,
1998 1997
- --------------------------------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks ...................................................... $ 42,846,000 $ 30,371,000
Securities available for sale ................................................ 99,515,000 110,769,000
Securities held to maturity (fair value of $19,029,000 at December 31, 1998
and $23,354,000 at December 31, 1997) ...................................... 18,349,000 22,525,000
Federal Home Loan Bank stock, at cost ........................................ 12,589,000 12,489,000
Loans held for sale .......................................................... 39,741,000 21,754,000
Loans
Commercial and agricultural ................................................ 238,863,000 199,098,000
Real estate mortgage ....................................................... 449,114,000 416,689,000
Installment ................................................................ 134,627,000 128,391,000
------------------------------------
Total Loans .............................................................. 822,604,000 744,178,000
Allowance for loan losses .................................................. (9,714,000) (7,670,000)
------------------------------------
Net Loans ................................................................ 812,890,000 736,508,000
Property and equipment, net .................................................. 27,255,000 21,067,000
Accrued income and other assets .............................................. 32,073,000 28,334,000
------------------------------------
Total Assets ........................................................... $ 1,085,258,000 $ 983,817,000
====================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Non-interest bearing ....................................................... $ 112,930,000 $ 88,546,000
Savings and NOW ............................................................ 377,592,000 339,594,000
Time ....................................................................... 339,992,000 272,340,000
------------------------------------
Total Deposits ........................................................... 830,514,000 700,480,000
Federal funds purchased ...................................................... 22,650,000 28,000,000
Other borrowings ............................................................. 130,964,000 167,185,000
Guaranteed preferred beneficial interests in Company's subordinated debentures 17,250,000 17,250,000
Accrued expenses and other liabilities ....................................... 14,175,000 11,386,000
------------------------------------
Total Liabilities ........................................................ 1,015,553,000 924,301,000
------------------------------------
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-14,000,000 shares authorized;
issued and outstanding: 7,382,506 shares at December 31, 1998 and
4,586,733 shares at December 31, 1997 ...................................... 7,383,000 4,587,000
Capital surplus ............................................................ 37,658,000 30,011,000
Retained earnings .......................................................... 22,749,000 23,243,000
Accumulated other comprehensive income ..................................... 1,915,000 1,675,000
------------------------------------
Total Shareholders' Equity ............................................... 69,705,000 59,516,000
------------------------------------
Total Liabilities and Shareholders' Equity ............................. $ 1,085,258,000 $ 983,817,000
====================================
A-12
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31,
1998 1997 1996
- -----------------------------------------------------------------------------------------------------------
INTEREST INCOME
Interest and fees on loans .......................... $ 77,167,000 $ 65,830,000 $ 49,768,000
Securities available for sale ....................... 6,599,000 9,023,000 6,337,000
Securities held to maturity
Taxable ........................................... 194,000 356,000 1,209,000
Tax-exempt ........................................ 1,082,000 1,206,000 1,200,000
Other investments ................................... 1,031,000 999,000 971,000
-----------------------------------------------
Total Interest Income ............................. 86,073,000 77,414,000 59,485,000
-----------------------------------------------
INTEREST EXPENSE
Deposits ............................................ 25,097,000 22,614,000 16,138,000
Other borrowings .................................... 11,743,000 12,161,000 8,675,000
-----------------------------------------------
Total Interest Expense ............................ 36,840,000 34,775,000 24,813,000
-----------------------------------------------
Net Interest Income ............................... 49,233,000 42,639,000 34,672,000
Provision for loan losses .............................. 3,043,000 1,750,000 1,233,000
-----------------------------------------------
Net Interest Income After Provision for Loan Losses 46,190,000 40,889,000 33,439,000
-----------------------------------------------
NON-INTEREST INCOME
Service charges on deposit accounts ................. 3,959,000 3,128,000 2,267,000
Net gains (losses) on asset sales
Real estate mortgage loans ........................ 4,815,000 2,270,000 1,871,000
Securities ........................................ 267,000 273,000 (162,000)
Other income ........................................ 4,804,000 2,844,000 1,576,000
-----------------------------------------------
Total Non-interest Income ......................... 13,845,000 8,515,000 5,552,000
-----------------------------------------------
NON-INTEREST EXPENSE
Salaries and employee benefits ...................... 25,974,000 20,280,000 15,685,000
Occupancy, net ...................................... 3,093,000 2,786,000 2,042,000
Furniture and fixtures .............................. 2,649,000 2,245,000 1,864,000
Other expenses ...................................... 13,972,000 11,534,000 8,270,000
-----------------------------------------------
Total Non-interest Expense ........................ 45,688,000 36,845,000 27,861,000
-----------------------------------------------
Income Before Federal Income Tax .................. 14,347,000 12,559,000 11,130,000
Federal income tax expense ............................. 4,126,000 3,635,000 3,278,000
-----------------------------------------------
Net Income ...................................... $ 10,221,000 $ 8,924,000 $ 7,852,000
==============================================
Income per common share
Basic ............................................... $ 1.39 $ 1.24 $ 1.11
==============================================
Diluted ............................................. $ 1.38 $ 1.22 $ 1.10
==============================================
Cash dividends declared per common share ............... $ .50 $ .45 $ .41
==============================================
See notes to consolidated financial statements
A-13
14
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------------
Net Income $ 10,221,000 $ 8,924,000 $ 7,852,000
------------------------------------------------------
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH
FROM OPERATING ACTIVITIES
Proceeds from sales of loans held for sale 302,424,000 116,803,000 110,593,000
Disbursements for loans held for sale (315,596,000) (124,704,000) (101,786,000)
Provision for loan losses 3,043,000 1,750,000 1,233,000
Deferred federal income tax credit (813,000) (352,000) (230,000)
Deferred loan fees 179,000 640,000 334,000
Depreciation, amortization of intangible assets and premiums and
accretion of discounts on securities and loans 4,451,000 4,204,000 2,759,000
Net gains on sales of real estate mortgage loans (4,815,000) (2,270,000) (1,871,000)
Net (gains) losses on sales of securities (267,000) (273,000) 162,000
(Increase) decrease in accrued income and other assets (2,159,000) 638,000 (7,906,000)
Increase in accrued expenses and other liabilities 2,849,000 1,950,000 356,000
------------------------------------------------------
Total Adjustments (10,704,000) (1,614,000) 3,644,000
------------------------------------------------------
Net Cash from Operating Activities (483,000) 7,310,000 11,496,000
------------------------------------------------------
CASH FLOW FROM INVESTING ACTIVITIES
Proceeds from the sale of securities available for sale 11,271,000 59,727,000 18,145,000
Proceeds from the maturity of securities available for sale 7,162,000 4,053,000 16,385,000
Proceeds from the maturity of securities held to maturity 2,676,000 4,713,000 3,015,000
Principal payments on securities available for sale 20,528,000 11,643,000 9,601,000
Principal payments on securities held to maturity 1,723,000 799,000 694,000
Purchases of securities available for sale (27,590,000) (51,035,000) (60,396,000)
Purchases of securities held to maturity (295,000)
Portfolio loans made to customers, net of principal payments (75,355,000) (108,968,000) (80,233,000)
Portfolio loans purchased (18,916,000) (29,758,000) (5,603,000)
Principal payments on portfolio loans purchased 14,695,000 2,572,000 270,000
Acquisition of bank, less cash received 9,478,000
Acquisition of branch offices, less cash received 16,168,000 89,864,000
Acquisition of business 1,459,000
Capital expenditures (8,333,000) (5,038,000) (3,709,000)
------------------------------------------------------
Net Cash from Investing Activities (54,512,000) (111,292,000) (2,784,000)
------------------------------------------------------
CASH FLOW FROM FINANCING ACTIVITIES
Net increase in total deposits 111,723,000 27,946,000 7,468,000
Net increase (decrease) in short-term borrowings (12,686,000) 16,237,000 (13,300,000)
Proceeds from Federal Home Loan Bank advances 101,715,000 115,954,000 63,000,000
Payments of Federal Home Loan Bank advances (128,600,000) (72,000,000) (55,000,000)
Proceeds from long-term debt 10,000,000
Retirement of long-term debt (2,000,000) (2,000,000) (1,000,000)
Proceeds from issuance of guaranteed preferred beneficial interests
in Company's subordinated debentures 16,220,000
Dividends paid (3,587,000) (3,186,000) (2,736,000)
Proceeds from issuance of common stock 905,000 771,000 59,000
------------------------------------------------------
Net Cash from Financing Activities 67,470,000 83,722,000 24,711,000
------------------------------------------------------
Net Increase (Decrease) in Cash and Cash Equivalents 12,475,000 (20,260,000) 33,423,000
Cash and Cash Equivalents at Beginning of Period 30,371,000 50,631,000 17,208,000
------------------------------------------------------
Cash and Cash Equivalents at End of Period $ 42,846,000 $ 30,371,000 $ 50,631,000
======================================================
Cash paid during the period for
Interest $ 36,241,000 $ 35,049,000 $ 23,736,000
Income taxes 5,300,000 3,743,000 3,890,000
Transfer of loans to other real estate 498,000 431,000 996,000
Transfer of portfolio loans to held for sale 10,000,000
See notes to consolidated financial statements
A-14
15
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
ACCUMULATED
OTHER
COMPRE- TOTAL
COMMON CAPITAL RETAINED HENSIVE SHAREHOLDERS'
STOCK SURPLUS EARNINGS INCOME EQUITY
- -----------------------------------------------------------------------------------------------------------------------------------
Balances at January 1, 1996 $ 2,704,000 $ 19,924,000 $ 23,683,000 $ 714,000 $ 47,025,000
Net income for 1996 7,852,000 7,852,000
Cash dividends declared, $.41 per share (2,868,000) (2,868,000)
5% stock dividend 136,000 3,799,000 (3,954,000) (19,000)
Issuance of 21,834 shares of common stock 22,000 537,000 559,000
Net issuance costs (1,030,000) (1,030,000)
Net change in unrealized gain on
securities available for sale, net of
$163,000 of related tax effect 317,000 317,000
-----------------------------------------------------------------------------
Balances at December 31, 1996 2,862,000 23,230,000 24,713,000 1,031,000 51,836,000
Net income for 1997 8,924,000 8,924,000
Cash dividends declared, $.45 per share (3,261,000) (3,261,000)
5% stock dividend 217,000 6,895,000 (7,133,000) (21,000)
Issuance of 62,520 shares of common stock 62,000 1,340,000 1,402,000
Three-for-two stock split 1,446,000 (1,454,000) (8,000)
Net change in unrealized gain on
securities available for sale, net of
$332,000 of related tax effect 644,000 644,000
-----------------------------------------------------------------------------
Balances at December 31, 1997 4,587,000 30,011,000 23,243,000 1,675,000 59,516,000
Net income for 1998 10,221,000 10,221,000
Cash dividends declared, $.50 per share (3,688,000) (3,688,000)
5% stock dividend 351,000 6,662,000 (7,027,000) (14,000)
Issuance of 105,813 shares of common stock 106,000 3,337,000 3,443,000
Three-for-two stock split 2,339,000 (2,352,000) (13,000)
Net change in unrealized gain on
securities available for sale, net of
$124,000 of related tax effect 240,000 240,000
-----------------------------------------------------------------------------
Balances at December 31, 1998 $ 7,383,000 $ 37,658,000 $ 22,749,000 $ 1,915,000 $ 69,705,000
=============================================================================
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------------
Net income ...................................................................... $10,221,000 $ 8,924,000 $ 7,852,000
Other comprehensive income
Net change in unrealized gain on securities available for sale, net of related
tax effect ................................................................. 240,000 644,000 317,000
----------- ----------- -----------
Comprehensive income ..................................................... $10,461,000 $ 9,568,000 $ 8,169,000
=========== =========== ===========
See notes to consolidated financial statements
A-15
16
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 generally accepted accounting
principles 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 segment 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. 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. The local
economies of the communities served by the Banks are relatively stable and
reasonably diversified.
Management is required to make estimates and assumptions in the preparation
of the financial statements which affect the amounts reported. Material
estimates that are particularly susceptible to changes in the near-term relate
to the determination 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 and
customer circumstances.
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 - The Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income," (SFAS #130) on January 1,
1998. SFAS #130 establishes standards for reporting comprehensive income, which
consists of unrealized gains and losses on securities available for sale. The
adoption of SFAS #130 did not have a material impact on total shareholders'
equity. Prior year amounts have been reclassified in the financial statements.
The net change in unrealized gain on securities available for sale in 1998
and 1997 reflect net realized gains of $267,000 and $273,000, respectively, and
net realized losses of $162,000 in 1996. Such reclassification resulted in
federal income tax expense of $93,000 and $95,000 in 1998 and 1997,
respectively, and a benefit of $55,000 in 1996.
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 that have been acquired by purchase or the origination and
subsequent sale of a loan. The fair value of originated mortgage servicing
rights has been determined based upon market value quotes for similar servicing.
These mortgage servicing rights are amortized in proportion to and over the
period of estimated net loan servicing income. The Banks assess mortgage
servicing rights for impairment based on the fair value of those rights. For
purposes of measuring impairment, the characteristics used by the Banks include
interest rate, term and type.
SECURITIES - The Company classifies its securities as trading, held to
maturity or available for sale. Trading securities are bought and held
principally for the purpose of selling them in the near-term and are reported at
fair value with realized and unrealized gains and losses included in earnings.
The Company does not have any trading securities. Securities held to maturity
represent those securities for which the Banks have the positive intent and
ability to hold until maturity and are reported at cost, adjusted for
amortization of premiums and accretion of discounts computed on the level yield
method. Securities available for sale represent those securities not classified
as trading or held to maturity and are reported at fair value with unrealized
gains and losses, net of applicable income taxes reported as a separate
component of shareholders' equity. 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, net of direct loan origination costs, are deferred and
recognized as an adjustment of yield over the 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 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 fee revenue over its life.
A-16
17
ALLOWANCE FOR LOAN LOSSES - Some loans will not be repaid in full.
Therefore, an allowance for loan losses is maintained at a level which
management has determined to be adequate to absorb inherent losses. Management's
assessment of the allowance is based on the aggregate amount and composition of
the loan portfolios, as well as an evaluation of specific commercial and
agricultural loans, historical loss experience and the level of non-performing
and impaired loans. Increases in the allowance are recorded by a provision for
loan losses charged to expense and, 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 future 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 $936,000 and $331,000 at December 31, 1998 and 1997,
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 $9,015,000 and $7,708,000 as of December 31, 1998 and
1997, respectively. Other intangible assets are amortized using both
straight-line and accelerated methods over 10 to 15 years. Other intangibles
amounted to $9,728,000 and $9,340,000 as of December 31, 1998 and 1997,
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 enacted 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 income 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.
COMMON STOCK - At December 31, 1998, 248,969 shares of common stock were
reserved for issuance under the Incentive Share Grant Plan, 298,824 shares of
common stock were reserved for issuance under the dividend reinvestment plan and
762,255 shares of common stock were reserved for issuance under stock option
plans.
RETIREMENT PLANS - The Company maintains an employee stock ownership plan as
well as a 401(k) plan for substantially all full-time employees.
RECLASSIFICATION - Certain amounts in the 1997 and 1996 financial
statements have been reclassified to conform with the 1998 presentation.
A-17
18
NOTE 2-ACQUISITIONS
In June 1996, the Company acquired North Bank Corporation ("NBC") for cash
consideration totaling approximately $15,800,000. At the effective date of the
acquisition, NBC's assets totaled $152,000,000 and its loans and deposits
totaled $84,000,000 and $131,600,000, respectively. The transaction was
accounted for as a purchase and the assets acquired and the liabilities assumed
have been recorded at fair value. The Company's results of operations include
revenues and expenses relating to NBC since May 31, 1996. Goodwill totaled
$7,500,000 and is being amortized over 15 years. NBC's sole banking subsidiary
consolidated with an existing subsidiary of the Company during the third quarter
of 1996.
The pro-forma information presented in the following table is based on
historical results of the Company and NBC. The information has been combined to
present the results of operations as if the acquisition had occurred at the
beginning of the period presented. The following pro-forma results for the year
ended December 31, 1996, are not necessarily indicative of the results which
would have actually been attained if the acquisition had been consummated in the
past or what may be attained in the future.
1996
(unaudited)
- --------------------------------------------------------------------------------
Total revenue .............................................. $ 70,200,000
Net income ................................................. 7,600,000
Earnings per share
Basic ................................................... $ 1.07
Diluted ................................................. 1.06
On December 13, 1996, one of the Banks purchased certain loans as well as
real and personal property and assumed deposit liabilities associated with eight
branch offices from First of America Bank - Michigan, NA ("FoA Purchase"). On
that date, loans purchased and deposit liabilities assumed totaled $22,100,000
and $121,900,000, respectively. An intangible asset of $8,800,000 is being
amortized over 12 years. The assets purchased and the liabilities assumed have
been recorded at fair value. The Company's results of operations include
revenues and expenses relating to the FoA Purchase since December 13, 1996.
On April 17, 1998, the Company purchased the outstanding capital stock of
First Home Financial, Inc. ("FHF"), an originator of manufactured home loans.
Aggregate consideration consisted of 72,000 shares of common stock with an
aggregate value of $1,783,000. The assets purchased and liabilities assumed have
been recorded at fair value. Goodwill totaled approximately $2,000,000 and is
being amortized over 15 years. The Company's results of operations include FHF's
revenues and expenses, including the amortization of goodwill, totaling
$1,300,000 and $1,100,000, respectively, since April 17, 1998.
On June 12, 1998, one of the Banks purchased the real and personal property
and assumed the deposit liabilities associated with two offices of Great Lakes
National Bank. On that date, deposits totaled $18,300,000 and the Bank recorded
an intangible asset of $1,300,000 which is being amortized over 10 years. The
assets purchased and the liabilities assumed have been recorded at fair value.
The Company's results of operations include revenues and expenses relating to
the purchase since June 12, 1998.
NOTE 3-RESTRICTIONS ON CASH AND DUE FROM BANKS
The Banks' legal reserve requirements were satisfied by maintaining average
non-interest earning vault cash balances of $7,337,000 and non-interest earning
cash balances with the Federal Reserve Bank of $2,740,000 in 1998 and
non-interest earning vault cash balances of $5,504,000 in 1997. The Banks do not
maintain compensating balances with correspondent banks.
NOTE 4-SECURITIES
Securities available for sale consist of the following at December 31:
AMORTIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
1998
U.S. Treasury $ 4,301,000 $ 27,000 $ 4,328,000
U.S. Government agencies 10,665,000 375,000 11,040,000
Mortgage-backed securities 30,352,000 864,000 $ 22,000 31,194,000
Obligations of states and political subdivisions 40,826,000 1,525,000 25,000 42,326,000
Other securities 10,470,000 157,000 10,627,000
-------------------------------------------------------------------
Total $ 96,614,000 $ 2,948,000 $ 47,000 $ 99,515,000
===================================================================
1997
U.S. Treasury $ 7,028,000 $ 77,000 $ 7,105,000
U.S. Government agencies 14,819,000 673,000 15,492,000
Mortgage-backed securities 52,581,000 797,000 $ 231,000 53,147,000
Obligations of states and political subdivisions 25,695,000 1,160,000 6,000 26,849,000
Other securities 8,108,000 68,000 8,176,000
-------------------------------------------------------------------
Total $ 108,231,000 $ 2,775,000 $ 237,000 $ 110,769,000
===================================================================
A-18
19
Securities held to maturity consist of the following at December 31:
AMORTIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
1998
Mortgage-backed securities $ 996,000 $ 6,000 $8,000 $ 994,000
Obligations of states and political subdivisions 16,563,000 682,000 17,245,000
Other securities 790,000 790,000
------------------------------------------------------------------
Total $ 18,349,000 $ 688,000 $8,000 $ 19,029,000
==================================================================
1997
U.S. Government agencies $ 997,000 $ 3,000 $ 1,000,000
Mortgage-backed securities 2,785,000 13,000 $9,000 2,789,000
Obligations of states and political subdivisions 18,353,000 822,000 19,175,000
Other securities 390,000 390,000
------------------------------------------------------------------
Total $ 22,525,000 $ 838,000 $9,000 $ 23,354,000
==================================================================
The amortized cost and approximate fair value of securities at December 31,
1998, by contractual maturity, follow. Actual maturities will differ from
contractual maturities because issuers may have the right to call or prepay
obligations with or without call or prepayment penalties.
AVAILABLE FOR SALE HELD TO MATURITY
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
- ----------------------------------------------------------------------------------------------------------------------------------
Maturing within one year ................................... $10,584,000 $10,779,000 $ 3,202,000 $ 3,233,000
Maturing after one year but within five years .............. 13,320,000 13,796,000 10,854,000 11,280,000
Maturing after five years but within ten years ............. 17,307,000 18,268,000 1,897,000 2,053,000
Maturing after ten years ................................... 24,549,000 24,976,000 610,000 679,000
----------- ----------- ----------- -----------
65,760,000 67,819,000 16,563,000 17,245,000
Mortgage-backed securities ................................. 30,352,000 31,194,000 996,000 994,000
Other securities ........................................... 502,000 502,000 790,000 790,000
----------- ----------- ----------- -----------
Total ............................................... $96,614,000 $99,515,000 $18,349,000 $19,029,000
=========== =========== =========== ===========
A summary of proceeds from the sale of securities available for sale and
realized gains and losses follows:
REALIZED REALIZED
PROCEEDS GAINS LOSSES
- ----------------------------------------------------------------------------------------
1998 ............................. $ 11,271,000 $ 267,000
1997 ............................. 59,727,000 354,000 $ 81,000
1996 ............................. 18,145,000 42,000 204,000
Securities with a book value of $39,385,000 and $31,660,000 at December 31,
1998 and 1997, 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,
1998 or 1997.
NOTE 5-LOANS
An analysis of the allowance for loan losses for the years ended December 31
follows:
1998 1997 1996
- ---------------------------------------------------------------------------------------------------------
Balance at beginning of period ....................... $ 7,670,000 $ 6,960,000 $ 5,243,000
Allowance on loans acquired ....................... 1,180,000
Provision charged to operating expense ............ 3,043,000 1,750,000 1,233,000
Recoveries credited to allowance .................. 641,000 585,000 440,000
Loans charged against allowance ................... (1,640,000) (1,625,000) (1,136,000)
------------------------------------------------
Balance at end of period ............................. $ 9,714,000 $ 7,670,000 $ 6,960,000
================================================
A-19
20
Loans are presented net of deferred fees of $2,587,000 at
December 31, 1998, and $2,408,000 at December 31, 1997.
Loans on non-accrual status, 90 days or more past due and still accruing
interest, or restructured amounted to $6,641,000, $5,386,000 and $3,902,000 at
December 31, 1998, 1997 and 1996, respectively. If these loans had continued to
accrue interest in accordance with their original terms, approximately $571,000,
$442,000, and $288,000 of interest income would have been realized in 1998, 1997
and 1996, respectively. Interest income realized on these loans was
approximately $175,000, $190,000 and $105,000 in 1998, 1997 and 1996,
respectively.
Impaired loans totaled approximately $3,500,000, $2,800,000 and $3,800,000
at December 31, 1998, 1997 and 1996, respectively. The Banks' average investment
in impaired loans was approximately $3,600,000, $3,300,000 and $2,500,000 in
1998, 1997 and 1996, respectively. Cash receipts on impaired loans on
non-accrual status are generally applied to the principal balance. Interest
income recognized on impaired loans in 1998, 1997 and 1996 was approximately
$145,000, $165,000 and $130,000, respectively. Certain impaired loans with a
balance of approximately $1,400,000, $1,300,000 and $2,300,000 had specific
allocations of the allowance for loan losses calculated in accordance with SFAS
#114 totaling approximately $300,000, $200,000 and $500,000 at December 31,
1998, 1997 and 1996, respectively.
The Banks capitalized approximately $1,800,000, $583,000 and $370,000 of
servicing rights relating to loans that were originated and sold during the
years ended December 31, 1998, 1997 and 1996, respectively. Amortization of
capitalized servicing rights during those years was $335,000, $131,000 and
$56,000, respectively. The fair value of capitalized servicing rights
approximated the book value of $2,070,000 at December 31, 1998, therefore no
valuation allowance relating to impairment was considered necessary. The
capitalized servicing rights relate to approximately $326,000,000 of loans sold
and serviced at December 31, 1998.
At December 31, 1998, 1997 and 1996, the Banks serviced loans totaling
approximately $387,000,000, $245,000,000 and $181,000,000, respectively, for the
benefit of third parties.
NOTE 6-PROPERTY AND EQUIPMENT
A summary of property and equipment at December 31 follows:
1998 1997
- -------------------------------------------------------------------------------------
Land ........................................... $ 3,500,000 $ 3,067,000
Buildings ...................................... 21,946,000 18,182,000
Equipment ...................................... 17,633,000 13,242,000
------------------------------
43,079,000 34,491,000
Accumulated depreciation and amortization ...... (15,824,000) (13,424,000)
------------------------------
Property and equipment, net ............. $ 27,255,000 $ 21,067,000
==============================
NOTE 7-DEPOSITS
A summary of interest expense on deposits for the years ended December 31
follows:
1998 1997 1996
- ---------------------------------------------------------------------------------------------
Savings and NOW .......................... $ 8,743,000 $ 8,480,000 $ 6,116,000
Time deposits under $100,000 ............. 12,038,000 11,997,000 8,718,000
Time deposits of $100,000 or more ........ 4,316,000 2,137,000 1,304,000
-------------------------------------------
Total ............................. $25,097,000 $22,614,000 $16,138,000
===========================================
Aggregate time certificates of deposit and other time deposits in
denominations of $100,000 or more amounted to $106,959,000, $52,605,000, and
$31,053,000 at December 31, 1998, 1997 and 1996, respectively.
A summary of maturities of certificates of deposit at December 31, 1998
follows:
1999 ...................... $210,700,000
2000 ...................... 68,953,000
2001 ...................... 20,294,000
2002 ...................... 6,344,000
2003 ...................... 7,638,000
2004 and thereafter ....... 26,063,000
------------
Total ................ $339,992,000
============
A-20
21
NOTE 8-OTHER BORROWINGS
A summary of other borrowings at December 31 follows:
1998 1997
- -------------------------------------------------------------------------------------
Advances from Federal Home Loan Bank ............. $119,069,000 $145,954,000
Notes payable .................................... 10,000,000 12,000,000
U.S. Treasury demand notes ....................... 1,883,000 1,450,000
Repurchase agreements ............................ 7,772,000
Other ............................................ 12,000 9,000
-----------------------------
Total ..................................... $130,964,000 $167,185,000
=============================
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 160% of outstanding advances. Interest
expense on advances amounted to $8,158,000, $7,877,000 and $6,757,000 for the
years ending December 31, 1998, 1997 and 1996, 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, 0.3% of
its total assets, or 5.0% of its outstanding advances. At December 31, 1998, 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,
1998, advances totaling $9,000,000, with a stated maturity of 2000, are
convertible in 1999 and advances totaling $9,000,000, with a stated maturity of
2005, are convertible in 2003.
Maturities and weighted average interest rates at December 31, follow:
1998 1997
AMOUNT RATE AMOUNT RATE
- ------------------------------------------------------------------------------------------------------------
Fixed-rate advances
1998 $ 42,000,000 5.97%
1999 $ 3,059,000 6.07% 26,059,000 5.98
2000 29,895,000 5.81 26,895,000 5.83
2001 2,000,000 5.86
2003 4,515,000 5.70
2004 and thereafter 11,100,000 5.53
------------------------------------------------------
Total fixed-rate advances 50,569,000 5.75 94,954,000 5.93
------------------------------------------------------
Variable-rate advances
1998 46,000,000 5.74
1999 68,500,000 5.21 5,000,000 5.83
------------------------------------------------------
Total variable-rate advances 68,500,000 5.21 51,000,000 5.75
------------------------------------------------------
Total advances $ 119,069,000 5.44% $ 145,954,000 5.87%
======================================================
The Company has established a $20,000,000 unsecured credit facility
comprised of a $10,000,000 five-year term loan, payable in equal quarterly
installments and a $10,000,000 revolving credit agreement. At December 31, 1998,
the term note and the revolving credit facility each had unpaid principal
balances of $5,000,000. The term note and the revolving credit facility accrue
interest at LIBOR, plus 1.00% and federal funds, plus .75%, respectively.
Maturities of the notes payable at December 31, 1998 follow:
1999 ................ $ 7,000,000
2000 ................ 2,000,000
2001 ................ 1,000,000
-----------
Total ........ $10,000,000
===========
A-21
22
NOTE 9-GUARANTEED PREFERRED BENEFICIAL INTERESTS
IN COMPANY'S SUBORDINATED DEBENTURES
On December 13, 1996, IBC Capital Finance, a trust subsidiary of the
Company, completed the public offering of 690,000 shares of cumulative trust
preferred securities ("Preferred Securities") with a liquidation preference of
$25 per security. The proceeds of the offering were loaned to the Company in
exchange for subordinated debentures with 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-EARNINGS PER SHARE
The Company adopted Statement of Financial Accounting Standards, No. 128,
"Earnings Per Share," ("SFAS #128") effective December 31, 1997. SFAS #128
replaced primary earnings per share ("Primary") and fully diluted earnings per
share ("Fully Diluted") with basic earnings per share ("Basic") and diluted
earnings per share ("Diluted"). This statement requires a dual presentation and
reconciliation of Basic and Diluted. Basic, unlike Primary, excludes any
dilution of common stock equivalents, while Diluted, like Fully Diluted,
reflects the potential dilution of all common stock equivalents.
A reconciliation of basic and diluted earnings per share for the years ended
December 31 follows:
1998 1997 1996
- ------------------------------------------------------------------------------------------------------------
Net income ................................................. $10,221,000 $ 8,924,000 $ 7,852,000
===========================================
Shares outstanding (Basic) (1) ............................. 7,342,000 7,204,000 7,092,000
Effect of dilutive securities - stock options ........... 84,000 83,000 62,000
-------------------------------------------
Shares outstanding (Diluted) (1) .................... 7,426,000 7,287,000 7,154,000
-------------------------------------------
Earning per share
Basic ................................................... $ 1.39 $ 1.24 $ 1.11
===========================================
Diluted ................................................. $ 1.38 $ 1.22 $ 1.10
===========================================
(1) Shares outstanding have been adjusted for three-for-two stock splits in
1998 and 1997 and 5% stock dividends in 1998, 1997 and 1996.
NOTE 11-FEDERAL INCOME TAX
The composition of federal income tax expense for the years ended December
31 follows:
1998 1997 1996
- -----------------------------------------------------------------------------------------------------
Current ......................................... $ 4,939,000 $ 3,987,000 $ 3,508,000
Deferred ........................................ (813,000) (352,000) (230,000)
---------------------------------------------
Federal income tax expense ............... $ 4,126,000 $ 3,635,000 $ 3,278,000
=============================================
A reconciliation of federal income tax expense to the amount computed by
applying the statutory federal income tax rate of 35% in 1998 and 1997 and 34%
in 1996, to income before federal income tax for the years ended December 31
follows:
1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------------
Statutory rate applied to income before federal income tax ........... $ 5,021,000 $ 4,396,000 $ 3,784,000
Tax-exempt interest income ........................................... (961,000) (906,000) (698,000)
Amortization of goodwill ............................................. 270,000 226,000 150,000
Other, net ........................................................... (204,000) (81,000) 42,000
---------------------------------------------
Federal income tax expense .................................... $ 4,126,000 $ 3,635,000 $ 3,278,000
=============================================
A-22
23
The deferred federal income tax benefit of $813,000, $352,000 and $230,000
in 1998, 1997 and 1996, respectively, resulted from the tax effect of temporary
differences. There was no impact for changes in tax laws and rates or changes in
the valuation allowance for deferred tax assets.
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31
follow:
1998 1997
- ---------------------------------------------------------------------------------------------
Deferred tax assets
Allowance for loan losses .............................. $ 2,852,000 $ 1,965,000
Deferred compensation .................................. 856,000 778,000
Purchase discounts ..................................... 415,000 376,000
Deferred loan fees ..................................... 212,000 218,000
Deferred credit life premiums .......................... 206,000 125,000
Other .................................................. 317,000 683,000
---------------------------
Gross deferred tax assets ............................ 4,858,000 4,145,000
---------------------------
Deferred tax liabilities
Unrealized gain on securities available for sale ....... 986,000 863,000
Fixed assets ........................................... 227,000 327,000
---------------------------
Gross deferred tax liabilities ....................... 1,213,000 1,190,000
---------------------------
Net deferred tax assets ............................ $ 3,645,000 $ 2,955,000
===========================
NOTE 12-EMPLOYEE BENEFIT PLANS
The Company maintains stock option plans for certain employees of the
Company and the Banks and for non-employee directors of the Company. An
aggregate of 762,255 shares of common stock has been authorized for issuance
under the plans. Options 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 five years after the date
of grant.
On January 1, 1996, the Company adopted Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation," ("SFAS #123").
SFAS #123 encourages companies to adopt a fair value method of accounting for
stock compensation plans. Companies that do not adopt a fair value method are
required to make pro-forma disclosures of net income and earnings per share as
if they had adopted the fair value accounting method. The Company has elected
the pro-forma disclosure method.
The per share weighted-average fair value of stock options granted in 1998
and 1997 was obtained using the Black Scholes options pricing model. A summary
of the assumptions used and values obtained follows:
1998 1997
- ---------------------------------------------------------------------------------------------------
Expected dividend yield .......................................... 1.98% 2.86%
Risk free interest rate .......................................... 5.65 6.76
Expected life .................................................... 5 years 5 years
Expected volatility .............................................. .23775 .14414
Per share weighted average fair value ............................ $6.43 $2.95
The Company applies APB Opinion No. 25 in accounting for its plans and,
accordingly, no compensation cost has been recognized for its stock options in
the financial statements. 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:
1998 1997
- -------------------------------------------------------------------------------------
Net income
As reported .................................. $ 10,221,000 $ 8,924,000
Pro-forma .................................... 9,785,000 8,747,000
Net income per share
Basic
As reported ................................ $ 1.39 $ 1.24
Pro-forma .................................. 1.33 1.21
Diluted
As reported ................................ $ 1.38 $ 1.22
Pro-forma .................................. 1.32 1.20
A-23
24
A summary of outstanding stock option grants and transactions follows:
NUMBER AVERAGE
OF EXERCISE
SHARES PRICE
- ----------------------------------------------------------------------------------
Outstanding at January 1, 1996 ........................ 203,339 $ 7.55
Granted ............................................ 72,800 10.97
Exercised .......................................... (8,204) 7.25
Forfeited .......................................... (2,734) 10.94
----------------------
Outstanding at December 31, 1996 ...................... 265,201 8.46
Granted ............................................ 90,666 15.62
Exercised .......................................... (71,667) 6.74
----------------------
Outstanding at December 31, 1997 ...................... 284,200 11.18
Granted ............................................ 104,347 25.08
Exercised .......................................... (34,215) 7.35
----------------------
Outstanding at December 31, 1998 ...................... 354,332 $ 15.64
======================
At December 31, 1998, the range of exercise prices of outstanding options
was $7.31 to $25.08.
The Company has a 401(k) and an employee stock ownership plan covering
substantially all full-time employees of the Company and 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. For the years ended December 31, 1998, 1997 and 1996,
$1,312,000, $1,157,000 and $850,000 respectively, was expensed for these
retirement plans.
Officers of the Company and subsidiaries participate in various
performance-based compensation plans. The Incentive Share Grant Plan provides
that the Board of Directors, at its sole discretion, may award restricted shares
of common stock to the participants in the Management Incentive Compensation
Plan in lieu of cash bonuses. The market value of such incentive shares at the
date of grant must equal twice the amount of the cash incentive otherwise
payable. Shares of common stock issued pursuant to the Incentive Share Grant
Plan vest over four years. For the years ended December 31, 1998, 1997 and 1996,
amounts expensed for all incentive plans totaled $1,681,000, $1,338,000, and
$1,026,000, 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.
A-24
25
NOTE 13-FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
In the normal course of business, the Banks enter into financial instruments
with off-balance sheet risk to meet the financing needs of customers or to
reduce exposure to fluctuations in interest rates. These financial instruments
may include commitments to extend credit, standby letters of credit and interest
rate derivatives. Financial instruments involve varying degrees of credit and
interest-rate risk in excess of amounts reflected in the consolidated balance
sheets. Exposure to credit risk in the event of non-performance by the
counterparties to the financial instruments for loan commitments to extend
credit and letters of credit is represented by the contractual amounts of those
instruments. Management does not, however, anticipate material losses as a
result of these financial instruments.
A summary of financial instruments with off-balance sheet risk at December
31 follows:
1998 1997
- ---------------------------------------------------------------------------------------------------------
Financial instruments whose risk is represented by contract amounts
Commitments to extend credit ................................... $ 142,913,000 $ 85,738,000
Standby letters of credit ...................................... 32,919,000 2,793,000
Interest-rate derivative financial instruments
Interest-rate cap agreements
Notional amount .............................................. $ 26,000,000 $ 28,000,000
Strike ....................................................... 6.69% 6.71%
Weighted-average maturity .................................... 1.2 years 2.3 years
Amortized cost ............................................... $ 70,000 $ 168,000
Fair value ................................................... 10,000 87,000
Interest-rate collar agreements
Notional amount .............................................. $ 28,000,000 $ 10,000,000
Cap strike ................................................... 6.42% 6.42%
Floor strike ................................................. 5.71 5.71
Weighted-average maturity .................................... 1.7 years 2.7 years
Fair value ................................................... $ (137,000) $ (10,000)
Interest-rate swap agreements (pay fixed)
Notional amount .............................................. $ 54,500,000
Rate paying .................................................. 5.28%
Rate receiving ............................................... 5.27
Weighted-average maturity .................................... 2.7 years
Fair value ................................................... $ (401,000)
Interest-rate swap agreements (pay variable)
Notional amount .............................................. $ 25,000,000
Rate paying .................................................. 5.10%
Rate receiving ............................................... 5.89
Weighted-average maturity .................................... 9.0 years
Fair value ................................................... $ (118,000)
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 many of the commitments are expected to 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, primarily public and
private borrowing arrangements. 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.
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26
NOTE 14-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 1998 and 1997.
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:
1998 1997
- ----------------------------------------------------------------------------------------
Balance at beginning of period ...................... $ 3,464,000 $ 3,944,000
New loans and advances ........................... 7,069,000 3,481,000
Repayments ....................................... (3,479,000) (3,961,000)
----------------------------
Balance at end of period ............................ $ 7,054,000 $ 3,464,000
============================
NOTE 15-OTHER OPERATING EXPENSES
Other operating expenses for the years ended December 31 follow:
1998 1997 1996
- ----------------------------------------------------------------------------------------------------
Computer processing ........................... $ 1,853,000 $ 1,340,000 $ 1,063,000
Amortization of intangible assets ............. 1,692,000 1,523,000 583,000
Communications ................................ 1,634,000 1,280,000 1,007,000
Advertising ................................... 1,577,000 1,329,000 827,000
Supplies ...................................... 1,300,000 1,019,000 804,000
Loan and collection ........................... 1,244,000 939,000 663,000
Other ......................................... 4,672,000 4,104,000 3,323,000
-------------------------------------------
Total .................................. $13,972,000 $11,534,000 $ 8,270,000
===========================================
NOTE 16-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, 1998, using the most restrictive of these
conditions for each Bank, the aggregate cash dividends that the Banks can pay
the Company without prior approval is approximately $28,514,000. 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. Failure to meet minimum capital requirements can initiate certain
mandatory, and possibly discretionary, actions by regulators that could have a
material effect on the Company's financial statements. Under capital adequacy
guidelines the Company and the Banks must meet specific capital requirements
that involve quantitative measures as well as qualitative judgments by the
regulators. 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. Actual capital
amounts and ratios for the Company and the Banks at December 31 follow:
A-26
27
MINIMUM RATIOS MINIMUM RATIOS FOR
FOR ADEQUATELY WELL-CAPITALIZED
ACTUAL CAPITALIZED INSTITUTIONS INSTITUTIONS
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
- -----------------------------------------------------------------------------------------------------------------------------------
1998
Total capital to risk-weighted assets
Consolidated ....................... $76,374,000 9.97% $61,262,000 8.00% $76,578,000 10.00%
Independent Bank ................... 27,051,000 10.57 20,474,000 8.00 25,593,000 10.00
Independent Bank West Michigan ..... 21,214,000 10.86 15,628,000 8.00 19,536,000 10.00
Independent Bank South Michigan .... 13,297,000 10.75 9,899,000 8.00 12,373,000 10.00
Independent Bank East Michigan ..... 18,446,000 10.21 14,450,000 8.00 18,063,000 10.00
Tier 1 capital to risk-weighted assets
Consolidated ....................... $66,800,000 8.72% $30,631,000 4.00% $45,947,000 6.00%
Independent Bank ................... 23,851,000 9.32 10,237,000 4.00 15,356,000 6.00
Independent Bank West Michigan ..... 18,768,000 9.61 7,814,000 4.00 11,721,000 6.00
Independent Bank South Michigan .... 11,747,000 9.49 4,949,000 4.00 7,424,000 6.00
Independent Bank East Michigan .......... 16,635,000 9.21 7,225,000 4.00 10,838,000 6.00
Tier 1 capital to average assets
Consolidated ....................... $66,800,000 6.38% $41,898,000 4.00% $52,372,000 5.00%
Independent Bank ................... 23,851,000 6.85 13,936,000 4.00 17,420,000 5.00
Independent Bank West Michigan ..... 18,768,000 6.82 11,010,000 4.00 13,763,000 5.00
Independent Bank South Michigan .... 11,747,000 6.92 6,786,000 4.00 8,483,000 5.00
Independent Bank East Michigan .......... 16,635,000 6.70 9,930,000 4.00 12,413,000 5.00
1997
Total capital to risk-weighted assets
Consolidated ....................... $66,332,000 9.91% $53,561,000 8.00% $66,951,000 10.00%
Independent Bank ................... 25,409,000 10.76 18,887,000 8.00 23,608,000 10.00
Independent Bank West Michigan ..... 17,122,000 10.56 12,975,000 8.00 16,218,000 10.00
Independent Bank South Michigan .... 11,815,000 10.97 8,619,000 8.00 10,774,000 10.00
Independent Bank East Michigan .......... 18,129,000 11.41 12,711,000 8.00 15,889,000 10.00
Tier 1 capital to risk-weighted assets
Consolidated ....................... $58,662,000 8.76% $26,781,000 4.00% $40,171,000 6.00%
Independent Bank ................... 22,693,000 9.61 9,443,000 4.00 14,165,000 6.00
Independent Bank West Michigan ..... 15,240,000 9.40 6,487,000 4.00 9,731,000 6.00
Independent Bank South Michigan .... 10,467,000 9.72 4,310,000 4.00 6,464,000 6.00
Independent Bank East Michigan .......... 16,540,000 10.41 6,356,000 4.00 9,533,000 6.00
Tier 1 capital to average assets
Consolidated ....................... $58,662,000 6.13% $38,286,000 4.00% $47,857,000 5.00%
Independent Bank ................... 22,693,000 6.75 13,456,000 4.00 16,820,000 5.00
Independent Bank West Michigan ..... 15,240,000 6.77 9,006,000 4.00 11,258,000 5.00
Independent Bank South Michigan .... 10,467,000 6.87 6,098,000 4.00 7,622,000 5.00
Independent Bank East Michigan .......... 16,540,000 6.91 9,568,000 4.00 11,960,000 5.00
A-27
28
NOTE 17-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 intruments 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 floating-interest rates which reprice
frequently and without significant credit risk, it is presumed that estimated
fair values approximate the recorded book balances.
Financial instrument assets actively traded in a secondary market, such as
securities, have been valued using quoted market prices while recorded book
balances have been used for cash and due from banks.
The fair value of loans is calculated by discounting estimated future cash
flows using estimated market discount rates that reflect credit and
interest-rate risk inherent in the loans.
Financial instruments with a stated maturity, such as certificates of
deposit, have been valued based on the discounted value of contractual cash
flows using a discount rate approximating current market rates for liabilities
with a similar maturity.
Financial instrument liabilities without a stated maturity, such as demand
deposits, savings, NOW and money market accounts, have a fair value equal to the
amount payable on demand.
The estimated fair values and recorded book balances at December 31 follow:
1998 1997
ESTIMATED RECORDED ESTIMATED RECORDED
FAIR BOOK FAIR BOOK
VALUE BALANCE VALUE BALANCE
- -------------------------------------------------------------------------------------------------
(in thousands)
Assets
Cash and due from banks ................. $ 42,800 $ 42,800 $ 30,400 $ 30,400
Securities available for sale ............. 99,500 99,500 110,800 110,800
Securities held to maturity ............. 19,000 18,300 23,400 22,500
Net loans and loans held for sale 864,800 852,600 767,700 758,300
Liabilities
Deposits with no stated maturity ........ $490,500 $490,500 $428,100 $428,100
Deposits with stated maturity ........... 341,700 340,000 274,000 272,300
Other borrowings ........................ 173,300 170,900 214,400 212,400
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.
NOTE 18-OPERATING SEGMENTS
On January 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and Related
Information," ("SFAS #131"). SFAS #131 establishes standards for the way that
public entities report information about operating segments in financial
statements.
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-28
29
A summary of selected financial information for the Company's reportable
segments follows:
IB IBWM IBSM IBEM OTHER(1) TOTAL
- -----------------------------------------------------------------------------------------------------------------------------------
1998
Total assets ............... $ 361,936,000 $ 276,385,000 $ 174,396,000 $ 268,559,000 $ 3,982,000 $ 1,085,258,000
Interest income ............ 28,439,000 24,825,000 13,764,000 19,012,000 33,000 86,073,000
Net interest income ........ 17,022,000 15,107,000 8,010,000 11,428,000 (2,334,000) 49,233,000
Provision for loan losses .. 940,000 1,050,000 340,000 713,000 3,043,000
Income (loss) before
income tax ............... 6,363,000 5,456,000 3,019,000 3,276,000 (3,767,000) 14,347,000
Net income (loss)........... 4,401,000 3,814,000 2,205,000 2,397,000 (2,596,000) 10,221,000
1997
Total assets ............... $ 346,765,000 $ 231,729,000 $ 152,694,000 $ 246,815,000 $ 5,814,000 $ 983,817,000
Interest income ............ 27,184,000 20,105,000 12,179,000 17,920,000 26,000 77,414,000
Net interest income ........ 15,740,000 12,286,000 6,835,000 10,294,000 (2,516,000) 42,639,000
Provision for loan losses .. 820,000 260,000 265,000 405,000 1,750,000
Income (loss) before
income tax ............... 5,988,000 4,588,000 2,652,000 2,907,000 (3,576,000) 12,559,000
Net income (loss) .......... 4,129,000 3,225,000 1,938,000 2,102,000 (2,470,000) 8,924,000
1996
Total assets .............. $ 338,133,000 $ 196,031,000 $ 136,716,000 $ 211,477,000 $ 6,240,000 $ 888,597,000
Interest income ........... 21,991,000 17,792,000 10,702,000 8,916,000 84,000 59,485,000
Net interest income ....... 12,709,000 10,829,000 6,191,000 5,445,000 (502,000) 34,672,000
Provision for loan losses.. 810,000 205,000 108,000 110,000 1,233,000
Income (loss) before
income tax .............. 4,537,000 4,299,000 2,653,000 1,462,000 (1,821,000) 11,130,000
Net income (loss).......... 3,164,000 3,010,000 1,912,000 1,019,000 (1,253,000) 7,852,000
(1) Includes items relating to the Company and certain insignificant operations.
NOTE 19-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,
1998 1997
- ---------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks ................................... $ 1,543,000 $ 3,394,000
Investment in subsidiaries ................................ 93,608,000 85,080,000
Other assets .............................................. 5,381,000 3,304,000
-----------------------------
Total Assets .......................................... $100,532,000 $ 91,778,000
=============================
LIABILITIES AND SHAREHOLDERS' EQUITY
Notes payable ............................................. $ 10,000,000 $ 12,000,000
Subordinated debentures ................................... 17,783,000 17,783,000
Other liabilities ......................................... 3,044,000 2,479,000
Shareholders' equity ...................................... 69,705,000 59,516,000
-----------------------------
Total Liabilities and Shareholders' Equity ............ $100,532,000 $ 91,778,000
=============================
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30
CONDENSED STATEMENTS OF OPERATIONS YEAR ENDED DECEMBER 31,
1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------------
OPERATING INCOME
Dividends from subsidiaries ...................................... $ 8,175,000 $ 7,400,000 $ 4,425,000
Management fees from subsidiaries and other income ............... 8,444,000 6,755,000 5,073,000
------------------------------------------------
Total Operating Income ......................................... 16,619,000 14,155,000 9,498,000
------------------------------------------------
OPERATING EXPENSES
Interest expense ................................................. 2,367,000 2,542,000 546,000
Administrative and other expenses ................................ 9,962,000 7,871,000 6,348,000
------------------------------------------------
Total Operating Expenses ....................................... 12,329,000 10,413,000 6,894,000
------------------------------------------------
Income Before Federal Income Tax and Undistributed Net Income
of Subsidiaries .............................................. 4,290,000 3,742,000 2,604,000
Federal income tax credit ........................................... 1,289,000 1,188,000 568,000
------------------------------------------------
Income Before Equity in Undistributed Net Income of Subsidiaries 5,579,000 4,930,000 3,172,000
Equity in undistributed net income of subsidiaries .................. 4,642,000 3,994,000 4,680,000
------------------------------------------------
Net Income ................................................... $ 10,221,000 $ 8,924,000 $ 7,852,000
================================================
CONDENSED STATEMENTS OF CASH FLOWS YEAR ENDED DECEMBER 31,
1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------------
Net Income .......................................................... $ 10,221,000 $ 8,924,000 $ 7,852,000
------------------------------------------------
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 ............. 540,000 437,000 336,000
(Increase) decrease in other assets .............................. (516,000) (203,000) 426,000
Increase in other liabilities .................................... 2,975,000 478,000 688,000
Equity in undistributed net income of subsidiaries ............... (4,642,000) (3,994,000) (4,680,000)
-------------------------------------------------
Total Adjustments .............................................. (1,643,000) (3,282,000) (3,230,000)
-------------------------------------------------
Net Cash from Operating Activities ............................. 8,578,000 5,642,000 4,622,000
-------------------------------------------------
CASH FLOW FROM INVESTING ACTIVITIES
Purchase of securities available for sale ........................ (100,000) (23,000)
Capital expenditures ............................................. (2,264,000) (807,000) (1,110,000)
Investment in subsidiaries ....................................... (3,383,000) (31,352,000)
------------------------------------------------
Net Cash from Investing Activities ............................. (5,747,000) (807,000) (32,485,000)
------------------------------------------------
CASH FLOW FROM FINANCING ACTIVITIES
Proceeds from short-term borrowings .............................. 5,000,000
Proceeds from long-term debt ..................................... 10,000,000
Proceeds from issuance of subordinated debentures ................ 16,753,000
Retirement of long-term debt ..................................... (2,000,000) (2,000,000) (1,000,000)
Dividends paid ................................................... (3,587,000) (3,186,000) (2,736,000)
Proceeds from issuance of common stock ........................... 905,000 771,000 59,000
------------------------------------------------
Net Cash from Financing Activities ............................... (4,682,000) (4,415,000) 28,076,000
------------------------------------------------
Net Increase (Decrease) in Cash and Cash Equivalents ........... (1,851,000) 420,000 213,000
Cash and Cash Equivalents at Beginning of Period .................... 3,394,000 2,974,000 2,761,000
------------------------------------------------
Cash and Cash Equivalents at End of Period ................... $ 1,543,000 $ 3,394,000 $ 2,974,000
================================================
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31
QUARTERLY SUMMARY
REPORTED SALE PRICES OF COMMON SHARES CASH DIVIDENDS
1998 1997 DECLARED
------------------------------------------------------------------
HIGH LOW CLOSE HIGH LOW CLOSE 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------------
First quarter ...................... $28.25 $24.00 $24.75 $15.88 $13.50 $15.50 $ .12 $ .11
Second quarter ..................... 30.19 15.69 18.63 17.75 15.25 17.25 .12 .11
Third quarter ...................... 27.88 19.75 21.00 20.25 17.25 19.75 .12 .11
Fourth quarter ..................... 24.50 18.00 20.25 25.75 20.00 25.75 .13 .12
The Company has approximately 1,900 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 Corporations 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 16 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,
- -----------------------------------------------------------------------------------------------------------------------------------
1998
Interest income ....................................... $20,718,000 $21,341,000 $21,944,000 $22,070,000
Net interest income ................................... 11,760,000 12,244,000 12,417,000 12,812,000
Provision for loan losses.............................. 633,000 670,000 915,000 825,000
Income before income tax expense ...................... 3,424,000 3,576,000 3,603,000 3,744,000
Net income ............................................ 2,433,000 2,539,000 2,582,000 2,667,000
Net income per share
Basic ............................................... $ .33 $ .35 $ .35 $ .36
Diluted ............................................. .33 .34 .35 .36
1997
Interest income ....................................... $17,846,000 $19,155,000 $20,001,000 $20,412,000
Net interest income ................................... 9,877,000 10,477,000 11,004,000 11,281,000
Provision for loan losses ............................. 321,000 321,000 461,000 647,000
Income before income tax expense ...................... 3,004,000 3,077,000 3,199,000 3,279,000
Net income ............................................ 2,134,000 2,194,000 2,275,000 2,321,000
Net income per share
Basic ............................................... $ .30 $ .31 $ .32 $ .32
Diluted ............................................. .29 .30 .31 .32
A-31
32
SELECTED CONSOLIDATED FINANCIAL DATA
YEAR ENDED DECEMBER 31,
1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands, except per share amounts)
SUMMARY OF OPERATIONS
Interest income $ 86,073 $ 77,414 $ 59,485 $ 45,982 $ 37,820
Interest expense 36,840 34,775 24,813 17,900 12,585
----------------------------------------------------------------------
Net interest income 49,233 42,639 34,672 28,082 25,235
Provision for loan losses 3,043 1,750 1,233 636 473
Non-interest income 13,845 8,515 5,552 3,766 3,101
Non-interest expense 45,688 36,845 27,861 21,702 19,503
----------------------------------------------------------------------
Income before federal income tax expense 14,347 12,559 11,130 9,510 8,360
Federal income tax expense 4,126 3,635 3,278 2,700 2,329
----------------------------------------------------------------------
Net income $ 10,221 $ 8,924 $ 7,852 $ 6,810 $ 6,031
======================================================================
PER COMMON SHARE DATA (1)
Net income (2)
Basic $ 1.39 $ 1.24 $ 1.11 $ .96 $ .85
Diluted 1.38 1.22 1.10 .96 .84
Cash dividends declared .50 .45 .41 .36 .29
Book value 9.44 8.24 7.30 6.67 5.69
Cash basis income per share (3)
Basic 1.58 1.41 1.18 1.00 .88
Diluted 1.56 1.39 1.17 1.00 .88
SELECTED BALANCES
Assets $ 1,085,258 $ 983,817 $ 888,597 $ 590,147 $ 516,211
Loans and loans held for sale 862,345 765,932 621,287 434,091 342,658
Allowance for loan losses 9,714 7,670 6,960 5,243 5,054
Deposits 830,514 700,480 672,534 411,624 409,471
Shareholders' equity 69,705 59,516 51,836 47,025 40,311
Long-term debt 3,000 5,000 7,000
SELECTED RATIOS
Tax equivalent net interest income
to average earning assets 5.36% 5.07% 5.38% 5.65% 5.88%
Net income to
Average equity 15.60 16.01 15.74 15.59 15.22
Average assets 1.00 .95 1.11 1.25 1.25
Cash basis income to (3)
Average tangible equity 24.61 26.69 19.65 17.22 16.96
Average tangible assets 1.16 1.10 1.20 1.31 1.32
Dividend payment ratio 36.08 36.54 36.53 36.80 34.62
Average shareholders' equity to average assets 6.42 5.95 7.05 8.04 8.22
Tier 1 leverage (tangible equity capital) ratio 6.23 6.02 5.72 7.47 7.76
Non-performing loans to Portfolio Loans .81 .72 .64 .61 .84
(1) Per share data has been adjusted for three-for-two stock splits in 1998 and
1997 and 5% stock dividends in 1998, 1997, 1996 and 1995.
(2) Statement of Financial Accounting Standards, No. 128 "Earnings Per Share,"
adopted during 1997, has been retroactively applied. (See note 10 to
consolidated financial statements.)
(3) Cash basis financial data excludes intangible assets and the related
amortization expense.
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33
SHAREHOLDER INFORMATION
HOW TO ORDER FORM 10-K
Shareholders may obtain, without charge, a copy of Form 10-K, the 1998
Annual Report to the Securities and Exchange Commission, by writing to William
R. Kohls, Chief Financial Officer, Independent Bank Corporation, P.O.
Box 491, Ionia, Michigan 48846.
PRESS RELEASES
The Company's press releases, including earnings and dividend announcements,
are available via facsimile by calling #800/758-5804 and entering 436425. Press
releases and other financial information are also 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 20, 1999, in the Ionia Theater located at 205 West Main Street, Ionia,
Michigan, 48846.
TRANSFER AGENT AND REGISTRAR
State Street Bank & Trust Company, (c/o EquiServe, P.O. Box 8200, Boston,
Massachusetts 02266-8200, #800/426-5523) 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.
MARKET MAKERS
Registered market makers at December 31, 1998 follow:
ABN Amro Securities Howe, Barnes Investments, Inc. Roney & Company
First of Michigan Corporation Keefe, Bruyette & Woods, Inc. Stifel Nicolaus & Co.
Herzog, Heine, Geduld, Inc. Robert W. Baird & Co., Inc.
EXECUTIVE OFFICERS AND DIRECTORS
EXECUTIVE OFFICERS
Charles C. Van Loan, President and Chief Executive Officer, Independent Bank Corporation
Jeffrey A. Bratsburg, Chairman of the Board, Independent Bank West Michigan
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
William R. Kohls, Executive Vice President and Chief Financial Officer, Independent Bank Corporation
DIRECTORS
Keith E. Bazaire, President, Carter's Food Center, Inc., Retail Grocer, Charlotte
Terry L. Haske, President, Ricker & Haske, C.P.A.s, P.C., Marlette
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-33