-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Islr2VF9YTPSbgvs4i8Xzjs5RD9IkHDPzEOpg3bRSwtNNJT2qGzJw0FrUFcQV+kW 2Xi4eGLfTfh81kCy+v8bXg== 0000950124-99-002204.txt : 19990331 0000950124-99-002204.hdr.sgml : 19990331 ACCESSION NUMBER: 0000950124-99-002204 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: INDEPENDENT BANK CORP /MI/ CENTRAL INDEX KEY: 0000039311 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 382032782 STATE OF INCORPORATION: MI FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-07818 FILM NUMBER: 99578917 BUSINESS ADDRESS: STREET 1: 230 W MAIN ST STREET 2: PO BOX 491 CITY: IONIA STATE: MI ZIP: 48846 BUSINESS PHONE: 6165279450 MAIL ADDRESS: STREET 1: 230 W MAIN ST CITY: IONIA STATE: MI ZIP: 48846 10-K 1 FORM 10-K 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K /X/ Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 1998 or / / Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from to ---------- ---------- Commission file Number 0-7818 ---------------------------------------------------------- INDEPENDENT BANK CORPORATION - -------------------------------------------------------------------------------- (Exact name of Registrant as specified in its charter) MICHIGAN 38-2032782 - ---------------------------- ------------------------ (State or other jurisdiction (I.R.S. employer of incorporation) identification no.) 230 W. Main St., P.O. Box 491, Ionia, Michigan 48846 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (616) 527-9450 ------------------------------ Securities registered pursuant to Section 12(g) of the Act: Common Stock, $1.00 Par Value - -------------------------------------------------------------------------------- (Title of class) 9.25% Cumulative Trust Preferred Securities, $25.00 Liquidation Amount - -------------------------------------------------------------------------------- (Title of class) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No___ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. . State the aggregate market value of the voting stock held by non-affiliates of the Registrant. (For this purpose only, the affiliates of the Registrant have been assumed to be the executive officers and directors of the Registrant and their associates.) Common Stock, $1.00 Par Value - $125,368,313 - -------------------------------------------------------------------------------- (Based on $18.75 per common share, the last reported sales price on The Nasdaq Stock Market on March 16, 1999. Reference is made to Part II, Item 5 for further information). Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date. Common stock, $1.00 par value - 7,426,991 shares at March 16, 1999 Documents incorporated by reference Portions of the Registrant's definitive proxy statement, and appendix thereto dated March 17, 1999, relating to its April 20, 1999 Annual Meeting of Shareholders are incorporated by reference into Part I, Part II and Part III of this form. The Exhibit Index appears on Page 21 2 Included or incorporated by reference in this Form 10-K are certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such forward-looking statements are based upon the beliefs of the Registrant's management as well as on assumptions made by and information currently available to the Registrant at the time such statements were made. Actual results could differ materially from those included in such forward-looking statements as a result of, among other things, the factors included in or incorporated by reference in this Report, general and certain economic and business factors, which may be beyond the control of the Registrant. Investors are cautioned that all forward-looking statements involve risks and uncertainty. PART I ITEM 1. BUSINESS Independent Bank Corporation (the "Registrant") was incorporated under the laws of the State of Michigan on September 17, 1973, for the purpose of becoming a bank holding company. The Registrant is registered under the Bank Holding Company Act of 1956, as amended, and owns the outstanding stock of four banks (the "Banks") which are all organized under the laws of the State of Michigan. Aside from the stock of the Banks, the Registrant has no other substantial assets. The Registrant conducts no business except for the provision of certain management and operational services to the Banks, the collection of fees and dividends from the Banks and the payment of dividends to the Registrant's shareholders. Certain employee retirement plans (including an employee stock ownership plan and a deferred compensation plan) as well as health and other insurance programs have been established by the Registrant. The proportional costs of these plans are borne by each of the Banks and their respective subsidiaries. The Registrant and the Banks have no material patents, trademarks, licenses or franchises except the corporate franchises of the Banks which permit them to engage in commercial banking pursuant to Michigan law. The following table shows each of the Banks and their total loans and deposits as of December 31, 1998:
Main Office Total Total Bank Location Deposits Loans - ---- -------- ------------ ------------ Independent Bank Ionia $279,421,000 $260,643,000 Independent Bank West Michigan Rockford 214,011,000 245,071,000 Independent Bank South Michigan Leslie 140,355,000 144,207,000 Independent Bank East Michigan Caro 201,888,000 212,424,000
Independent Bank (formerly First Security Bank) affiliated with the Registrant on June 1, 1974. Independent Bank consolidated with North Bank, the sole banking subsidiary of North Bank Corporation ("NBC") acquired by the Registrant effective May 31, 1996. Independent Bank West Michigan is the result of a merger in 1985 of the First State Bank of Newaygo (acquired December 16, 1974), the Western State Bank, Howard City (acquired February 7, 1977), and the Bank of Rockford (organized by the Registrant as a new bank on August 18, 1975). Independent Bank South Michigan is the result of a merger in 1985 of the Peoples Bank of Leslie (acquired February 16, 1981) and the Olivet State Bank (acquired on October 16, 1979). 1 3 ITEM 1. BUSINESS (Continued) Independent Bank East Michigan is the result of the consolidation of the former American Home Bank (acquired October 8, 1993), Pioneer Bank (acquired October 15, 1993) and The Kingston State Bank (acquired March 7, 1994). On December 13, 1996 Independent Bank East Michigan purchased eight offices from First of America Bank--Michigan N.A. On November 7, 1996, the Registrant formed IBC Capital Finance, a Delaware statutory business trust ("IBC Capital"). IBC Capital's business and affairs are conducted by its property trustee, a Delaware trustee, and three individual administrative trustees who are employees or officers of or affiliated with the Registrant. IBC Capital exists for the sole purposes of selling and issuing its preferred and common securities, using the proceeds from the sale of those securities to acquire subordinated debentures issued by the Registrant and certain related services. As a result, the sole assets of IBC Capital are the subordinated debentures of the Registrant. The Banks transact business in the single industry segment of commercial banking. Most of the Banks' offices provide full-service lobby and drive-in services in the communities which they serve. Automatic teller machines are also provided at most locations. The Banks' activities cover all 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 Banks' mortgage lending activities are conducted through separate mortgage bank subsidiaries formed during 1998. The Banks also offer title insurance services through a separate subsidiary. The Banks do not offer trust services. The principal markets are the rural and suburban communities across lower Michigan that are served by the Banks' branch networks. The local economies of the communities served by the Banks are relatively stable and reasonably diversified. The Banks serve their markets through their four main offices and a total of 56 branch and 11 loan production offices. The Banks compete with other commercial banks, savings and loan associations, credit unions, mortgage banking companies, securities brokerage companies, insurance companies, and money market mutual funds. Many of these competitors have substantially greater resources than the Registrant and the Banks and offer certain services that the Registrant and Banks do not currently provide. Such competitors may also have greater lending limits than the Banks. The number of competitors may increase as a result of the easing of restrictions on interstate banking effected under the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the "Riegle-Neal Act"). In addition, non-bank competitors are generally not subject to the extensive regulations applicable to the Registrant and the Banks. Price (the interest charged on loans and/or paid on deposits) remains a principal means of competition within the financial services industry. The Banks also compete on the basis of service and convenience, utilizing the strengths and benefits of the Registrant's decentralized structure to providing financial services. The principal sources of revenue, on a consolidated basis, are interest and fees on loans, other interest income and non-interest income. The sources of income for the three most recent years are as follows:
1998 1997 1996 ------ ------ ------ Interest and fees on loans 77.2% 76.6% 76.5% Other interest income 8.9 13.5 15.0 Non-interest income 13.9 9.9 8.5 ----- ----- ----- 100.0% 100.0% 100.0% ===== ===== =====
As of December 31, 1998, the Registrant and the Banks had 597 full-time employees and 198 part-time employees. Supervision and Regulation The following is a summary of certain statutes and regulations affecting the Registrant and the Banks. This summary is qualified in its entirety by reference to the particular statutes and regulations. A change in applicable laws or regulations may have a material effect on the Registrant, the Banks and the businesses of the Registrant and the Banks. 2 4 ITEM 1. BUSINESS (Continued) General Financial institutions and their holding companies are extensively regulated under federal and state law. Consequently, the growth and earnings performance of the Registrant and the Banks can be affected not only by management decisions and general and local economic conditions, but also by the statutes administered by, and the regulations and policies of, various governmental regulatory authorities. The effect of such statutes, regulations and policies and any changes thereto can be significant and cannot be predicted. The system of supervision and regulation applicable to the Registrant and the Banks establishes a comprehensive framework for their respective operations and is intended primarily for the protection of the Federal Deposit Insurance Corporation's (the "FDIC") deposit insurance funds, the depositors of the Banks, and the public, rather than the shareholders of the Registrant. Federal law and regulations, including provisions added by the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") and regulations promulgated thereunder, establish supervisory standards applicable to the lending activities of the Banks, including internal controls, credit underwriting, loan documentation, and loan-to-value ratios for loans secured by real property. The Registrant General. The Registrant is a bank holding company and, as such, is registered with, and subject to regulation by, the Board of Governors of the Federal Reserve System (the "Federal Reserve") under the Bank Holding Company Act, as amended (the "BHCA"). Under the BHCA, the Registrant is subject to periodic examination by the Federal Reserve, and is required to file periodic reports of its operations and such additional information as the Federal Reserve may require. In accordance with Federal Reserve policy, a bank holding company is expected to act as a source of financial strength to its subsidiary banks and to commit resources to support the subsidiary banks in circumstances where the bank holding company might not do so absent such policy. In addition, if the Commissioner of the Michigan Financial Institutions Bureau (the "Commissioner") deems a bank's capital to be impaired, the Commissioner may require a bank to restore its capital by special assessment upon a bank holding company, as the bank's sole shareholder. If the bank holding company were to fail to pay such assessment, the directors of that bank would be required, under Michigan law, to sell the shares of that bank stock owned by the bank holding company to the highest bidder at either public or private auction and use the proceeds of the sale to restore the bank's capital. Any capital loans by a bank holding company to a subsidiary bank are subordinate in right of payment to deposits and to certain other indebtedness of such subsidiary bank. In the event of a bank holding company's bankruptcy, any commitment by the bank holding company to a federal bank regulatory agency to maintain the capital of a subsidiary bank will be assumed by the bankruptcy trustee and entitled to a priority of payment. Investments and Activities. Under the BHCA, bank holding companies are prohibited, with certain limited exceptions, from engaging in activities other than those of banking or of managing or controlling banks and from acquiring or retaining direct or indirect ownership or control of voting shares or assets of any company which is not a bank or bank holding company, other than subsidiary companies furnishing services to or performing services for its subsidiaries, and other subsidiaries engaged in activities which, by the Federal Reserve's determination, are closely related to banking or managing or controlling banks. In general, any direct or indirect acquisition by a bank holding company of any voting shares of any bank which would result in the bank holding company's direct or indirect ownership or control of more than 5% of any class of voting shares of such bank, and any merger or consolidation of the bank holding company with another bank holding company, will require the prior written approval of the Federal Reserve under the BHCA. In acting on such applications, the Federal Reserve must consider various statutory factors. Among others, such statutory factors include the effect of the proposed transaction on competition in relevant geographic and product markets, and each party's financial condition, managerial resources, and record of performance under the Community Reinvestment Act. 3 5 ITEM 1. BUSINESS (Continued) In addition and subject to certain exceptions, the Change in the Bank Control Act ("Control Act") and regulations promulgated thereunder by the Federal Reserve, require any person acting directly or indirectly, or through or in concert with one or more persons, to give the Federal Reserve 60 days' written notice before acquiring control of a bank holding company. Transactions which are presumed to constitute the acquisition of control include the acquisition of any voting securities of a bank holding company having securities registered under Section 12 of the Securities Exchange Act of 1934, as amended, if, after the transaction, the acquiring person (or persons acting in concert) owns, controls or holds with power to vote 25% or more of any class of voting securities of the institution. The acquisition may not be consummated subsequent to such notice if the Federal Reserve issues a notice within 60 days, or within certain extensions of such period, disapproving the same. The merger or consolidation of an existing bank subsidiary of a bank holding company with another bank, or the acquisition by such a subsidiary of the assets of another bank, or the assumption of the deposit and other liabilities by such a subsidiary requires the prior written approval of the responsible Federal depository institution regulatory agency under the Bank Merger Act, based upon a consideration of statutory factors similar to those outlined above with respect to the BHCA. In addition, in certain cases an application to, and the prior approval of, the Commissioner under Michigan banking laws, may be required. With certain limited exceptions, the BHCA prohibits bank holding companies from acquiring direct or indirect ownership or control of voting shares or assets of any company other than a bank, unless the company involved is engaged solely in one or more activities which the Federal Reserve has determined to be closely related to banking or managing or controlling banks. The Economic Growth and Regulatory Paperwork Reduction Act of 1996 streamlined the nonbanking activities application process for well capitalized and well managed bank holding companies. Capital Requirements. The Federal Reserve uses capital adequacy guidelines in its examination and regulation of bank holding companies. If capital falls below minimum guidelines, a bank holding company may, among other things, be denied approval to acquire or establish additional banks or non-bank businesses. The Federal Reserve's capital guidelines establish the following minimum regulatory capital requirements for bank holding companies: (i) a capital leverage requirement expressed as a percentage of total assets, (ii) a risk-based requirement expressed as a percentage of total risk-weighted assets, and (iii) a Tier 1 leverage requirement expressed as a percentage of total assets. The capital leverage requirement consists of a minimum ratio of total capital to total assets of 6%, with an expressed expectation that banking organizations generally should operate above such minimum level. The risk-based requirement consists of a minimum ratio of total capital to total risk-weighted assets of 8%, of which at least one-half must be Tier 1 capital (which consists principally of shareholders' equity). The Tier 1 leverage requirement consists of a minimum ratio of Tier 1 capital to total assets, less goodwill, of 3% for the most highly rated companies, with minimum requirements of 4% to 5% for all others. The risk-based and leverage standards presently used by the Federal Reserve are minimum requirements, and higher capital levels will be required if warranted by the particular circumstances or risk profiles of individual banking organizations. FDICIA requires the federal bank regulatory agencies biennially to review risk-based capital standards to ensure that they adequately address interest rate risk, concentration of credit risk and risks from non-traditional activities. In 1995, the Federal bank regulatory agencies have also adopted regulations requiring as part of the assessment of an institution's capital adequacy the consideration of identified concentrations of credit risks and the exposure of the institution to a decline in the value of its capital due to changes in interest rates. Dividends. Subsidiary banks are subject to statutory restrictions on their ability to pay dividends to a bank holding company. In its policy statement, the Federal Reserve expressed its view that a bank holding company experiencing earnings weaknesses should not pay cash dividends exceeding its net income or which could only be funded in ways that weakened the bank holding company's financial health. Additionally, the Federal Reserve possesses enforcement powers over bank holding companies and their non-bank subsidiaries to prevent or remedy actions that represent unsafe or unsound practices or violations of applicable statutes and regulations. Among these powers is the ability to proscribe the payment of dividends by banks and bank holding companies. Similar enforcement 4 6 ITEM 1. BUSINESS (Continued) powers over subsidiary banks are possessed by the FDIC. The "prompt corrective action" provisions of FDICIA impose further restrictions on the payment of dividends by insured banks which fail to meet specified capital levels and, in some cases, impose similar restrictions on their parent bank holding companies. In addition to the restrictions on dividends imposed by the Federal Reserve, the Michigan Business Corporation Act provides that dividends may be legally declared or paid only if after the distribution a corporation can pay its debts as they come due in the usual course of business and its total assets equal or exceed the sum of its liabilities plus the amount that would be needed to satisfy the preferential rights upon dissolution of any holders of preferred stock whose preferential rights are superior to those receiving the distribution. The Registrant does not have any holders of its preferred stock. The Banks General. The Banks are Michigan banking corporations and their deposit accounts are principally insured by the Bank Insurance Fund ("BIF") of the FDIC. As BIF-insured Michigan chartered banks, the Banks are subject to the examination, supervision, reporting and enforcement requirements of the Commissioner, as the chartering authority for Michigan banks, and the FDIC, as administrator of the BIF. Deposit Insurance. As FDIC-insured institutions, banks are required to pay deposit insurance premium assessments to the FDIC. Pursuant to FDICIA, the FDIC adopted a risk-based assessment system under which all insured depository institutions are placed into one of nine categories and assessed insurance premiums, based upon their level of capital and supervisory evaluation. Institutions classified as well-capitalized and considered healthy pay the lowest premium while institutions that are less than adequately capitalized and considered of substantial supervisory concern pay the highest premium. The FDIC has established the schedule of BIF-insurance assessments, ranging from 0% of deposits for institutions in the highest category to .27% of deposits for institutions in the lowest category. Capital Requirements. FDICIA establishes five capital categories, and the federal depository institution regulators, as directed by FDICIA, have adopted, subject to certain exceptions, the following minimum requirements for each of such categories:
Total Tier 1 Risk-Based Risk-Based Capital Ratio Capital Ratio Leverage Ratio ------------- ------------- -------------- Well capitalized 10% or above 6% or above 5% or above Adequately capitalized 8% or above 4% or above 4% or above Undercapitalized Less than 8% Less than 4% Less than 4% Significantly undercapitalized Less than 6% Less than 3% Less than 3% Critically undercapitalized -- -- A ratio of tangible equity to total assets of 2% or less
At December 31, 1998, each of the Banks' ratios exceeded minimum requirements for the well-capitalized category. (See note 16 to the 1998 consolidated financial statements on pages A-26 through A-27 of the Appendix to the Registrant's definitive proxy statement, dated March 17, 1999, relating to the April 20, 1999 Annual Meeting of Shareholders (as filed with the commission and filed as exhibit 13 to this report on Form 10-K.) FDICIA requires the federal depository institution regulators to take prompt corrective action with respect of depository institutions that do not meet minimum capital requirements. The scope and degree of regulatory intervention is linked to the capital category to which a depository institution is assigned. A depository institution may be reclassified to a lower category than is indicated by its capital position if the appropriate federal depository institution regulatory agency determines the institution to be otherwise in an unsafe or unsound condition or to be engaged in an unsafe or unsound practice. 5 7 ITEM 1. BUSINESS (Continued) Commissioner Assessments. Michigan banks are required to pay supervisory fees to the Commissioner to fund the operations of the Michigan Financial Institutions Bureau. The amount of supervisory fees paid by a bank is based upon the bank's total assets, as reported to the Commissioner. FICO Assessments. Pursuant to federal legislation enacted September 30, 1996, the banks, as members of BIF, are subject to assessments to cover the payments on outstanding obligations of the financing corporation ("FICO"). FICO was created in 1987 to finance the recapitalization of the Federal Savings and Loan Insurance Corporation, the predecessor to the FDIC's Savings Association Insurance Fund (the "SAIF"), which insures the deposits of thrift institutions. Until January 1, 2000, the FICO assessments made against BIF members may not exceed 20 percent of the amount of FICO assessments made against SAIF members. Currently, SAIF members pay FICO assessments at a rate equal to approximately 0.063 percent of deposits, while BIF members pay FICO assessments at a rate equal to approximately 0.013 percent of deposits. Between January 1, 2000, and the maturity of the outstanding FICO obligations in 2019, BIF members and SAIF members will share the cost of the interest on the FICO bonds on a pro rata basis. Dividends. Under Michigan law, banks are restricted as to the maximum amount of dividends they may pay on their common stock. A Michigan state bank may not declare or pay a dividend unless the bank will have a surplus amounting to at least 20% of its capital after the payment of the dividend. FDICIA generally prohibits a depository institution from making any capital distribution or paying any management fee to its holding company if the depository institution would thereafter be undercapitalized. The FDIC may also prevent an insured bank from paying dividends if the bank is in default of payment of any assessment due to the FDIC. Payment of dividends by a bank may be prevented by the applicable federal regulatory authority if such payment is determined, by reason of the financial condition of such bank, to be an unsafe and unsound banking practice. Insider Transactions. Banks are subject to certain restrictions imposed by the Federal Reserve Act on "covered transactions" with the Registrant or its subsidiaries. Certain limitations and reporting requirements are also placed on extensions of credit by banks to their directors and officers, to directors and officers of bank holding company's and their subsidiaries, to principal shareholders of the Registrant, and to "related interests" of such directors, officers and principal shareholders. Safety and Soundness Standards. Pursuant to FDICIA, the FDIC adopted guidelines to establish operational and managerial standards to promote the safety and soundness of federally insured depository institutions. The guidelines establish standards for internal controls, information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, and compensation, fees and benefits. The guidelines prescribe the goals to be achieved in each area, and each institution is responsible for establishing its own procedures to achieve those goals. If an institution fails to comply with any of the standards set forth in the guidelines, the institution's primary federal regulator may require the institution to submit a plan for achieving and maintaining compliance. State Bank Activities. Under FDICIA, as implemented by final regulations adopted by the FDIC, FDIC-insured state banks are prohibited, subject to certain exceptions, from making or retaining equity investments of a type, or in an amount, that are not permissible for a national bank. FDICIA, as implemented by FDIC regulations, also prohibits FDIC-insured state banks and their subsidiaries, subject to certain exceptions, from engaging as a principal in any activity that is not permitted for a national bank or its subsidiary, respectively, unless the bank meets, and continues to meet, its minimum regulatory capital requirements and the FDIC determines the activity would not pose a significant risk to the deposit insurance fund of which the bank is a member. Impermissible investments and activities must be otherwise divested or discontinued within certain time frames set by the FDIC in accordance with FDICIA. Consumer Banking. The Banks' business includes making a variety of types of loans to individuals. In making these loans, the Banks are subject to State usury and regulatory laws and to various Federal statutes, such as the Equal Credit Opportunity Act, Fair Credit Reporting Act, Truth in Lending Act, Real Estate Settlement Procedures Act, and Home Mortgage Disclosure Act, and the regulations promulgated thereunder. In receiving deposits, the Banks are subject to extensive regulation under state and federal law and regulations, including the Truth in Savings 6 8 ITEM 1. BUSINESS (Continued) Act, the Expedited Funds Availability Act, the Bank Secrecy Act, the Electronic Funds Transfer Act, and the Federal Deposit Insurance Act. Violation of these laws could result in the imposition of significant damages and fines upon the Banks and their respective directors and officers. Other. The Riegle-Neal Act allows bank holding companies to acquire banks located in any state in the United States without regard to geographic restrictions or reciprocity requirements imposed by state law, but subject to certain conditions, including limitations on the aggregate amount of deposits that may be held by the acquiring holding company and all of its insured depository institution affiliates. The Riegle-Neal Act also allows banks to establish interstate branch networks through acquisitions of other banks, subject to certain conditions that include limitations on the aggregate amount of deposits that may be held by the surviving bank and all of its insured depository institution affiliates. The establishment of de novo interstate branches or the acquisition of individual branches of a bank in another state (rather than the acquisition of an out-of-state bank in its entirety) is allowed by the Riegle-Neal Act only if specifically authorized by state law. The legislation allowed individual states to "opt-out" of certain provisions of the Riegle-Neal Act if appropriate legislation was enacted prior to June 1, 1997. Michigan did not opt out of the Riegle-Neal Act, and now permits both U.S. and non-U.S. banks to establish branch offices in Michigan. The Michigan Banking Code permits, in appropriate circumstances and with the approval of the Commissioner, (i) the acquisition of all or substantially all of the assets of a Michigan-chartered bank by an FDIC-insured bank, savings bank, or savings and loan association located in another state, (ii) the acquisition by a Michigan-chartered bank of all or substantially all of the assets of an FDIC-insured bank, savings bank or savings and loan association located in another state, (iii) the consolidation of one or more Michigan-chartered banks and FDIC-insured banks, savings banks or savings and loan associations located in other states having laws permitting such consolidation, with the resulting organization chartered by Michigan, (iv) the establishment by a foreign bank, which has not previously designated any other state as its home state under the International Banking Act of 1978, of branches located in Michigan, and (v) the establishment or acquisition of branches in Michigan by FDIC-insured banks located in other states, the District of Columbia or U.S. territories or protectorates having laws permitting Michigan-chartered banks to establish branches in such jurisdiction. Further, the Michigan Banking Code permits, upon written notice to the Commissioner, (i) the acquisition by a Michigan-chartered bank of one or more branches (not comprising all or substantially all of the assets) of an FDIC-insured bank, savings bank or savings and loan association located in another state, the District of Columbia, or a U.S. territory or protectorate, (ii) the establishment by Michigan-chartered banks of branches located in other states, the District of Columbia, or U.S. territories or protectorates, and (iii) the consolidation of one or more Michigan-chartered banks and FDIC-insured banks, savings banks or savings and loan associations located in other states, with the resulting organization chartered by one of such other states. In addition to the authorization of interstate banking discussed above, Michigan law permits banks to consolidate on a state-wide basis and to operate the offices of merged banks as branches of a surviving bank. Also, with the written approval of the Commissioner, banks may relocate their main office to any location in the state, establish and operate branch banks anywhere in the state and contract with other banks to act as branches thereof. To better serve their customers, the Banks have entered into interbank branching agreements, whereby each of the Banks may act as a branch of the other three banks. 7 9 ITEM 1. BUSINESS -- STATISTICAL DISCLOSURE I. (A) DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY; (B) INTEREST RATES AND INTEREST DIFFERENTIAL (C) INTEREST RATES AND DIFFERENTIAL The information set forth in the tables captioned "Average Balances and Tax Equivalent Rates" and "Change in Tax Equivalent Net Interest Income" on page A-3 of the Appendix to the Registrant's definitive proxy statement, dated March 17, 1999, relating to the April 20, 1999 Annual Meeting of Shareholders (as filed with the commission and filed as exhibit 13 to this report on Form 10-K) is incorporated herein by reference. II. INVESTMENT PORTFOLIO (A) The following table sets forth the book value of securities at December 31:
1998 1997 1996 -------- -------- -------- (in thousands) Held to maturity U.S. Government agencies $ 997 $ 1,484 States and political subdivisions $ 16,563 18,353 21,192 Mortgage-backed securities 996 2,785 3,688 Other securities 790 390 390 -------- -------- -------- Total $ 18,349 $ 22,525 $ 26,754 ======== ======== ======== Available for sale U.S. Treasury $ 4,328 $ 7,105 $ 27,722 U.S. Government agencies 11,040 15,492 21,159 States and political subdivisions 42,326 26,849 21,854 Mortgage-backed securities 31,194 53,147 57,528 Other securities 10,627 8,176 8,589 -------- --------- -------- Total $ 99,515 $ 110,769 $136,852 ======== ========= ========
8 10 ITEM 1. BUSINESS -- STATISTICAL DISCLOSURE (Continued) II. INVESTMENT PORTFOLIO (Continued) (B) The following table sets forth contractual maturities of securities at December 31, 1998 and the weighted average yield of such securities:
Maturing Maturing Maturing After One After Five Maturing Within But Within But Within After One Year Five Years Ten Years Ten Years Amount Yield Amount Yield Amount Yield Amount Yield ------- ----- ------ ----- ------- ----- ------ ----- (dollars in thousands) Held to maturity - ---------------- States and political subdivisions $ 3,202 9.52% $10,854 9.49% $ 1,897 9.38% $ 610 9.51% Mortgage-backed securities -- guaranteed or issued by U.S. Government agencies 194 7.00 453 8.22 215 8.69 134 10.03 Other securities 600 5.66 190 6.50 ------- ------- ------- ------- Total $ 3,996 8.70% $11,497 9.25% $ 2,112 9.17% $ 744 9.46% ======= ======= ======= ======= Tax equivalent adjustment for calculations of yield $ 107 $ 360 $ 62 $ 20 ======= ======= ======= ======= Available for sale - ------------------ U.S. Treasury $ 4,328 5.99% U.S. Government agencies 5,001 6.32 $ 6,039 6.44% States and political subdivisions 1,450 9.80 $ 8,548 9.42% 12,229 8.12 $20,099 7.58% Mortgage backed securities Guaranteed or issued by U.S. Government agencies 5,897 6.44 12,590 7.66 1,657 7.13 6,119 6.74 Other mortgage-backed securities 1,055 6.97 1,941 6.88 1,935 6.45 Other securities 5,248 6.68 5,379 6.91 ------- ------- ------- ------- Total $17,731 6.59% $28,327 7.91% $21,860 7.35% $31,597 7.23% ======= ======= ======= ======= Tax equivalent adjustment for calculations of yield $ 50 $ 282 $ 347 $ 533 ======= ======= ======= =======
The rates set forth in the tables above for obligations of state and political subdivisions have been restated on a tax equivalent basis assuming a marginal tax rate of 35% in 1998 and 1997 and 34% in 1996. The amount of the adjustment is as follows:
Tax-Exempt Rate on Tax Held to maturity Rate Adjustment Equivalent Basis - ---------------- ---------- ---------- ---------------- Under 1 year 6.19% 3.33% 9.52% 1-5 years 6.17 3.32 9.49 5-10 years 6.10 3.28 9.38 After 10 years 6.18 3.33 9.51 Available for sale Under 1 year 6.37% 3.43% 9.80% 1-5 years 6.12 3.30 9.42 5-10 years 5.28 2.84 8.12 After 10 years 4.93 2.65 7.58
9 11 ITEM 1. BUSINESS -- STATISTICAL DISCLOSURE (Continued) III. LOAN PORTFOLIO (A) The following table sets forth loans outstanding at December 31:
1998 1997 1996 1995 1994 -------- -------- -------- -------- -------- (in thousands) Loans held for sale $ 39,741 $ 21,754 $ 11,583 $ 16,047 $ 5,933 Real estate mortgage 449,114 416,689 331,150 225,900 166,794 Commercial and agricultural 238,863 199,098 164,304 108,879 103,984 Installment 134,627 128,391 114,250 83,265 65,947 -------- -------- -------- -------- -------- Total Loans $862,345 $765,932 $621,287 $434,091 $342,658 ======== ======== ======== ======== ========
The loan portfolio is periodically and systematically reviewed and the results of these reviews are reported to the Boards of Directors of the Registrant and the Banks. The purpose of these reviews is to assist in assuring proper loan documentation, to facilitate compliance with consumer protection laws and regulations, to provide for the early identification of potential problem loans (which enhances collection prospects) and to evaluate the adequacy of the allowance for loan losses. (B) The following table sets forth scheduled loan repayments (excluding 1-4 family residential mortgages and installment loans) at December 31, 1998:
Due Due After One Due Within But Within After One Year Five Years Five Years Total -------- ------------- ---------- -------- (in thousands) Real estate mortgage $ 15,900 $ 14,547 $ 35,556 $ 66,003 Commercial and agricultural 99,158 120,564 19,141 238,863 -------- ----------- ---------- -------- Total $115,058 $ 135,111 $ 54,697 $304,866 ======== =========== ========== ========
The following table sets forth loans due after one year which have predetermined (fixed) interest rates and/or adjustable (variable) interest rates at December 31, 1998:
Fixed Variable Rate Rate Total -------- ------------- -------- (in thousands) Due after one but within five years $130,597 $ 4,514 $135,111 Due after five years 51,143 3,554 54,697 -------- -------- -------- Total $181,740 $ 8,068 $189,808 ======== ======== ========
10 12 ITEM 1. BUSINESS -- STATISTICAL DISCLOSURE (Continued) III. LOAN PORTFOLIO (Continued) (C) The following table sets forth non-performing loans at December 31:
1998 1997 1996 1995 1994 ------ ------ ------ ------ ------ (in thousands) (a) Loans accounted for on a non-accrual basis (1,2) $4,106 $3,298 $1,711 $1,886 $2,052 (b) Aggregate amount of loans ninety days or more past due (excludes loans in (a) above) 2,240 1,904 1,994 427 254 (c) Loans not included above which are "troubled debt restruc- turings" as defined in State- ment of Financial Accounting Standards No. 15 (2) 295 184 197 247 528 ------ ------ ------ ------ ------ Total non-performing loans $6,641 $5,386 $3,902 $2,560 $2,834 ====== ====== ====== ====== ======
(1) 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. Non-accrual loans may be restored to accrual status when interest and principal payments are current and the loan appears otherwise collectible. (2) Interest in the amount of $571,000 would have been earned in 1998 had loans in categories (a) and (c) remained at their original terms, however, only $175,000 was included in interest income for the year with respect to these loans. Other loans of concern identified by the loan review department which are not included as non-performing totaled approximately $1,000,000 at December 31, 1998. These loans involve circumstances which have caused management to place increased scrutiny on the credits and may, in some instances, represent an increased risk of loss to the Banks. At December 31, 1998, there was no concentration of loans exceeding 10% of total loans which is not already disclosed as a category of loans in this section "Loan Portfolio" (Item III(A)). There were no other interest bearing assets at December 31, 1998, that would be required to be disclosed above (Item III(C)), if such assets were loans. There were no foreign loans outstanding at December 31, 1998. 11 13 ITEM 1. BUSINESS -- STATISTICAL DISCLOSURE (Continued) IV. SUMMARY OF LOAN LOSS EXPERIENCE (A) The following table sets forth loan balances and summarizes the changes in the allowance for loan losses for each of the years ended December 31:
1998 1997 1996 1995 1994 -------- -------- -------- -------- -------- (dollars in thousands) Loans outstanding at the end of the year (net of unearned fees) $862,345 $765,932 $621,287 $434,091 $342,658 ======== ======== ======== ======== ======== Average loans outstanding for the year (net of unearned fees) $804,217 $689,166 $510,434 $382,644 $294,968 ======== ======== ======== ======== ======== Balance of allowance for loan losses at beginning of year $ 7,670 $ 6,960 $ 5,243 $ 5,054 $ 5,053 -------- -------- -------- -------- -------- Loans charged-off Real estate 69 78 24 24 14 Commercial and agricultural 113 262 66 113 311 Installment 1,458 1,285 1,046 575 546 -------- -------- -------- -------- -------- Total loans charged-off 1,640 1,625 1,136 712 871 -------- -------- -------- -------- -------- Recoveries of loans previously charged-off Real estate 4 1 8 28 6 Commercial and agricultural 195 149 138 115 151 Installment 442 435 294 122 242 -------- -------- -------- -------- -------- Total recoveries 641 585 440 265 399 -------- -------- -------- -------- -------- Net loans charged-off 999 1,040 696 447 472 Additions to allowance charged to operating expense 3,043 1,750 1,233 636 473 Allowance on loans acquired 1,180 -------- -------- -------- -------- -------- Balance at end of year $ 9,714 $ 7,670 $ 6,960 $ 5,243 $ 5,054 ======== ======== ======== ======== ======== Net loans charged-off as a percent of average loans outstanding for the year 0.12% 0.15% 0.14% 0.12% 0.16% Allowance for loan losses as a percent of loans outstanding at the end of the year 1.13 1.00 1.12 1.21 1.48
The allowance for loan losses reflected above is a valuation allowance in its entirety and the only allowance available to absorb future loan losses. Further discussion of the provision and allowance for loan losses as well as non-performing loans is presented in Management's Discussion and Analysis of Financial Condition and Results of Operations, incorporated herein by reference to Item 7, Part II of this report. 12 14 ITEM 1. BUSINESS -- STATISTICAL DISCLOSURE (Continued) IV. SUMMARY OF LOAN LOSS EXPERIENCE (Continued) (B) The Banks have allocated the allowance for loan losses to provide for the possibility of losses being incurred within the categories of loans set forth in the table below. The amount of the allowance that is allocated and the ratio of loans within each category to total loans at December 31 follows:
1998 1997 1996 ---- ---- ---- Percent Percent Percent Allowance of Loans to Allowance of Loans to Allowance of Loans to Amount Total Loans Amount Total Loans Amount Total Loans ------ ----------- ------ ----------- ------ ----------- Commercial and agricultural $3,146 28.1% $2,200 26.4% $2,176 26.4% Real estate mortgage 312 56.3 322 56.8 257 55.2 Installment 875 15.6 892 16.8 834 18.4 Unallocated 5,381 4,256 3,693 _ ------ ----- ------ ----- ------ ----- Total $9,714 100.0% $7,670 100.0% $6,960 100.0% ====== ===== ====== ===== ====== =====
1995 1994 ---- ---- Percent Percent Allowance of Loans to Allowance of Loans to Amount Total Loans Amount Total Loans ------ ----------- ------ ----------- (dollars in thousands) Commercial and agricultural $1,612 25.8% $1,655 30.3% Real estate mortgage 162 55.0 177 50.4 Installment 597 19.2 474 19.3 Unallocated 2,872 2,748 ------ ----- ------ ----- Total $5,243 100.0% $5,054 100.0% ====== ===== ====== =====
V. DEPOSITS The following table sets forth average deposit balances and the weighted-average rates paid thereon for the years ended December 31:
1998 1997 1996 ---- ---- ---- Average Average Average Balance Rate Balance Rate Balance Rate ------- ---- ------- ---- ------- ---- (dollars in thousands) Non-interest bearing demand $ 95,167 $ 81,191 $ 61,161 Savings and NOW 354,690 2.46% 331,959 2.55% 250,977 2.44% Time deposits 303,183 5.39 263,046 5.37 187,117 5.36 -------- -------- -------- Total $753,040 3.33% $676,196 3.34% $499,255 3.23% ======== ==== ======== ==== ======== ====
The following table summarizes time deposits in amounts of $100,000 or more by time remaining until maturity at December 31, 1998: (in thousands) Three months or less $ 35,484 Over three through six months 11,763 Over six months through one year 25,440 Over one year 34,272 -------- Total $106,959 ======== 13 15 ITEM 1. BUSINESS -- STATISTICAL DISCLOSURE (Continued) VI. RETURN ON EQUITY AND ASSETS The ratio of net income to average shareholders' equity and to average total assets, and certain other ratios, for the years ended December 31 follow:
1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- Net income as a percent of Average common equity 15.60% 16.01% 15.74% 15.59% 15.22% Average total assets 1.00 0.95 1.11 1.25 1.25 Dividends declared per share as a percent of net income per share 36.23 36.79 36.76 37.20 34.78 Average shareholders' equity as a percent of average total assets 6.42 5.95 7.05 8.04 8.22
Additional performance ratios are set forth in Selected Consolidated Financial Data, incorporated herein by reference in Item 6, Part II of this report. Any significant changes in the current trend of the above ratios are reviewed in Management's Discussion and Analysis of Financial Condition and Results of Operations, incorporated herein by reference in Item 7, Part II of this report. VII. SHORT-TERM BORROWINGS Short-term borrowings are discussed in note 8 to the consolidated financial statements incorporated herein by reference in Item 8, Part II of this report. 14 16 ITEM 2. PROPERTIES The Registrant and the Banks operate a total of 73 facilities in Michigan. The individual properties are not materially significant to the Registrants' or the Banks' business or to the consolidated financial statements. With the exception of the potential remodeling of certain facilities to provide for the efficient use of work space or to maintain an appropriate appearance, each property is considered reasonably adequate for current and anticipated needs. ITEM 3. LEGAL PROCEEDINGS Due to the nature of their business, the Banks are often subject to numerous legal actions. These legal actions, whether pending or threatened, arise through the normal course of business and are not considered unusual or material. Currently, no material legal procedures are pending which involve the Registrant or the Banks. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. 15 17 ADDITIONAL ITEM - EXECUTIVE OFFICERS Executive officers of the Registrant are appointed annually by the Board of Directors at the meeting of Directors following the Annual Meeting of Shareholders. There are no family relationships among these officers and/or the Directors of the Registrant nor any arrangement or understanding between any officer and any other person pursuant to which the officer was elected. The following sets forth certain information with respect to the Registrant's executive officers and certain key officers of its subsidiaries (included for information purposes only) at December 31, 1998. First elected as an officer of Name (Age) Position with Registrant the Registrant - ---------- ------------------------ ----------------- Charles C. Van Loan (51) President, Chief Executive December, 1984 Officer and Director William R. Kohls (41) Executive Vice President and May, 1985 Chief Financial Officer Jeffrey A. Bratsburg (55) Chairman of the Board - 1985 Independent Bank West Michigan Edward B. Swanson (45) President and Chief Executive 1989 Officer - Independent Bank South Michigan Michael M. Magee, Jr. (43) President and Chief Executive 1993 Officer - Independent Bank Ronald L. Long (39) President and Chief Executive 1993 Officer - Independent Bank East Michigan David C. Reglin (39) President and Chief Executive 1998 Officer - Independent Bank West Michigan Prior to being named President and Chief Executive Officer in 1998, Mr. Reglin was Senior Vice President of Independent Bank West Michigan since 1991. The President and Chief Executive Officer of each of the Registrant's subsidiary banks serve as members of various committees of the Registrant. 16 18 PART II. ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The information set forth under the caption "Quarterly Summary " on Page A-31 of the Appendix to the Registrant's definitive proxy statement, dated March 17, 1999, relating to the April 20, 1999 Annual Meeting of Shareholders (as filed with the commission and as filed as exhibit 13 to this report on Form 10-K) is incorporated herein by reference. ITEM 6. SELECTED FINANCIAL DATA The information set forth under the caption "Selected Consolidated Financial Data" on Page A-32 of the Appendix to the Registrant's definitive proxy statement, dated March 17, 1999, relating to the April 20, 1999 Annual Meeting of Shareholders (as filed with the commission and as filed as exhibit 13 to this report on Form 10-K) is incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information set forth under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" on pages A-2 through A-10 of the Appendix to the Registrant's definitive proxy statement, dated March 17, 1999, relating to the April 20, 1999 Annual Meeting of Shareholders (as filed with the commission and as filed as exhibit 13 to this report on Form 10-K) is incorporated herein by reference. ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. The information set forth in the caption "Asset/liability management" on pages A-8 through A-9 of the Appendix to the Registrant's definitive proxy statement, dated March 17, 1999, relating to the April 20, 1999 Annual Meeting of Shareholders (as filed with the commission and filed as exhibit 13 to this report on Form 10-K) is incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The following consolidated financial statements of the Registrant and the independent auditor's report are set forth on pages A-11 through A-30 of the Appendix to the Registrant's definitive proxy statement, dated March 17, 1999, relating to the April 20, 1999 Annual Meeting of Shareholders (as filed with the commission and as filed as exhibit 13 to this report on Form 10-K) is incorporated herein by reference. Independent Auditor's Report Consolidated Statements of Financial Condition at December 31, 1998 and 1997 Consolidated Statements of Operations for the years ended December 31, 1998, 1997 and 1996 Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996 Consolidated Statements of Shareholders' Equity for the years ended December 31, 1998, 1997 and 1996 Consolidated Statements of Comprehensive Income for the years ended December 31, 1998, 1997 and 1996 Notes to Consolidated Financial Statements 17 19 PART II. The supplementary data required by this item set forth under the caption "Quarterly Financial Data" on page A-31 of the Appendix to the Registrant's definitive proxy statement, dated March 17, 1999, relating to the April 20, 1999 Annual Meeting of Shareholders (as filed with the commission and as filed as exhibit 13 to this report on Form 10-K) is incorporated herein by reference. The portions of the Appendix to the Registrant's definitive proxy statement, dated March 17, 1999, relating to the April 20, 1999 Annual Meeting of Shareholders (as filed with the commission and as filed as exhibit 13 to this report on Form 10-K) which are not specifically incorporated by reference as part of this Form 10-K are not deemed to be a part of this report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None PART III. ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT DIRECTORS - The information with respect to Directors of the Registrant, set forth under the caption "Election of Directors" on pages 2 through 4 of the Registrant's definitive proxy statement, dated March 17, 1999, relating to the April 20, 1999 Annual Meeting of Shareholders (as filed with the commission) is incorporated herein by reference. EXECUTIVE OFFICERS - Reference is made to additional item under Part I of this report on Form 10-K. ITEM 11. EXECUTIVE COMPENSATION The information set forth under the captions "Summary Compensation Table", "Option Grants in 1998" and "Aggregated Stock Option Exercises in 1998 and Year End Option Values" on pages 8 through 9 of the Registrant's definitive proxy statement, dated March 17, 1999, relating to the April 20, 1999 Annual Meeting of Shareholders (as filed with the commission) is incorporated herein by reference. Information under the caption "Committee Report on Executive Compensation" on pages 6 through 7 of the definitive proxy statement is not incorporated by reference herein and is not deemed to be filed with the Securities and Exchange Commission. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information set forth under the captions "Voting Securities and Record Date", "Election of Directors" and "Securities Ownership of Management" on pages 1, 2 and 8, respectively, of the Registrant's definitive proxy statement, dated March 17, 1999, relating to the April 20, 1999 Annual Meeting of Shareholders (as filed with the commission) is incorporated herein by reference. Information under the captions "Shareholder Return Performance Graph" and "Committee Report on Executive Compensation" on pages 5 through 7 of the definitive proxy statement is not incorporated by reference herein and is not deemed to be filed with the Securities and Exchange Commission. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information set forth under the caption "Transactions Involving Management" on page 10 of the Registrant's definitive proxy statement, dated March 17, 1999, relating to the April 20, 1999 Annual Meeting of Shareholders (as filed with the commission) is incorporated herein by reference. 18 20 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) 1. Financial Statements All financial statements of the Registrant are incorporated herein by reference as set forth in the Appendix to the Registrant's definitive proxy statement, dated March 17, 1999, relating to the April 20, 1999 Annual Meeting of Shareholders (filed as exhibit 13 to this report on Form 10-K.) 2. Financial Statement Schedules Not applicable 3. Exhibits (Numbered in accordance with Item 601 of Regulation S-K) The Exhibit Index is located on the final page of this report on Form 10-K. (b) Reports on Form 8-K No reports on Form 8-K were filed during the fourth quarter of the year ended December 31, 1998. 19 21 SIGNATURES Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, dated March 16, 1999. INDEPENDENT BANK CORPORATION s/Charles C. Van Loan Charles C. Van Loan, President and Chief - ----------------------- Executive Officer (Principal Executive Officer) s/William R. Kohls William R. Kohls, Executive Vice President and - ----------------------- Chief Financial Officer (Principal Financial Officer) s/James J. Twarozynski James J. Twarozynski, Vice President and Controller - ----------------------- (Principal Accounting Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Each director of the Registrant, who's signature appears below hereby appoints Charles C. Van Loan and William R. Kohls and each of them severally, as his attorney-in-fact, to sign in his name and on his behalf, as a director of the Registrant, and to file with the Commission any and all Amendments to this Report on Form 10-K. Keith E. Bazaire, Director s/Keith E. Bazaire ------------------------- Terry L. Haske, Director s/Terry L. Haske ------------------------- Thomas F. Kohn, Director s/Thomas F. Kohn ------------------------- Robert J. Leppink, Director s/Robert J. Leppink ------------------------- Charles A. Palmer, Director s/Charles A. Palmer ------------------------- Charles C. Van Loan, Director s/Charles C. Van Loan ------------------------- Arch V. Wright, Jr., Director s/Arch V. Wright, Jr. ------------------------- 20 22 EXHIBIT INDEX Exhibit number and description EXHIBITS FILED HEREWITH 10 The form of Management Continuity Agreement as executed with executive officers and certain senior managers. 13 Appendix to the Registrant's definitive proxy statement, dated March 17, 1999, relating to the April 20, 1999 Annual Meeting of Shareholders. This appendix was filed with the Commission as part of the Company's proxy statement and was delivered to the Company's shareholders in compliance with Rule 14(a)-3 of the Securities Exchange Act of 1934, as amended. 21 List of Subsidiaries. 23 Consent of Independent Accountants 24 Power of Attorney (Included on page 20). 27.1 Financial Data Schedule 1998 27.2 Financial Data Schedules 1995 & 1996 27.3 Financial Data Schedules 1997 EXHIBITS INCORPORATED BY REFERENCE 3.1 Restated Articles of Incorporation (incorporated herein by reference to Exhibit 3(i) to the Registrant's report on Form 10-Q for the quarter ended June 30, 1994). 3.2 Amended and Restated Bylaws (incorporated herein by reference to Exhibit 3(ii) to the Registrant's report on Form 10-Q for the quarter ended June 30, 1994). 4 Automatic Dividend Reinvestment and Stock Purchase Plan, as amended (incorporated herein by reference to the Registrant's Form S-3 Registration Statement dated September 17, 1998, filed under Registration No. 3380088). 4.1 Form of Indenture, dated as of December 17, 1996 (incorporated herein by reference to the Registrant's Form S-2 Registration Statement dated December 6, 1996, filed under Registration No. 33-14507). 4.2 Form of Subordinated Debenture (included as an exhibit to Exhibit 4.1), (incorporated herein by reference to the Registrant's Form S-2 Registration Statement dated December 6, 1996, filed under Registration No. 33- 14507). 4.3 Certificate of Trust of IBC Capital Finance (incorporated herein by reference to the Registrant's Form S-2 Registration Statement dated December 6, 1996, filed under Registration No. 33-14507). 4.4 Trust Agreement of IBC Capital Finance dated as of November 7, 1996 (incorporated herein by reference to the Registrant's Form S-2 Registration Statement dated December 6, 1996, filed under Registration No. 33-14507). 4.5 Form of Amended and Restated Trust Agreement of IBC Capital Finance dated as of December 17, 1996 (incorporated herein by reference to the Registrant's Form S-2 Registration Statement dated December 6, 1996, filed under Registration No. 33-14507). 4.6 Form of Preferred Security Certificate of IBC Capital Finance (included as an exhibit to Exhibit 4.5.), (incorporated herein by reference to the Registrant's Form S-2 Registration Statement dated December 6, 1996, filed under Registration No. 33-14507). 21 23 4.7 Form of Preferred Securities Guarantee Agreement for IBC Capital Finance (incorporated herein by reference to the Registrant's Form S-2 Registration Statement dated December 6, 1996, filed under Registration No. 33-14507). 4.8 Form of Agreement as to Expenses and Liabilities (included as an exhibit to Exhibit 4.5), (incorporated herein by reference to the Registrant's Form S-2 Registration Statement dated December 6, 1996, filed under Registration No. 33-14507). 10.1 Deferred Benefit Plan for Directors (incorporated herein by reference to Exhibit 10(C) to the Registrant's report on Form 10-K for the year ended December 31, 1984). 10.2 The form of Indemnity Agreement approved by the Registrant's shareholders at its April 19, 1988 Annual Meeting, as executed with all of the Directors of the Registrant (incorporated herein by reference to Exhibit 10(F) to the Registrant's report on Form 10-K for the year ended December 31, 1988). 10.3 Incentive Share Grant Plan, as amended, approved by the Registrant's shareholders at its April 21, 1992 Annual Meeting (incorporated herein by reference to Exhibit 10 to the Registrant's report on Form 10-K for the year ended December 31, 1992). 10.4 Non-Employee Director Stock Option Plan, as amended, approved by the Registrant's shareholders at its April 15, 1997 Annual Meeting (incorporated herein by reference to Exhibit 4 to the Registrant's Form S-8 Registration Statement dated July 28, 1997, filed under registration No. 333-32269). 10.5 Employee Stock Option Plan, as amended, approved by the Registrant's shareholders at its April 15, 1997 Annual Meeting (incorporated herein by reference to Exhibit 4 to the Registrant's Form S-8 Registration Statement dated July 28, 1997, filed under registration No. 333-32267). 22 EX-10 2 FORM OF MANAGEMENT CONTINUITY AGREEMENT 1 EXHIBIT 10 MANAGEMENT CONTINUITY AGREEMENT THIS IS AN AGREEMENT between INDEPENDENT BANK CORPORATION (the "Corporation"), whose principal offices are 230 West Main Street, Ionia, Michigan 48846, and _____________ (the "Executive"), dated ______________, 1998. RECITALS The Executive is a key officer of the Corporation or a Subsidiary whose continued dedication, availability, advice and counsel to the Corporation and its Subsidiaries is deemed important to the Board of Directors of the Corporation ("Board"), the Corporation and its shareholders. The services of the Executive, his experience and knowledge of the affairs of the Corporation and his reputation and contacts in the industry are extremely valuable to the Corporation. The Corporation wishes to attract and retain such well-qualified executives, and it is in the best interests of the Corporation to secure the continued services of the Executive notwithstanding any change in control of the Corporation. The Corporation considers the establishment and maintenance of a sound and vital management team to be part of its overall corporate strategy and to be essential to protecting and enhancing the best interests of this Corporation and its shareholders. Accordingly, the Board has approved this Agreement with the Executive and authorized its execution and delivery on behalf of the Corporation. AGREEMENT 1. Term of Agreement. This Agreement will begin on the date entered above (the "Commencement Date") and will continue in effect through the third anniversary of the Commencement Date (the "Initial Term"). Thereafter, this Agreement shall be extended automatically for additional three (3) year periods ("Renewal Terms") at the end of the Initial Term and each Renewal Term, unless not later than twelve (12) months prior to the end of the Initial Term or a Renewal Term, the Corporation gives written notice to Executive that it has elected not to renew this Agreement. Notwithstanding the foregoing, if a Change of Control occurs during the term of this Agreement, this Agreement will continue in effect for thirty-six (36) months beyond the end of the month in which any Change of Control occurs. 2. Definitions. The following defined terms shall have the meanings set forth below, for purposes of this Agreement: (a) Average Base Salary. Average Base Salary shall mean the Executive is average annual salary during the three (3) calendar year period beginning two (2) years immediately prior to the year of Change of Control and the year in which the Change of Control occurred; provided that if Executive has been employed for less than three (3) years, Average Base Salary shall be determined, during that lesser period or if less than one year, the Executive's prevailing salary shall be annualized. 1 2 (b) Average Bonus. Average Bonus shall mean the average of the last three (3) bonuses paid to Executive under the Corporation's Management Incentive Compensation Plan immediately preceding the Change of Control, and if the Executive is eligible to participate in the Corporation's Incentive Share Grant Plan, the Executive shall be deemed to have participated in that plan for each of those three years, whereby those bonuses shall be based on the aggregate fair market value of the shares of the Corporation's stock acquired or that would have been acquired irrespective of the restrictions on transfer or forfeiture provisions. (c) Change of Control. A "Change in Control" shall mean a change in control of the Corporation of such a nature that would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A promulgated under the Securities Exchange Act of 1934 ("Exchange Act"), or such item thereof which may hereafter pertain to the same subject; provided that, and notwithstanding the foregoing, a Change in Control shall be deemed to have occurred if: (i) Any "person" (as such term is used in Sections 13(d) and 14(d) of the Exchange Act) is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Corporation representing twenty percent (20%) or more of the combined voting power of the Corporation's then outstanding securities; or (ii) At any time a majority of the Board of Directors of the Corporation is comprised of other than Continuing Directors (for purposes of this paragraph, the term Continuing Director means a director who was either (A) first elected or appointed as a Director prior to the date of this Agreement; or (B) subsequently elected or appointed as a director if such director was nominated or appointed by at least a majority of the then Continuing Directors); or (iii) Any of the following occur: (A) Any merger or consolidation of the Corporation, other than a merger or consolidation in which the voting securities of the Corporation immediately prior to the merger or consolidation continue to represent (either by remaining outstanding or being converted into securities of the surviving entity) fifty-one percent (51%) or more of the combined voting power of the Corporation or surviving entity immediately after the merger or consolidation with another entity; (B) Any sale, exchange, lease, mortgage, pledge, transfer, or other disposition (in a single transaction or a series of related transactions) of all or substantially all of the assets of the Corporation which shall include, without limitation, the sale of assets or earning power aggregating more than fifty percent (50%) of the assets or earning power of the Corporation on a consolidated basis; 2 3 (C) Any liquidation or dissolution of the Corporation; (D) Any reorganization, reverse stock split, or recapitalization of the Corporation which would result in a Change of Control; or (E) Any transaction or series of related transactions having, directly or indirectly, the same effect as any of the foregoing; or any agreement, contract, or other arrangement providing for any of the foregoing. (d) Disability. "Disability" means that, as a result of Executive's incapacity due to physical or mental illness, the Executive shall have been found to be eligible for the receipt of benefits under the Corporation's long term disability plan. (e) Cause. "Cause" means (i) the willful commission by the Executive of a criminal or other act that causes or will probably cause substantial economic damage to the Corporation or a Subsidiary or substantial injury to the business reputation of the Corporation or a Subsidiary; (ii) the commission by the Executive of an act of fraud in the performance of such Executive's duties on behalf of the Corporation or a Subsidiary; (iii) the continuing willful failure of the Executive to perform the duties of such Executive to the Corporation or a Subsidiary (other than any such failure resulting from the Executive's Disability or occurring after issuance by Executive of a Notice of Termination for Good Reason) after written notice thereof (specifying the particulars thereof in reasonable detail) and a reasonable opportunity to be heard and cure such failure are given to the Executive by the Board; or (iv) the order of a federal or state bank regulatory agency or a court of competent jurisdiction requiring the termination of the Executive's employment. For purposes of this subparagraph, no act, or failure to act, on the Executive's part shall be deemed "willful" unless done, or omitted to be done, by the Executive not in good faith and without reasonable belief that the action or omission was in the best interest of the Corporation or a Subsidiary. (f) Good Reason. For purposes of this Agreement, "Good Reason" means the occurrence of any one or more of the following without the Executive's express written consent: (i) The assignment to Executive of duties which are materially different from or inconsistent with the duties, responsibilities and status of Executive's position at any time during the six (6) month period prior to the Change of Control of the Corporation, or which result in a significant reduction in Executive's authority and responsibility as an executive of the Corporation or a Subsidiary; (ii) A reduction by the Corporation in Executive's base salary or salary grade as of the day prior to the Change of Control, or the failure to grant salary increases and bonus payments on a basis comparable to those granted to other executives of the Corporation, or reduction of Executive's most recent incentive bo- 3 4 nus potential prior to the Change of Control under the Corporation's Management Incentive Compensation Plan, or any successor plan; (iii) Either (a) the Corporation requiring Executive to be based at a location in excess of ten (10) miles from the location where Executive is currently based, or (b) in the event of any relocation of the Executive with the Executive's express written consent, the failure of the Corporation or a Subsidiary to pay (or reimburse the Executive for) all reasonable moving expenses by the Executive relating to a change of principal residence in connection with such relocation and to pay the Executive the amount of any loss realized in the sale of the Executive's principal residence in connection with any such change of residence. Any gain realized upon the sale shall not offset the obligation to pay moving expenses, and the amounts payable under (b) shall be tax effected, all to the effect that the Executive shall incur no loss on an after tax basis; (iv) The failure of the Corporation to obtain a satisfactory agreement from any successor to the Corporation to assume and agree to perform this Agreement, as contemplated in Paragraph 6 hereof; (v) Any termination by the Corporation of Executive's employment that is other than for Cause; (vi) Any termination of Executive's employment, reduction in Executive's compensation or benefits, or adverse change in Executive's location or duties, if such termination, reduction or adverse change (aa) occurs within six (6) months before a Change of Control, (bb) is in contemplation of such Change in Control, and (cc) is taken to avoid the effect of this Agreement should such action occur after such Change in Control; or (vii) The failure of the Corporation to provide the Executive with substantially the same fringe benefits (including, without limitation, retirement plan, health care, insurance, stock options and paid vacations) that were provided to him immediately prior to the Change in Control, or with a package of fringe benefits that, though one or more of such benefits may vary from those in effect immediately prior to such Change in Control, is substantially comparable in all material respects to such fringe benefits taken as a whole. The existence of Good Reason shall not be affected by Executive's Disability. Executive's continued employment shall not constitute a waiver of Executive's rights with respect to any circumstance constituting Good Reason under this Agreement. (g) Notice of Termination. "Notice of Termination" means a written notice indicating the specific termination provision in this Agreement relied upon and setting forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the employment under the provision so indicated. The Executive shall not be entitled to give a Notice of Termination that the Executive is terminating employment for Good Reason more than six (6) months following the occurrence of the event alleged to 4 5 constitute Good Reason, except with respect to an event which occurred before the Change of Control, in which case the Notice of Termination must be given within six (6) months following the Change of Control. Any termination by the Corporation for Cause or due to Executive's Disability, or by Executive for Good Reason shall be communicated by Notice of Termination to the other party. (h) Subsidiary. "Subsidiary" means a corporation with at least eighty percent (80%) of its outstanding capital stock owned directly or indirectly by the Corporation. 3. Eligibility for Severance Benefits. Subject to Paragraph 5, the Executive shall receive the Severance Benefits described in Paragraph 4 if the Executive's employment is terminated during the term of this Agreement, and (a) The termination occurs within thirty-six (36) months after a Change of Control, unless the termination is (i) because of Executive's death or Disability, (ii) by the Corporation for Cause, or (iii) by the Executive other than for Good Reason; or (b) The Corporation terminates the employment of Executive within six (6) months before a Change of Control, in contemplation of such Change of Control, and to avoid the effect of this Agreement should such action occur after such Change of Control. 4. Severance Benefits. Subject to Paragraph 5, the Executive shall receive the following Severance Benefits (in addition to accrued compensation and vested benefits) if eligible under Paragraph 3: (a) A lump sum cash amount (which shall be paid not later than thirty (30) days after the date of termination of employment) equal to Executive's Average Base Salary, multiplied by ________________; (b) A lump sum cash amount (which shall be paid not later than thirty (30) days after the date of termination of employment) equal to the Executive's Average Bonus, multiplied by __________________; (c) For a __________ year period after the date the employment is terminated, the Corporation will arrange to provide to Executive at the Corporation's expense, with: (i) Health care coverage equal to that in effect for Executive prior to the termination (or, if more favorable to Executive, that furnished generally to salaried employees of the Corporation), including, but not limited to, hospital, surgical, medical, dental, prescription and dependent coverages. Upon the expiration of the health care benefits required to be provided pursuant to this subparagraph 4(c), the Executive shall be entitled to the continuation of such benefits under the provisions of the Consolidated Omnibus Budget Reconciliation Act. Health care benefits otherwise receivable by Executive pursuant to this subparagraph 4(c) shall be reduced to the extent comparable benefits are actually received by Executive from a subsequent employer during the ___________ year period follow- 5 6 ing the date the employment is terminated and any such benefits actually received by Executive shall be reported to the Corporation; (ii) Life and accidental death and dismemberment insurance coverage (including supplemental coverage purchase opportunity and double indemnity for accidental death) equal (including policy terms) to that in effect at the time Notice of Termination is given (or on the date the employment is terminated if no Notice of Termination is required) or, if more favorable to Executive, equal to that in effect at the date the Change of Control occurs; and (iii) Disability insurance coverage (including policy terms) equal to that in effect at the time Notice of Termination is given (or on the date employment is terminated if no Notice of Termination is required) or, if more favorable to Executive, equal to that in effect immediately prior to the Change of Control; provided, however, that no income replacement benefits will be payable under such disability policy with regard to the _____ year period following a termination of employment provided that the payments payable under subparagraphs 4(a) and (b) above have been made. (d) The Corporation shall pay all fees for outplacement services for the Executive up to a maximum equal to fifteen percent (15%) of the Executive's base salary used to calculate his benefit under subparagraph 4(a) plus provide a travel expense account of up to $10,000 to reimburse job search travel; (e) In computing and determining Severance Benefits under subparagraphs 4(a) through (d) above, a decrease in Executive's salary, incentive bonus, or insurance benefits shall be disregarded if such decrease occurs within six (6) months before a Change of Control, is in contemplation of such Change of Control, and is taken to avoid the effect of this Agreement should such action be taken after such Change of Control; in such event, the salary, incentive bonus, and/or insurance benefits used to determine Average Annual Salary, Average Bonus, and therefore Severance Benefits shall be that in effect immediately before the decrease that is disregarded pursuant to this subparagraph 4(e); (f) Executive shall not be required to mitigate the amount of any payment provided for in this Paragraph 4 by seeking other employment or otherwise, nor shall the amount of any payment provided for in this Paragraph 4 be reduced by any compensation earned by Executive as the result of employment by another employer after the date the employment is terminated, or otherwise, with the exception of a reduction in health insurance coverage as provided in subparagraph 4(c)(i). 5. Maximum Payments. Notwithstanding any provision in this Agreement to the contrary, if part or all of any amount to be paid to Executive by the Corporation under this Agreement or otherwise constitute a "parachute payment" (or payments) under Section 280G or any other similar provision of the Internal Revenue Code of 1986, as amended (the "Code"), the following limitation shall apply: 6 7 If the aggregate present value of such parachute payments (the "Parachute Amount") exceeds (i) three (3) times Executive's "base amount" as defined in Section 280G of the Code, and (ii) less One Dollar ($1.00), then the amounts otherwise payable to or for the benefit of the Executive subsequent to the termination of his employment, and taken into account in calculating the Parachute Amount (the "Termination Payments"), shall be reduced and/or delayed, as further described below, to the extent necessary so that the Parachute Amount is equal to three (3) times the Executive's "base amount," less One Dollar ($1.00). Any determination or calculation described in this Paragraph 5 shall be made by the Corporation's independent accountants or the Corporation's tax counsel, as selected by Executive. Such determination, and any proposed reduction and/or delay in termination payments shall be furnished in writing promptly by the accountants to the Executive. The Executive may then elect, in his sole discretion, which and how much of any particular termination payment shall be reduced and/or delayed and shall advise the Corporation in writing of his election, within thirty (30) days of the accountant's determination, of the reduction or delay in termination payments. If no such election is made by the Executive within such 30-day period, the Corporation may elect which and how much of any termination payment shall be reduced and/or delayed and shall notify the Executive promptly of such election. As promptly as practicable following such determination and the elections hereunder, the Corporation shall pay to or distribute to or for the benefit of the Executive such amounts as are then due to the Executive. Any disagreement regarding a reduction or delay in termination payments will be subject to arbitration under Paragraph 15 of this Agreement. Neither the Executive's designation of specific payments to be reduced or delayed, nor the Executive's acceptance of reduced or delayed payments, shall waive the Executive's right to contest such reduction or delay. 6. Successors; Binding Agreements. This Agreement shall inure to the benefit of and be enforceable by Executive's personal and legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. Executive's rights and benefits under this Agreement may not be assigned, except that if Executive dies while any amount would still be payable to Executive hereunder if Executive had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement, to the beneficiaries designated by the Executive to receive benefits under this Agreement in a writing on file with the Corporation at the time of the Executive's death or, if there is no such beneficiary, to Executive's estate. The Corporation will require any successor (whether direct or indirect, by purchase, merger, consolidation, or otherwise) to all or substantially all of the business and/or assets of the Corporation (or of any division or Subsidiary thereof employing Executive) to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Corporation would be required to perform it if no such succession had taken place. Failure of the Corporation to obtain such assumption and agreement prior to the effectiveness of any such succession shall be a breach of this Agreement and shall entitle Executive to compensation from the Corporation in the same amount and on the same terms to which Executive would be entitled hereunder if Executive terminated the employment for Good Reason following a Change of Control. 7 8 7. Withholding of Taxes. The Corporation may withhold from any amounts payable under this Agreement all federal, state, city, or other taxes as required by law. 8. Notice. For the purpose of this Agreement, notices and all other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given when personally delivered or mailed by United States registered mail, return receipt requested, postage prepaid, addressed to the respective addressees set forth on the first page of this Agreement, or at such other addresses as the parties may designate in writing. 9. Miscellaneous. No provision of this Agreement may be modified, waived, or discharged unless such waiver, modification, or discharge is agreed to in writing and signed by Executive and such officer as may be specifically designated by the Board of Directors of the Corporation. The validity, interpretation, construction, and performance of this Agreement shall be governed by the laws of the State of Michigan. 10. Employment Rights. Except as specifically provided in this Agreement, this Agreement shall not confer upon Executive any right to continue in the employ of the Corporation or its Subsidiaries and shall not in any way affect the right of the Corporation or its Subsidiaries to dismiss or otherwise terminate Executive's employment at any time with or without cause. 11. No Vested Interest. Neither Executive nor Executive's beneficiary shall have any right, title, or interest in any benefit under this Agreement prior to the occurrence of the right to the payment thereof, or in any property of the Corporation or its subsidiaries or affiliates. 12. Prior Agreements. This Agreement contains the understanding between the parties hereto with respect to Severance Benefits in connection with a Change of Control of the Corporation and supersedes any such prior agreement between the Corporation (or any predecessor of the Corporation) and Executive. If there is any discrepancy or conflict between this Agreement and any plan, policy, or program of the Corporation regarding any term or condition of Severance Benefits in connection with a Change of Control of the Corporation, the language of this Agreement shall govern. 13. Validity. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 14. Counterparts. This Agreement may be executed in several counterparts, each of which shall be deemed to be an original but all of which together shall constitute one and the same instrument. 8 9 15. Arbitration. The sole and exclusive method for resolving any dispute arising out of this Agreement shall be arbitration in accordance with this paragraph. Except as provided otherwise in this paragraph, arbitration pursuant to this paragraph shall be governed by the Commercial Arbitration Rules of the American Arbitration Association. A party wishing to obtain arbitration of an issue shall deliver written notice to the other party, including a description of the issue to be arbitrated. Within fifteen (15) days after either party demands arbitration, the Corporation and the Executive shall each appoint an arbitrator. Within fifteen (15) additional days, these two arbitrators shall appoint the third arbitrator by mutual agreement; if they fail to agree within said fifteen (15) day period, then the third arbitrator shall be selected promptly pursuant to the rules of the American Arbitration Association for Commercial Arbitration. The arbitration panel shall hold a hearing in Kent County, Michigan, within ninety (90) days after the appointment of the third arbitrator. The fees and expenses of the arbitrator, and any American Arbitration Association fees, shall be paid by the Corporation. Both the Corporation and the Executive may be represented by counsel and may present testimony and other evidence at the hearing. Within ninety (90) days after commencement of the hearing, the arbitration panel will issue a written decision; the majority vote of two of the three arbitrators shall control. The majority decision of the arbitrators shall be final and binding on the parties, and shall be enforceable in accordance with law. Judgment may be entered on the arbitrators' award in any court having jurisdiction. The Executive shall be entitled to seek specific performances of his rights under this Agreement during the pendency of any dispute or controversy arising under or in connection with this Agreement. The Corporation will reimburse Executive for all reasonable attorney fees incurred by Executive as the result of any arbitration with regard to any issue under this Agreement (or any judicial proceeding to compel or to enforce such arbitration); (i) which is initiated by Executive if the Corporation is found in such proceeding to have violated this Agreement substantially as alleged by Executive; or (ii) which is initiated by the Corporation, 9 10 unless Executive is found in such proceeding to have violated this Agreement substantially as alleged by the Corporation. IN WITNESS WHEREOF, the parties have signed this Agreement as of the day and year written above. CORPORATION: INDEPENDENT BANK CORPORATION By ______________________________________ Its _________________________________ EXECUTIVE: _________________________________________ 10 EX-13 3 APPENDIX TO REGISTRANT'S DEFINITIVE PROXY STMT 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 3
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 4
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 6 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 8
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. A-25 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 =============================
A-29 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 ================================================
A-30 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. A-32 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 EX-21 4 LIST OF SUBSIDIARIES 1 EXHIBIT 21 INDEPENDENT BANK CORPORATION Subsidiaries of the Registrant
State of Incorporation ---------------------- IBC Capital Finance Ionia, Michigan Delaware Independent Bank Ionia, Michigan Michigan Independent Bank West Michigan Rockford, Michigan Michigan Independent Bank South Michigan Leslie, Michigan Michigan Independent Bank East Michigan Caro, Michigan Michigan IBC Financial Services, Inc. (a subsidiary of Independent Bank) Ionia, Michigan Michigan Independent Title Services, Inc. (a subsidiary of Independent Bank, Independent Bank West Michigan, Independent Bank South Michigan and Independent Bank East Michigan) Rockford, Michigan Michigan First Home Financial (a subsidiary of Independent Bank) Grand Rapids, Michigan Michigan Independent Mortgage Company-Central Michigan (a subsidiary of Independent Bank) South Ionia, Michigan Michigan Independent Mortgage Company-West Michigan (a subsidiary of Independent Bank West Michigan) Rockford, Michigan Michigan Independent Mortgage Company-South Michigan (a subsidiary of Independent Bank South Michigan) Leslie, Michigan Michigan Independent Mortgage Company-East Michigan (a subsidiary of Independent Bank East Michigan) Caro, Michigan Michigan
EX-23 5 CONSENT OF INDEPENDENT ACCOUNTANTS 1 EXHIBIT 23 The Board of Directors Independent Bank Corporation: We consent to incorporation by reference in the registration statements (No. 33-80088) on Form S-3 and (Nos. 333-32267 and 333-32269) on Forms S-8 of Independent Bank Corporation of our report dated February 1, 1999, relating to the 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, comprehensive income, shareholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1998, which report is incorporated by reference in the December 31, 1998 annual report on Form 10-K of Independent Bank Corporation. /s/ KPMG LLP Lansing, Michigan March 24, 1999 EX-27.1 6 FINANCIAL DATA SCHEDULE 1998
9 1,000 12-MOS DEC-31-1998 DEC-31-1998 42,846 0 0 0 99,515 18,349 19,029 822,604 9,714 1,085,258 830,514 150,614 14,175 20,250 0 0 7,383 62,322 1,085,258 77,167 7,875 1,031 86,073 25,097 36,840 49,233 3,043 267 45,688 14,347 14,347 0 0 10,221 1.39 1.38 5.36 4,106 2,240 295 3,500 7,670 1,640 641 9,714 4,333 0 5,381
EX-27.2 7 FINANCIAL DATA SCHEDULE RESTATED 1995 & 1996
9 1,000 12-MOS 3-MOS 6-MOS 9-MOS 12-MOS DEC-31-1995 DEC-31-1996 DEC-31-1996 DEC-31-1996 DEC-31-1996 DEC-31-1995 MAR-31-1996 JUN-30-1996 SEP-30-1996 DEC-31-1996 17,208 14,776 26,324 26,601 40,631 0 0 0 0 0 0 5,500 6,100 0 10,000 0 0 0 0 0 87,553 90,108 126,962 122,487 136,852 27,906 27,284 28,135 26,874 26,754 29,031 28,231 0 27,698 27,645 418,044 419,055 540,218 565,418 609,704 5,243 5,367 6,677 6,720 6,960 590,147 595,716 777,115 793,152 888,597 411,624 425,495 550,574 541,781 672,534 124,294 114,514 149,000 183,459 136,994 7,204 7,206 28,136 9,679 9,983 0 0 0 7,500 17,250 0 0 0 0 0 0 0 0 0 0 2,704 2,723 2,725 2,861 2,862 44,321 45,748 46,680 47,872 48,974 590,147 595,416 777,115 793,152 888,597 37,861 10,398 22,089 35,587 49,768 8,121 1,780 3,899 6,375 8,746 0 210 349 636 971 45,982 12,388 26,337 42,598 59,485 12,470 3,346 7,118 11,598 16,138 17,900 5,017 10,565 17,548 24,813 28,082 7,371 15,772 25,050 34,672 636 207 689 942 1,233 (120) (51) (146) (130) (162) 21,702 5,707 12,170 19,804 27,861 9,510 2,681 5,482 8,285 11,130 6,810 1,890 3,842 5,819 11,130 0 0 0 0 0 0 0 0 0 0 6,810 1,890 3,842 5,819 7,852 2.48 0.70 1.41 2.04 2.75 2.50 0.69 1.40 2.02 2.72 5.65 5.48 5.55 5.45 5.38 1,886 2,083 2,042 2,089 1,711 427 199 1,604 1,159 1,994 247 245 206 203 197 3,200 2,300 2,800 2,200 3,800 5,054 5,243 5,243 5,243 5,243 712 165 359 665 1,136 265 82 174 395 440 5,243 5,367 6,677 6,720 6,960 2,371 2,078 2,911 2,869 3,267 0 0 0 0 0 2,872 3,289 3,766 3,851 3,693
EX-27.3 8 FINANCIAL DATA SCHEDULE RESTATED 1997
9 1,000 3-MOS 6-MOS 9-MOS 12-MOS DEC-31-1997 DEC-31-1997 DEC-31-1997 DEC-31-1997 MAR-31-1997 JUN-30-1997 SEP-30-1997 DEC-31-1997 29,304 32,400 23,411 30,371 0 0 0 0 0 0 0 0 0 0 0 0 155,050 145,398 121,939 110,769 26,286 25,257 23,856 22,525 27,058 26,117 24,711 23,354 637,976 687,123 719,407 744,178 7,041 7,100 7,329 7,670 912,568 958,354 959,077 983,817 670,922 667,552 681,133 700,480 153,039 201,160 187,629 190,185 9,726 10,937 9,964 11,386 25,750 23,250 22,750 22,250 0 0 0 0 0 0 0 0 4,337 4,347 4,574 4,587 48,794 51,108 53,027 54,929 912,568 958,354 959,077 983,817 14,763 30,764 47,937 65,830 2,805 5,743 8,320 10,585 278 494 745 999 17,846 37,001 57,002 77,414 5,554 11,050 16,749 22,614 7,969 16,647 25,644 34,775 9,877 20,354 31,358 42,639 321 642 1,103 1,750 78 74 166 273 8,288 17,293 26,798 36,845 3,004 6,081 9,280 12,559 2,134 6,081 9,280 12,559 0 0 0 0 0 0 0 0 2,134 4,328 6,603 8,924 0.49 1.00 1.45 1.95 0.49 0.99 1.43 1.93 5.05 5.04 5.05 5.07 2,850 2,589 2,861 3,298 1,332 1,874 2,277 1,904 195 189 186 184 2,800 3,000 3,200 2,800 6,960 6,960 6,960 6,960 415 855 1,189 1,625 175 353 455 585 7,041 7,100 7,329 7,670 3,040 3,240 3,265 3,414 0 0 0 0 4,001 3,860 4,064 4,256
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