<PAGE> 1
SCHEDULE 14A
(RULE 14A-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Filed by the registrant [X]
Filed by a party other than the registrant [ ]
Check the appropriate box:
[ ] Preliminary proxy statement. [ ] Confidential, for use of the
Commission only (as permitted by
Rule 14a-6(e)(2).
[X] Definitive proxy statement.
[ ] Definitive additional materials.
[ ] Soliciting material pursuant to Rule 14a-11(c) or Rule 14a-12.
Independent Bank Corporation
- --------------------------------------------------------------------------------
(Name of Registrant as Specified in Its Charter)
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(Name of Person(s) Filing Proxy Statement if Other Than the Registrant)
Payment of filing fee (check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and
0-11.
(1) Title of each class of securities to which transaction applies:
- --------------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
- --------------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
- --------------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
- --------------------------------------------------------------------------------
(5) Total fee paid:
- --------------------------------------------------------------------------------
[ ] Fee paid previously with preliminary materials.
- --------------------------------------------------------------------------------
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration
statement number, or the form or schedule and the date of its filing.
(1) Amount Previously Paid:
- --------------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
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(3) Filing Party:
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(4) Date Filed:
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<PAGE> 2
[INDEPENDENT BANK CORPORATION LOGO]
March 15, 2000
Dear Shareholder:
We invite you to attend the 2000 Annual Meeting of Shareholders. This year's
meeting will be held on Tuesday, April 18, 2000, at 3:00 p.m. at the Ionia
Theater, 205 West Main Street, Ionia, Michigan 48846.
Many of the traditional elements of our annual report, including our audited
financial statements, can be found in an appendix to this Proxy Statement. For
your convenient reference, a table of contents is located on page A-1.
It is important that your shares are represented at the Annual Meeting.
Please carefully read the Notice of Annual Meeting and Proxy Statement. Whether
or not you expect to attend the Annual Meeting, PLEASE SIGN, DATE AND RETURN THE
ENCLOSED PROXY IN THE ENVELOPE PROVIDED AT YOUR EARLIEST CONVENIENCE OR REGISTER
YOUR VOTE BY PHONE OR THE INTERNET.
Sincerely,
/s/ Charles Van Loan
Charles C. Van Loan
President and
Chief Executive Officer
<PAGE> 3
INDEPENDENT BANK CORPORATION
230 West Main Street
Ionia, Michigan 48846
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
To Be Held April 18, 2000
The Annual Meeting of Shareholders of Independent Bank Corporation will be
held at the Ionia Theater, 205 West Main Street, Ionia, Michigan 48846, on
Tuesday, April 18, 2000, at 3:00 p.m. (local time) for the following purposes:
1. Election of Directors
a. To elect one nominee to the Board of Directors to serve a one-
year term expiring in 2001.
b. To elect three nominees to the Board of Directors to serve three-
year terms expiring in 2003.
2. To consider and vote upon a proposal to amend the Company's Articles
of Incorporation to increase the authorized shares of common stock
from 14 million shares to 30 million shares.
3. To consider and vote upon a proposal to amend the Company's Articles
of Incorporation and eliminate the requirement that certain business
combinations be approved by 75% of the Company's outstanding shares of
common stock.
4. To consider and vote upon a proposal to make an additional 516,000
shares of the Company's common stock available for issuance under the
Employee Stock Option Plan.
5. To transact such other business as may properly come before the
meeting or any adjournment thereof.
Shareholders of record as shown by the transfer books of the Company at the
close of business on February 18, 2000, are entitled to notice of and to vote at
the meeting or any adjournment thereof. Whether or not you expect to be present
in person at this meeting, please sign the enclosed proxy and return it promptly
in the enclosed envelope or register your vote by phone or the internet. If you
attend the meeting and wish to vote in person, you may do so even though you
have submitted a proxy.
By order of the Board of Directors,
/s/ William R. Kohls
William R. Kohls
Secretary
Dated: March 15, 2000
<PAGE> 4
INDEPENDENT BANK CORPORATION
230 West Main Street
Ionia, Michigan 48846
PROXY STATEMENT
March 15, 2000
This Proxy Statement is furnished in connection with the solicitation,
beginning approximately March 15, 2000, by the Board of Directors of Independent
Bank Corporation (the "Company"), of proxies for use at the Annual Meeting of
Shareholders. This meeting will be held on Tuesday, April 18, 2000, at 3:00 p.m.
at the Ionia Theater, 205 West Main Street, Ionia, Michigan 48846.
If the form of the Proxy accompanying this Proxy Statement is properly
executed and returned, the shares represented by the Proxy will be voted at the
Annual Meeting of Shareholders in accordance with the directions given in such
Proxy. If no choice is specified, the shares represented by the Proxy will be
voted for the election of directors listed as nominees and for the proposals to
amend the Company's Articles of Incorporation and to reserve additional shares
for issuance under its Employee Stock Option Plan.
To vote by telephone, call toll free on a touch-tone phone 1-877-PRX-VOTE
(1-877-779-8683); enter the control number located on your proxy card and follow
the recorded instructions. Shareholders residing outside the United States may
call collect on a touch-tone phone 1-201-536-8073.
To vote by internet, go to the site http://www.eproxyvote.com/ibcp; enter
the control number located on your proxy card and follow the instructions
provided.
A Proxy may be revoked prior to its exercise by delivering a written notice
of revocation to the Secretary of the Company, executing a subsequent Proxy or
attending the meeting and voting in person. Attendance at the meeting does not,
however, automatically serve to revoke a Proxy.
VOTING SECURITIES AND RECORD DATE
As of February 18, 2000, the record date for the Annual Meeting, the
Company had issued and outstanding 11,188,299 shares of common stock, par value
$1.00 per share ("Common Stock"). Shareholders are entitled to one vote for each
share of Common Stock registered in their names at the close of business on the
record date. Votes cast at the meeting and submitted by proxy are counted by the
inspectors of the meeting, who are appointed by the Company.
As of February 18, 2000, no person was known by Management to be the
beneficial owner of more than 5% of the Common Stock, except as follows:
<TABLE>
<CAPTION>
Amount and
Nature of Approximate
Name and Address of Beneficial Percent
Title of Class Beneficial Owner Ownership of Class
--------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Common Stock, Independent Bank Corporation 715,402 (1) 6.24%
$1 par value Employee Stock Ownership
Trust, 230 West Main Street
Ionia, Michigan 48846
</TABLE>
(1)Includes 255,835 shares of Common Stock held by the employee stock
ownership plan that was maintained by the former Mutual Savings Bank, f.s.b.
Upon receipt of a favorable determination by the Internal Revenue Service,
that plan will merge into the ESOP.
1
<PAGE> 5
The Employee Stock Ownership Trust ("ESOT") holds shares of Common Stock
pursuant to the terms of the Company's Employee Stock Ownership Plan ("ESOP").
Firstar Trust Company administers the ESOP and serves as directed trustee. The
Company's ESOP Administrative Committee has investment power with respect to the
shares of Common Stock held by the ESOT and has voting power to the extent that
the ESOP participants do not direct the voting of the shares of Common Stock
allocated to their accounts.
The Administrative Committee is comprised of William R. Kohls, James J.
Twarozynski and Laurinda M. Neve, each of whom are officers of the Company.
Except for the shares of Common Stock allocated to their account as participants
in the ESOP, each member of the Administrative Committee disclaims beneficial
ownership of the shares held by the ESOP.
ELECTION OF DIRECTORS
The Bylaws of the Company permit the Board of Directors to establish the
size of the Board from three to fifteen members. The current Board has fixed the
size of the Board at nine members. All directorships possible under the
Company's Bylaws are not being filled because the Board believes that under the
present circumstances, a Board of nine persons is adequate to manage the affairs
of the Company.
The Company's Articles of Incorporation provide that the Board be divided
into three classes of nearly equal size, with the classes to hold office for
staggered terms of three years each. In order to maintain each of the three
classes of the Board at nearly equal size, Jeffery A. Bratsburg is a nominee for
election to a one-year term expiring in 2001. Robert J. Leppink, Arch V. Wright,
Jr., and Robert L. Hetzler are nominees for election to serve three-year terms
expiring in 2003.
Mr. Bratsburg is the Chairman of the Board of Independent Bank West
Michigan and was appointed to the Company's Board in January, 2000. Mr. Hetzler
serves as a Director of Independent Bank MSB and has been nominated to stand for
election to the Company's Board. Mr. Leppink and Mr. Wright are incumbent
directors. Additional information on the nominees is set forth in the following
pages of this Proxy Statement.
The Proxies cannot be voted for a greater number of persons than the number
of nominees named. In the event that any nominee is unable to serve, which is
not now contemplated, the Board may designate a substitute nominee. The proxy
holders, to the extent they have been granted authority to vote in the election
of directors, may or may not vote for a substitute nominee.
In addition to the nominees for director, each director whose term will
continue after the meeting is named on the following page. Each nominee and
director owned beneficially, directly or indirectly, the number of shares of
Common Stock set forth opposite their respective names. The stock ownership
information and the information relating to each nominee's and director's age,
principal occupation or employment for the past five years has been furnished to
the Company as of February 18, 2000, by the respective nominees and directors.
A plurality of the votes cast at the Annual Meeting of Shareholders is
required to elect the nominees as directors. Accordingly, at this year's
meeting, the four individuals who receive the largest number of votes cast at
the meeting will be elected as directors. Shares not voted at the meeting,
whether by abstention, broker nonvote or otherwise, will not be treated as
votes cast at the meeting. The Board of Directors recommends a vote FOR the
election of the persons nominated by the Board.
2
<PAGE> 6
<TABLE>
<CAPTION>
Amount and
Nature of
Beneficial Percent of
Ownership (1) Outstanding
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
NOMINEE FOR A ONE-YEAR TERM EXPIRING IN 2001
Jeffrey A. Bratsburg (age 56) 91,466 (2) .80%
Mr. Bratsburg served as President and Chief Executive
Officer of Independent Bank West Michigan from 1985 until
his retirement in 1999. He became a Director in 2000.
NOMINEES FOR THREE-YEAR TERMS EXPIRING IN 2003
Robert J. Leppink (age 67) 47,814 .42
Mr. Leppink is the President of Leppink's, Inc.
(retail grocer). He became a Director in 1980.
Arch V. Wright, Jr. (age 67) 52,923 .46
Mr. Wright is the President of Charlevoix Development Company
(real estate development). He became a Director in 1974.
Robert L. Hetzler (age 55)
Mr. Hetzler is the President of Monitor Sugar Company 6,720 .06
(food processor).
DIRECTORS WHOSE TERMS EXPIRE IN 2001
Charles A. Palmer (age 55) 40,994 .36
Mr. Palmer is an attorney and a professor of law at Thomas M. Cooley
Law School. He became a Director in 1991.
Charles C. Van Loan (age 52) 114,918 (3) 1.01
Mr. Van Loan is the President and Chief Executive Officer of
Independent Bank Corporation. He became a Director in 1992.
DIRECTORS WHOSE TERMS EXPIRE IN 2002
Keith E. Bazaire (age 61) 14,325 .13
Mr. Bazaire is the President of Carter's Food Center, Inc.
(retail grocer). He became a Director in 1996.
Terry L. Haske (age 51) 17,451 (4) .15
Mr. Haske is the President of Ricker & Haske, CPAs, p.c.
He became a Director in 1996.
Thomas F. Kohn (age 67) 19,949 .17
Mr. Kohn is the Chief Executive Officer of Belco Industries, Inc.
(manufacturer). He became a Director in 1995.
</TABLE>
(1)Except as described in the following notes, each nominee owns the shares
directly and has sole voting and investment power or shares voting and
investment power with his spouse under joint ownership. Includes shares of
Common Stock that are issuable under options exercisable within 60 days.
(2)Includes 13,578 shares allocated to Mr. Bratsburg's account under the ESOT.
Also includes 23,153 shares held by Mr. Bratsburg's wife.
(3)Includes 17,935 shares allocated to Mr. Van Loan's account under the ESOT.
Also includes 8,732 shares held by Mr. Van Loan's dependent children.
(4)Includes 2,411 shares owned jointly with Mr. Haske's father with respect to
which Mr. Haske shares voting and investment power.
3
<PAGE> 7
There are no family relationships between or among the directors, nominees or
executive officers of the Company. The Board of Directors had seven meetings in
1999. During 1999, all directors attended at least 75% of the aggregate number
of meetings of the Board and the Board committees on which they served. In
addition to the audit and personnel committees, the Board has a corporate
development committee.
The audit committee (consisting of directors Haske, Kohn and Palmer) met
twice in 1999 to select independent public accountants and discuss financial
matters with such independent accountants; review internal audit and loan review
reports as well as Management's responses thereto; and review and discuss other
pertinent financial, accounting, audit, and policy matters with Management.
The personnel committee (consisting of directors Bazaire, Haske, Leppink,
Palmer and Wright) met once in 1999 to review and make recommendations to the
Board relating to remuneration, including benefit plans, to be paid to the
Company's directors and officers.
The corporate development committee (consisting of directors Bazaire, Kohn
and Leppink) met three times in 1999 to consider and approve candidates to serve
as directors of the Company's subsidiary banks (the "Banks"). Although
Management's nominees to serve as directors of the Company have been selected
from individuals serving as directors of the Banks, the committee will consider
qualified individuals who are recommended by shareholders. Written
recommendations of individuals for Board nomination may be forwarded to the
Company's secretary for consideration as nominees at the 2001 Annual Meeting of
Shareholders. Such recommendations must be received no earlier than January 18,
2001, and no later than February 17, 2001.
PROPOSED INCREASE IN AUTHORIZED COMMON STOCK
The Company's Board of Directors has proposed that the first paragraph of
Article III of the Company's Articles of Incorporation (the "Articles") be
amended to read as follows:
The total number of shares of all classes of capital stock which the
Corporation shall have the authority to issue is thirty million two
hundred thousand shares, of which thirty million (30,000,000) shares
shall be common stock of the par value of $1.00 per share, and two
hundred thousand (200,000) shares shall be series preferred stock,
without par value.
This amendment will increase the Company's authorized Common Stock from
14,000,000 shares to 30,000,000 shares of Common Stock. The purpose of the
amendment is to provide additional shares of Common Stock for future issuance.
As of February 18, 2000, there were approximately 11,188,000 shares of Common
Stock issued and outstanding, 722,000 stock options granted but not exercised,
and 517,000 shares of Common Stock reserved for issuance under the Company's
stock compensation plans and Dividend Reinvestment Plan. As a result, as of
February 18, 2000, only 1,573,000 shares of Common Stock remain available for
future issuance. The Company has no series preferred stock issued or
outstanding. This proposed amendment will not affect those shares.
The Board of Directors believes it desirable to increase the authorized
number of shares of Common Stock in order to provide the Company with adequate
flexibility in corporate planning and strategies. The availability of additional
Common Stock for issuance could be used for a number of purposes, including
corporate financing, acquisitions, stock dividends and splits, stock options,
and other stock-based compensation. There are currently no plans, agreements or
understandings regarding the issuance of any of the additional shares of Common
Stock that would be available if this proposal is approved. Such additional
authorized shares may be issued for such purposes and for such consideration as
the Board of Directors may determine without further shareholder approval,
unless such action is required by applicable law or the rules of the Nasdaq
stock market or any stock exchange on which the Company's securities may be
listed.
The additional shares of Common Stock for which authorization is sought
would be part of the existing class of Common Stock, and, to the extent issued,
would have the same rights and privileges as the shares of Common Stock
presently outstanding. Ownership of shares of the Company's Common Stock confers
no preemptive rights.
The increase in the authorized but unissued shares of Common Stock which
would result from adoption of the proposed amendment could have a potential
anti-takeover effect with respect to the Company, although Management is not
presenting the proposal for that reason and does not presently anticipate using
the increased authorized shares for such a purpose. The potential anti-takeover
effect of the proposed amendment arises because it would enable the Company to
issue additional shares of Common Stock up to the total authorized number with
the effect that the shareholdings and related voting rights of then existing
shareholders would be diluted to an extent proportionate to the number of
additional shares issued.
The affirmative vote of the holders of a majority of the outstanding shares
of Common Stock of the Company is required for approval of the proposed
amendment. Unless otherwise directed by a shareholder's proxy, the persons named
as proxy voters in the accompanying proxy will vote FOR the amendment.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE APPROVAL OF THE PROPOSED
AMENDMENT TO THE COMPANY'S ARTICLES OF INCORPORATION TO INCREASE THE NUMBER OF
SHARES OF AUTHORIZED COMMON STOCK.
4
<PAGE> 8
PROPOSED DELETION OF ARTICLE VI OF THE ARTICLES OF INCORPORATION
The Company's Board of Directors has proposed that Article VI of the
Company's Articles of Incorporation be deleted in its entirety. Article VI
currently states:
The authorization and approval of any proposed (i) merger or
consolidation of this Corporation as a result of which this Corporation
will not be the surviving Corporation, (ii) sale of all or substantially
all of the assets of this Corporation, (iii) dissolution of this
Corporation, or (iv) amendment to or deletion of this Article VI shall
require the affirmative vote or consent of at least three-fourths (3/4)
of the outstanding stock of this Corporation entitled to vote on any
such merger, consolidation, sale of assets, dissolution or amendment.
Article VI was included in the Company's original Articles of Incorporation,
prior to the adoption of the fair price provisions and shareholder equity
provisions of the Michigan Business Corporation Act ("MBCA"). The fair price
provisions of Chapter 7A of the MBCA provide that except in cases in which
certain minimum price, form of consideration and procedural requirements are
satisfied or for certain transactions that are approved in advance by the
Company's Board of Directors, higher than normal voting requirements are imposed
with respect to various transactions involving persons who own 10 percent or
more of the Company's voting stock (referred to as "Interested Shareholders").
Transactions to which the higher vote requirements apply require an advisory
statement from the Board of Directors and must be approved by not less than 90
percent of the votes of each class of stock entitled to vote and by not less
than two-thirds of the votes, other than the votes of Interested Shareholders
who are (or whose affiliates are) a party to the proposed transaction or an
affiliate of the Interested Shareholders, of each class entitled to vote.
The shareholder equity provisions of Chapter 7B of the MBCA affect the
voting rights of persons who acquire more than 20 percent, 33-1/3 percent, or 50
percent of a Michigan corporation's voting stock (referred to as "Control
Shares"). These provisions deny shareholder voting rights to those persons or
entities who make purchase offers or investors who increase their holdings above
any of these control share levels, unless they are granted voting rights by a
majority vote of all Interested Shareholders (shareholders excluding the bidders
or owners of Control Shares and the corporation's management). If the
shareholders do not elect to grant voting rights to Control Shares, under
certain circumstances, the Control Shares may become subject to redemption.
Due to the protections now provided by the MBCA, the Board of Directors has
determined that the provisions of Article VI are no longer necessary to protect
the interests of the Company's shareholders.
Article VI and Michigan law require the affirmative vote of the holders of
at least 75 percent of the outstanding shares of Common Stock of the Company in
order to approve the proposed amendment. Accordingly, the proposed amendment
would not be approved if the total of (1) shares voted against the proposal, (2)
broker nonvotes, and (3) shares voted as abstentions, exceeds 25 percent of the
shares entitled to vote. Unless otherwise directed by a shareholder's proxy, the
persons named as proxy voters in the accompanying proxy will vote FOR the
amendment.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE APPROVAL OF THE PROPOSED
AMENDMENT TO THE COMPANY'S ARTICLES OF INCORPORATION TO DELETE ARTICLE VI IN ITS
ENTIRETY.
PROPOSED AMENDMENT TO THE COMPANY'S
EMPLOYEE STOCK OPTION PLAN
GENERAL
In 1992, the Board of Directors adopted and the shareholders approved the
Independent Bank Corporation Employee Stock Option Plan (the "Plan"). The Plan
is intended to encourage stock ownership by selected employees of the Company
and its subsidiaries and to provide them with an additional incentive to
contribute to the success of the Company and to encourage them to remain in the
Company's employ.
The Plan currently provides that options may be granted for the purchase of
up to 584,000 shares of Common Stock. The proposed amendment would make an
additional 516,000 shares available for issuance under the Plan, bringing the
total shares reserved for issuance to 1,100,000. In the case of stock dividends
or similar transactions, the number of shares available for grant under the Plan
and the number of shares subject to options then outstanding are subject to
adjustment. Effective on September 15, 1999, the Board of Directors adopted the
Amendment, subject to approval by the Company's shareholders.
The following is a summary of the principal features of the Plan. This
summary is qualified in its entirety by reference to the terms of the Plan and
the text of the amendment the latter of which is set forth in Exhibit A to this
Proxy Statement.
5
<PAGE> 9
ELIGIBILITY
Employees of the Company or any subsidiary who are determined
to be key employees are eligible to participate in the Plan.
ADMINISTRATION
The Plan is to be administered by a committee of the Board of Directors (the
"Committee"), which is required to consist of not less than two members of the
Board, each of whom is required to be a "disinterested person" as defined in
Rule 16b-3 of the Securities Exchange Act of 1934. The Committee determines the
employees of the Company who are to be granted options, the number of shares
subject to each option and such other matters as are specified in the Plan.
PRICE AND OTHER TERMS
Under the Plan, options may be granted to purchase shares of Common Stock
at prices equal to the fair market value of the shares on the date of grant. No
employee may be granted options to purchase in excess of 10 percent of the total
number of shares authorized for grant under the Plan. Options are not
exercisable until 12 months after the date of grant and expire not later than
ten years after the date of grant. The option price is payable upon exercise in
cash, in shares of Common Stock already owned by the optionee the withholding of
shares otherwise issuable upon exercise, or by a combination of shares and cash.
Options may not be transferred by optionees, except by will or by the laws of
descent and distribution, and with respect to non-qualified stock options to
certain permitted transferees, and may be exercised only while the optionee is
employed by the Company or during various limited periods after death,
retirement or other termination of employment.
OPTIONS
The Plan provides for the grant of incentive stock options ("ISOs") as
defined by Section 422A of the Internal Revenue Code (the "Code"), and non-ISOs,
as may be designated by the Committee. ISOs and non-ISOs have similar features;
however, ISOs are subject to certain additional restrictions of the Code and are
entitled to different federal income tax treatment, as described below.
Option grants may also include reload options. A reload option is an option
to purchase shares equal to the number of shares of Common Stock delivered in
payment of the exercise price (including, at the discretion of the Committee,
the number of shares tendered to the Company to satisfy any withholding tax
liability arising upon exercise), and is automatically granted upon delivery of
the shares without further action by the Committee. A reload option contains the
same terms as the original option, including the exercise period; however, the
exercise price of the reload option must equal the fair market value of the
Common Stock on the date of grant of the reload option.
AMENDMENT AND TERMINATION
The Board of Directors may amend or terminate the Plan with respect to
shares which, at the time, are not subject to option, provided that the Plan
cannot be amended without shareholder approval if the amendment would increase
the maximum number of shares of Common Stock which may be subject to the Plan,
increase the maximum number of shares which may be optioned to any one employee,
change the designation of the class of employees eligible to receive options,
materially increase the benefits accruing to option holders under the Plan,
decrease the price at which options may be granted, remove the administration of
the Plan from the Committee or permit the granting of options under the Plan
after April 21, 2002.
FEDERAL TAX CONSEQUENCES
The following summarizes the consequences of the grant and exercise of
options under the Plan for federal income tax purposes, based on Management's
understanding of existing federal income tax laws. This summary is necessarily
general in nature and does not purport to be complete. Also, state and local
income tax consequences are not discussed and may vary from locality to
locality.
Plan participants will not recognize taxable income at the time an option
is granted under the Plan unless the option has a readily ascertainable market
value at the time of grant. Management understands that options to be granted
under the Plan will not have a readily ascertainable market value; therefore,
income will not be recognized by participants before the time of exercise of an
option. For non-ISOs, the difference between the fair market value of the shares
at the time an option is exercised and the option price generally will be
treated as ordinary income to the optionee, in which case the Company will be
entitled to a deduction equal to the amount of the optionee's ordinary income.
With respect to ISOs, participants will not realize income for federal income
tax purposes as a result of the exercise of such options. In addition, if the
shares acquired as a result of the exercise of an ISO are disposed of more than
two years after the date the option is granted and more than one year after the
date the option was exercised, the entire gain, if any, realized upon
disposition of such Common Stock will be treated as capital gain for federal
income tax purposes. Under these circumstances, no deduction will be allowable
to the Company in connection with either the grant or exercise of an ISO.
Exceptions to the general rules apply in the case of a "disqualifying
disposition."
6
<PAGE> 10
If a participant disposes of shares of Common Stock acquired pursuant to the
exercise of an ISO before the expiration of one year after the date of exercise
or two years after the date of grant, the sale of such stock will be treated as
a "disqualifying disposition." As a result, such a participant would recognize
ordinary income and the Company would be entitled to a deduction in the year in
which such disposition occurred. The amount of the deduction and the ordinary
income recognized upon a disqualifying disposition would generally be equal to
the lesser of: (a) the sale price of the shares sold minus the option price, or
(b) the fair market value of the shares at the time of exercise minus the option
price. If the disposition is to a related party (such as a spouse, brother,
sister, lineal descendant, or certain trusts for business entities in which the
seller holds a direct or indirect interest), the ordinary income recognized
generally is equal to the excess of the fair market value of the shares at the
time of exercise over the exercise price. Any additional gain recognized upon
disposition, in excess of the ordinary income, will be taxable as capital gain.
In addition, the exercise of ISOs may result in an alternative minimum tax
liability.
REQUIRED VOTE FOR APPROVAL
The affirmative vote of a majority of the Company's outstanding Common Stock
represented and voted at the annual meeting, by person or by proxy, is required
to approve the adoption of the amendment to the Plan. While broker nonvotes will
not be treated as votes cast on the approval of this amendment, shares voted as
abstentions will be counted as votes cast. Since a majority of the votes cast is
required for approval, the sum of any negative votes and abstentions will
necessitate offsetting affirmative votes to assure approval. Unless otherwise
directed by marking the accompanying proxy, the proxy holders named therein will
vote for the approval of the adoption of the amendment to the Plan.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE APPROVAL OF THE PROPOSED
AMENDMENT TO THE COMPANY'S EMPLOYEE STOCK OPTION PLAN TO INCREASE THE NUMBER OF
SHARES AVAILABLE FOR ISSUANCE TO 1,100,000 SHARES.
COMPENSATION OF DIRECTORS
Directors of the Company who are not employees of the Company or any of its
subsidiaries ("Non-employee Directors") receive an annual retainer of $10,000.
Each Non-employee Director also serves as a director of a subsidiary of the
Company. Non-employee Directors of these subsidiaries receive an annual retainer
of $1,000 and monthly meeting fees of $500. Non-employee Directors of the
Company and its subsidiaries are not compensated for committee meetings.
Pursuant to the Non-employee Director Stock Option Plan, a committee
designated by the Board may grant options to purchase shares of Common Stock to
each Non-employee Director. These options are not exercisable for 12 months and
expire not more than ten years after the date of the grant. During 1999, each
Non-employee Director received an option to purchase 3,906 shares of Common
Stock at $15.95 per share, the fair market value of the Common Stock on the date
of the grant.
The Company maintains a Deferred Compensation and Stock Purchase Plan for
Non-employee Directors (the "Plan"). The Plan provides that Non-employee
Directors of the Company or its subsidiaries may defer payment of all or a part
of their director fees ("Fees") or receive shares of Common Stock in lieu of
cash payment of Fees. Each Non-employee Director may elect to participate in a
Current Stock Purchase Account, a Deferred Cash Investment Account or a Deferred
Stock Account.
A Current Stock Purchase Account is credited with shares of Common
Stock having a fair market value equal to the Fees otherwise payable. A
Deferred Cash Investment Account is credited with an amount equal to the Fees
deferred and on each quarterly credit date with an appreciation factor that
may not exceed the prime rate of interest charged by Independent Bank. A
Deferred Stock Account is credited with the amount of Fees deferred and
converted into stock units based on the fair market value of the Common
Stock at the time of the deferral. Amounts in the Deferred Stock Account are
credited with cash dividends and other distributions on the Common Stock. Fees
credited to a Deferred Cash Investment Account or a Deferred Stock Account are
deferred for income tax purposes. The Plan does not provide for distributions
of amounts deferred prior to a participant's termination as a Non-employee
Director and the participant may generally elect either a lump sum or
installment distribution.
One of the Company's directors participates in a deferred compensation plan
in lieu of current payment of Fees. The plan was adopted by the Company in 1985
and provides for retirement and death benefits to be paid to the participating
director by the Company over a minimum of fifteen years. The Company is the
owner and beneficiary of life insurance policies which are structured to fund
the Company's obligations under the terms of the plan.
7
<PAGE> 11
SHAREHOLDER RETURN PERFORMANCE GRAPH
Set forth below is a line graph comparing the yearly percentage change in
the cumulative total shareholder return on the Common Stock (based on the last
reported sales price of the respective year) with the cumulative total return of
the Nasdaq Stock Market Index (United States stocks, only) and the Nasdaq Bank
Stocks Index for the five-year period ended December 31, 1999. The following
information is based on an investment of $100 on January 1, 1995, in the Common
Stock, the Nasdaq Stock Market Index and the Nasdaq Bank Stocks Index, with
dividends reinvested.
TOTAL SHAREHOLDER RETURN
[LINE GRAPH]
<TABLE>
<CAPTION>
December 31,
January 1, ------------------------------------------------------------------
1995 1995 1996 1997 1998 1999
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Independent Bank Corporation............ $100.00 $122.74 $169.94 $325.46 $259.53 $200.61
Nasdaq Stock Market..................... 100.00 141.33 173.89 213.07 300.25 542.43
Nasdaq Bank Stocks...................... 100.00 149.00 196.73 329.39 327.11 314.42
</TABLE>
8
<PAGE> 12
COMMITTEE REPORT ON EXECUTIVE COMPENSATION
GENERAL
The Company's ability to create shareholder wealth is predicated on its
ability to attract and retain qualified executives and senior managers. The
Board of Directors, therefore, believes that the Company's compensation policies
and practices must: 1) provide incentives and rewards for superior performance;
2) align the interests of its executive officers and senior managers with the
interests of its shareholders, and; 3) provide executive officers and senior
managers with the opportunity to accumulate wealth that is commensurate with
increases in the value of the Common Stock.
COMPENSATION STRATEGY
Consistent with these objectives and based on a compensation review by
nationally recognized compensation consultants, the Board of Directors adopted a
"pay-for-performance" compensation strategy in 1991. The strategy seeks to
maintain an optimum balance among three principal components of total
compensation, as follows:
BASE SALARY-Excluding consideration of other relevant factors, which may
include individual performance, experience, expertise and tenure, the Board
intends to maintain the base salaries of executive officers and senior managers
at approximately 95% of the level established by the Company's peers.
Annually, the Personnel Committee (the "Committee") recommends a base salary
for the President and Chief Executive Officer for consideration by the entire
Board of Directors. The Committee's recommendation is based upon compensation
levels established by the Company's peers and the Committee's evaluation of the
relevant factors that are described above. The base salaries of the Presidents
of each of the Bank, are determined in a similar manner by the Company's
President and Chief Executive Officer and the Bank's respective board of
directors. The base salaries of other executive officers are established by the
Company's President and Chief Executive Officer.
ANNUAL CASH INCENTIVE-To provide performance incentives and to compensate
for the below-peer base salary, the strategy provides for annual cash awards
that are payable if the Company and the Banks meet or exceed annual performance
objectives established by the Board of Directors. Assuming "target performance"
is achieved under the Management Incentive Compensation Plan described below,
the Board intends that aggregate annual cash compensation (the total of base
salary and annual cash incentive) will equal approximately 105% of peer level.
LONG-TERM INCENTIVES-To align the interests of its executive officers and
senior managers with the Company's shareholders, the Board's compensation
strategy provides for equity-based compensation plans, including the Employee
Stock Ownership Plan and the Employee Stock Option Plan described below. Both of
these compensation plans have been adopted by the Board of Directors, and the
Employee Stock Option Plan has been approved by the Company's shareholders. Such
plans are, however, administered by the Committee.
COMPENSATION PLANS
Pursuant to the MANAGEMENT INCENTIVE COMPENSATION PLAN, the Board of
Directors establishes annual performance levels as follows: 1) threshold
represents the performance level which must be achieved before any incentive
awards are granted; 2) target performance is defined as the desired level of
performance in view of all relevant factors, as discussed below, and; 3) maximum
represents that which reflects outstanding performance.
The principal factors considered by the Board in the determination of these
performance levels include peer performance and investment community
expectations for return on equity and earnings per common share for the Company,
as well as similar expectations for its competitors in the financial services
industry. Corresponding performance levels are established for each of the
Banks.
In addition to the objective earnings goals for the Company and the Banks,
cash payments pursuant to this plan may also be subject to certain
pre-determined individual goals. Such individual goals may be objective or
subjective in nature. The individual performance component is, however, limited
to 20% of the total incentive formula for the Company's executive officers and
the Bank Presidents.
For the Chief Executive Officer, cash payments made pursuant to this plan
may range from 20% to 50% of base salary. For other executive officers and the
Bank Presidents, such cash payments may range from 15% to 35% of their base
salary. For the year ended December 31, 1999, the Company's executive officers
and the Bank Presidents received cash awards pursuant to the Management
Incentive Compensation Plan that ranged from 30% to 50% of their respective base
salaries.
9
<PAGE> 13
The EMPLOYEE STOCK OPTION PLAN is intended to provide the Company's
executive officers and senior managers with additional long-term incentives to
manage the affairs of the Company in the best interests of its shareholders. On
April 20, 1999, the Board of Directors granted options to purchase 91,840 shares
of Common Stock to 32 executive officers and senior managers of the Company and
the Banks. Each of the options provides the recipient the right to purchase
2,870 shares of Common Stock at $15.95 per share, the market price of the Common
Stock as of the date of the grant. Such options are restricted as to
transferability and expire 5 years after the date of the grant.
Prior to 1999, the Company's executive officers and the Bank Presidents were
participants in the Incentive Share Grant Plan. That plan provided that the
Committee, in its sole discretion, could grant to the participants, shares of
Common Stock in lieu of the cash incentives payable pursuant to the Management
Incentive Compensation Plan. The market value of such incentive shares at the
date of the grant was equal to twice the amount of the cash incentive otherwise
payable. Shares issued pursuant to the plan were subject to restrictions, which
lapse in respect to 20% of the shares on the date of grant and 20% on each of
the succeeding anniversaries of the grant.
During 1999, the Company terminated the Incentive Share Grant Plan in favor
of cash incentives pursuant to the Management Incentive Compensation Plan and
the grant of options to purchase shares of the Common Stock pursuant to the
Employee Stock Option Plan. The Committee believes that such cash payments and
option grants provide greater incentives and enhances the participants' ability
to accumulate shares of Common Stock.
On January 16, 2000, the Board of Directors granted options to purchase
56,853 shares of Common Stock to the Company's executive officers and the Bank
Presidents. Each of the options were designated as incentive stock options, as
defined by the Internal Revenue Code, and provides the recipient the right to
purchase the underlying shares of Common Stock at $13.69 per share, the market
price of the Common Stock as of the date of the grant. Such options are
restricted as to transferability and expire 10 years after the date of the
grant.
The EMPLOYEE STOCK OWNERSHIP PLAN provides substantially all full-time
employees with an equity interest in the Company. Contributions to the ESOP are
determined annually and are subject to the approval of the Board of Directors.
Contributions for the year ended December 31, 1999, were equal to 6% of the
eligible wages for each of the approximately 752 participants in the ESOP.
CHIEF EXECUTIVE OFFICER COMPENSATION
Charles C. Van Loan has served as the Company's Chief Executive Officer
since December 16, 1992. Prior to that time, Mr. Van Loan served as the
President and Chief Operating Officer of the Company and as the President and
Chief Executive Officer of Independent Bank.
Consistent with the Company's existing policies and practices, the Committee
reviewed compensation data from the Company's peers and evaluated Mr. Van Loan's
contributions to the Company's success as well as his experience and expertise.
On the basis of its evaluation, the Committee recommended for consideration by
the full Board of Directors a base salary of $240,000. As a result of the
Company's record earnings, relative to the goals established pursuant to the
Management Incentive Compensation Plan, Mr. Van Loan's cash incentive for 1999
totaled $120,000.
KEITH E. BAZAIRE ROBERT J. LEPPINK CHARLES A. PALMER
TERRY L. HASKE ARCH V. WRIGHT
10
<PAGE> 14
SECURITIES OWNERSHIP OF MANAGEMENT
The following table sets forth the beneficial ownership of the Common Stock
by the Company's Chief Executive Officer and the four highest paid executive
officers of the Company or the Banks ("Named Executives") and by all directors
and executive officers as a group as of February 18, 2000.
<TABLE>
<CAPTION>
Amount and
Nature of
Beneficial Percent of
Name Ownership (1) Outstanding
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Charles C. Van Loan 114,918 (2) 1.01%
Michael M. Magee 29,229 .26
Jeffrey A. Bratsburg 91,466 (3) .80
Edward B. Swanson 48,999 .43
Ronald L. Long 23,432 .21
1,297,123 (4) 11.37
All executive officers and directors
as a group (consisting of 18 persons)
persons)
</TABLE>
(1)In addition to shares held directly or under joint ownership with their
spouse, beneficial ownership includes shares that are issuable under options
exercisable within 60 days, shares that are restricted and subject to
forfeiture pursuant to the Incentive Share Grant Plan and shares that are
allocated to their accounts as participants in the ESOP.
(2)Includes shares held by Mr. Van Loan's dependent children.
(3)Includes shares held by Mr. Bratsburg's wife with respect to which Mr.
Bratsburg disclaims beneficial ownership.
(4)Includes shares held by the ESOT. Beneficial ownership is disclaimed as to
665,429 shares, including 631,133 shares which are held by the ESOT.
SUMMARY COMPENSATION TABLE
The following table sets forth compensation received by the Named Executives
for each of the three years ended December 31, 1999.
<TABLE>
<CAPTION>
Long-Term
Compensation Awards
Annual -------------------- All
Compensation Restricted Securities Other
------------ Stock Underlying Compen-
Name & Principal Position Year Salary(1) Bonus(2) Awards(3) Options (#)(4) sation(5)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Charles C. Van Loan 1999 $240,000 $ 120,000 20,404 $16,295
President and Chief 1998 223,450 $223,450 2,870 16,307
Executive Officer 1997 205,000 205,000 2,870 14,715
Michael M. Magee 1999 $157,500 $ 55,125 10,924 $13,970
President and CEO 1998 150,000 $105,000 2,870 13,449
Independent Bank 1997 140,000 98,000 2,870 12,277
Jeffrey A. Bratsburg 1999 $135,000 $ 47,250 9,774 $12,149
President and CEO 1998 135,000 $94,500 2,870 11,477
Independent Bank West Michigan 1997 135,000 94,500 2,870 11,527
Edward B. Swanson 1999 $150,000 $ 51,129 10,340 $14,029
President and CEO 1998 141,000 $98,700 2,870 12,305
Independent Bank South Michigan 1997 131,000 91,700 2,870 11,697
Ronald L. Long 1999 $146,000 $ 43,860 9,278 $12,996
President and CEO 1998 137,000 $68,500 2,870 11,859
Independent Bank East Michigan 1997 123,000 61,622 2,870 11,086
</TABLE>
11
<PAGE> 15
(1) Includes elective deferrals by employees pursuant to Section 401(k) of the
Internal Revenue Code.
(2) Represents amounts earned under the Company's Management Incentive
Compensation Plan.
(3) Amounts represent the aggregate value of restricted shares of Common Stock
(based on the closing price of the stock on the date of grant) issued to the
Named Executives for the designated year under the Company's Incentive Share
Grant Plan. The Plan provided that the Personnel Committee may, at its sole
discretion, grant shares of restricted stock in lieu of cash incentives
payable under the Company's Management Incentive Compensation Plan. The
aggregate fair market value of the shares granted to each participant were
equal to twice the value of the amount otherwise payable in cash. The shares
are subject to restrictions on transfer and risks of forfeiture which lapse
over a period of five years at an annual rate of 20% of the granted shares,
subject to earlier termination of those restrictions and risks upon death,
disability or a change in control of the Company. The Named Executives have
no right to such restricted shares, except voting rights and the right to
all dividends or other distributions paid to holders of the Common Stock. As
of December 31, 1999, the Named Executives held shares of restricted stock
in the following aggregate amounts and values (based on the closing price of
the Common Stock on December 31, 1999, which equaled $14.63): Mr. Van Loan -
13,270 shares ($194,140); Mr. Magee - 6,205 shares ($90,779); Mr. Bratsburg
- 5,850 shares ($85,585); Mr. Swanson - 5,910 shares ($86,463); and Mr. Long
- 3,976 shares ($58,169).
(4) Includes options granted in 2000 relating to 1999 performance.
(5) Amounts represent Company contributions to the Employee Deferred
Compensation Plan [401(k)] and Employee Stock Ownership Plan. Subject to
certain age and service requirements, all employees of the Company and its
subsidiaries are eligible to participate in these plans.
OPTION GRANTS IN 1999
The following table provides information on options granted to the Named
Executives during the year ended December 31, 1999.
<TABLE>
<CAPTION>
Individual Grants
Number of Percent of Total Exercise or Grant Date
Securities Underlying Options Granted to Base Price Expiration Present
Options Granted(1) Employees in 1999 (per share)(2) Date Value(3)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Charles C. Van Loan 2,870 1.93% $15.92 April 20, 2004 $ 12,083
17,534 11.79 13.69 January 16, 2010 117,828
Michael M. Magee 2,870 1.93% $15.92 April 20, 2004 $ 12,083
8,054 5.42 13.69 January 16, 2010 54,123
Jeffrey A. Bratsburg 2,870 1.93% $15.92 April 20, 2004 $ 12,083
6,904 4.64 13.69 January 16, 2010 46,395
Edward B. Swanson 2,870 1.93% $15.92 April 20, 2004 $ 12,083
7,470 5.02 13.69 January 16, 2010 50,198
Ronald L. Long 2,870 1.93% $15.92 April 20, 2004 $ 12,083
6,408 4.31 13.69 January 16, 2010 43,062
</TABLE>
(1)Indicates number of shares which may be purchased pursuant to options
granted under the Company's Employee Stock Option Plan. Options may not be
exercised in full or in part prior to the expiration of one year from the
date of grant.
(2)The exercise price equals the prevailing market price of the Common Stock on
the date of grant. The exercise price may be paid in cash, by the delivery of
previously owned shares, through the withholding of shares otherwise issuable
upon exercise or a combination thereof.
(3)The values reflect application of the Black-Scholes option pricing model.
The assumptions employed on options with an expiration date of April 20, 2004
were expected volatility of 15.5%, risk-free rate of return of 5.04%,
dividend yield of 3.35% and time to exercise of five years. The assumptions
employed on options with an expiration date of January 16, 2010 were expected
volatility of 8.32%, risk-free rate of return of 6.74%, dividend yield of
4.09% and time to exercise of ten years
12
<PAGE> 16
AGGREGATED STOCK OPTION EXERCISES IN 1999
AND YEAR END OPTION VALUES
The following table provides information on the number and value of options
exercised in the past year, as well as the number and value of unexercised
options held by the Named Executives at December 31, 1999. Options covering
77,068 shares of Common Stock were exercised in 1999.
<TABLE>
<CAPTION>
Number of Securities Underlying Value of Unexercised
Shares Unexercised Options In-the-Money Options(2)
Acquired Value ------------------------------- ----------------------------
Name on Exercise Realized(1) Exercisable Unexercisable Exercisable Unexercisable
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Charles C. Van Loan 2,871 $24,278 11,483 20,404 $29,064 $16,438
Michael M. Magee 0 0 11,483 10,924 29,064 7,551
Jeffrey A. Bratsburg 2,871 24,272 11,483 9,774 29,064 6,473
Edward B. Swanson 2,871 25,809 11,483 10,340 29,064 7,003
Ronald L. Long 2,871 21,817 8,612 9,278 12,070 6,008
</TABLE>
(1)The value realized upon the exercise of options is equal to the difference
between the market value of the shares of Common Stock acquired at the time
of exercise and the aggregate exercise price paid by the Named Executive to
the Company.
(2)The value of unexercised options is based on the difference between the
closing price of the Common Stock on December 31, 1999 ($14.63) and the
exercise prices of the options.
MANAGEMENT CONTINUITY AGREEMENTS
The Company has entered into individual Management Continuity Agreements
with its executive officers and certain senior managers, including the Named
Executives. These agreements provide severance benefits if the individual's
employment is terminated within 36 months after a change in control of the
Company or within six months before a change in control if the Company
terminates the individual's employment in contemplation of a change in control
and to avoid the agreement. For the purposes of these agreements, a "change in
control" is any occurrence reportable as such in a proxy statement under
applicable rules of the Securities and Exchange Commission, and would include,
without limitation, the acquisition of beneficial ownership of 20% of the
Company's voting securities by any person, certain extraordinary changes in the
composition of the board of directors, or the merger or consolidation of the
Company in which it is not the surviving entity, or its sale or liquidation.
Severance benefits are not payable if the Company terminates the employment
for cause, if employment terminates due to the individual's death or disability,
or if the individual resigns without "good reason." An individual may resign
with "good reason"| after a change in control and retain benefits if the Company
reduces the individual's salary or bonus, assigns duties inconsistent with the
individual's prior position, or makes other material, adverse changes in the
terms or conditions of the individual's employment. The agreements are for
self-renewing terms of one to three years unless the Company takes action to
terminate further extensions. The agreements are automatically extended for a
one- to three-year term from the date of a change in control. These agreements
provide a severance benefit of a lump-sum payment equal to one- to three-years'
salary and bonus and a continuation of benefits coverage for one to three years.
TRANSACTIONS INVOLVING MANAGEMENT
Directors and officers of the Company and their associates were customers
of, and had transactions with, subsidiaries of the Company in the ordinary
course of business during 1999. All loans and commitments included in such
transactions were made in the ordinary course of business on substantially the
same terms,including interest rates and collateral, as those prevailing at the
time for comparable transactions with other persons and do not involve an
unusual risk of collectibility or present other unfavorable features. Such loans
totaled $16,829,000 at December 31, 1999, equal to 14.80% of shareholders'
equity.
Two directors have financial interests in partnerships, that sold land
contracts to one of the Banks during 1999. Mr. Wright has an interest in one of
these partnerships, that sold nine contracts with an aggregate principal face
value of approximately $580,000. Mr. Wright and Mr. Van Loan have interests in a
second partnership that sold two contracts with an aggregate principal face
value of $269,000. The contracts mature not later than January of 2005 and have
an average rate of approximately 8.5%. The contracts were sold without recourse
at face value.
13
<PAGE> 17
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Pursuant to Section 16 of the Securities Exchange Act of 1934, the Company's
directors and executive officers, as well as any person holding more than 10% of
its Common Stock, are required to report initial statements of ownership of the
Company's securities and changes in such ownership to the Securities and
Exchange Commission. Based upon written representations by each Director and
Executive Officer, all of the required reports were timely filed by such persons
during 1999, except that Mr. Kohn failed to file one report covering the
acquisition of Common Stock.
RELATIONSHIP WITH INDEPENDENT PUBLIC ACCOUNTANTS
Representatives of KPMG LLP will be present at the Annual Meeting and will
have the opportunity to make a statement if desired and will be available to
respond to appropriate questions. The Board of Directors has not yet selected
independent accountants for 2000. It is expected that KPMG LLP will be selected
to serve as the independent accountants for 2000.
SHAREHOLDER PROPOSALS
Article VIII of the Company's Articles of Incorporation contains certain
procedural requirements applicable for shareholder nominations of persons to be
elected as directors of the Company. A copy of the Company's Articles of
Incorporation has been filed with the Securities and Exchange Commission and can
be obtained from its Public Reference Section or the Company. Any other
shareholder proposal to be considered by the Company for inclusion in the 2001
Annual Meeting of Shareholders proxy material must be received by the Company
not later than November 20, 2000.
GENERAL
The cost of soliciting proxies will be borne by the Company. In addition to
solicitation by mail, the officers and employees of the Company and its
subsidiaries may solicit proxies by telephone, telegraph or in person. The
Company has retained the services of Corporate Investor Communications, Inc. to
deliver proxy materials to brokers, nominees, fiduciaries and other custodians
for distribution to beneficial owners, as well as solicit proxies from these
institutions. The cost of such services is expected to total approximately
$5,000, plus reasonable out of pocket expenses.
As of the date of this proxy statement, Management knows of no other matters
to be brought before the meeting. However, if further business is presented by
others, the proxy holders will act in accordance with their best judgment.
By order of the Board of Directors,
/s/ William R. Kohls
William R. Kohls
Secretary
Dated: March 15, 2000
14
<PAGE> 18
EXHIBIT A
THIRD AMENDMENT TO THE
INDEPENDENT BANK CORPORATION
EMPLOYEE STOCK OPTION PLAN
THIRD AMENDMENT TO THE INDEPENDENT BANK CORPORATION EMPLOYEE STOCK OPTION
PLAN, is adopted by the Board of Directors of Independent Bank Corporation (the
"Company"), to be effective as of September 15, 1999, with reference to the
following:
A. The Independent Bank Corporation Employee Stock Option Plan (the "Plan")
was approved by the Company's shareholders on April 21, 1992, and has
subsequently been amended.
B. Under Paragraph 8 of the Plan, the Board of Directors has the authority,
subject to certain conditions, to amend the Plan from time to time.
C. The Board of Directors has elected to amend the Plan to increase the
aggregate number of shares reserved for issuance pursuant to the Plan.
NOW, THEREFORE, the Plan is amended as follows:
1. The first sentence of Paragraph 5 of the Plan is hereby amended to read
as follows:
Subject to adjustments as provided in Paragraph 6(h), the aggregate number
of shares reserved for issuance pursuant to the Plan shall be 1,100,000
shares of the Company's Common Stock (the "Shares").
2. In all other respects, the Plan shall continue in full force and effect.
3. This Third Amendment shall be submitted to the Company's shareholders
for approval. The effective date for this Third Amendment shall be
September 15, 1999.
15
<PAGE> 19
APPENDIX
- -------------------------------------------------------------------------------
Independent Bank Corporation is a bank holding company with total assets of
$1.7 billion. Its five subsidiary banks (the "Banks") principally serve suburban
and rural communities located across Michigan's Lower Peninsula.
The Banks emphasize service and convenience as the principal means of
competing in the delivery of financial services. Accordingly, the Company's
community banking philosophy vests discretion and authority in the Banks'
management while providing financial incentives to align the interests of such
managers with those of its shareholders.
To support the Banks' service and sales efforts, while providing the
internal controls that are consistent with its decentralized structure, the
Company has consolidated the Banks' operations and provides administrative and
operation services to the Banks.
CONTENTS
Management's Discussion and Analysis................................. A-2
Selected Consolidated Financial Data................................. A-12
Independent Auditor's Report......................................... A-13
Consolidated Financial Statements.................................... A-14
Notes to Consolidated Financial Statements........................... A-18
Quarterly Data....................................................... A-34
Shareholder Information.............................................. A-35
Executive Officers and Directors..................................... A-35
A-1
<PAGE> 20
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management's discussion and analysis of financial condition and results of
operations contains forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. Actual results could differ materially
from those projected in such forward-looking statements.
The following section presents additional information to assess the
financial condition and results of operations of the Company and its subsidiary
banks (the "Banks"). This section should be read in conjunction with the
consolidated financial statements and the supplemental financial data contained
elsewhere in this appendix.
ACQUISITIONS
On September 15, 1999, the Company completed its acquisition of Mutual
Savings Bank, f.s.b. ("MSB"). On that date, MSB's assets and shareholders'
equity totaled approximately $580 million and $44 million, respectively. The
markets served by MSB's 22 offices are located within the Lower Peninsula of
Michigan and are generally contiguous to markets that are served by the
remaining Banks.
Consideration consisted of 3,436,000 shares of common stock (3,608,000
shares adjusted for a 5% stock dividend.) The transaction qualifies as a
"pooling of interests" and the Company's results of operations for 1999 include
MSB's revenues and expenses since January 1, 1999. The Company's results of
operations for 1998 and 1997 as well as its statement of financial condition at
December 31, 1998, have been restated to include the accounts of MSB.
Restructuring and other non-recurring charges totaled approximately $8,000,000
before federal income tax.
On April 17, 1998, the Company purchased the outstanding capital stock of
First Home Financial, Inc. ("FHF"), an originator of manufactured home loans.
Aggregate consideration consisted of 76,000 shares of common stock (adjusted for
stock splits and dividends). Goodwill totaled approximately $2.0 million. FHF
operates as a subsidiary of one the Banks and substantially all of the loans
originated by FHF are sold to non-affiliated banks and finance companies.
On June 12, 1998, one of the Banks purchased two branches from 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 and net cash
proceeds from the transaction totaled $16.2 million.
RESULTS OF OPERATIONS
SUMMARY. Net income totaled $8,669,000 in 1999 compared to $11,949,000 and
$1,469,000 in 1998 and 1997, respectively. The Company's results of operation
for 1999 reflect certain non-recurring, merger-related charges, which include a
net loss on the sale of securities as well as settlement costs relating to a
shareholder suit against MSB. Net income for 1997 also reflects a charge to
settle a similar lawsuit against MSB. These non-recurring charges, net of
federal income taxes, totaled $5,750,000 in 1999 and $8,125,000 in 1997. (See
"Non-interest income" and "Non-interest expense.")
<TABLE>
<CAPTION>
NON-RECURRING CHARGES Year Ended December 31,
1999
- -------------------------------------------------------------------------------
<S> <C>
Litigation settlement.................................... $ 2,025,000
Data processing termination and conversion costs......... 1,677,000
Legal and professional................................... 1,133,000
Severance................................................ 683,000
Write-off of fixed assets................................ 910,000
Loss on sale of securities............................... 772,000
Other.................................................... 800,000
------------
Total non-recurring charges............................ 8,000,000
Federal income tax benefit............................... (2,250,000)
------------
Net non-recurring charges............................ $ 5,750,000
============
</TABLE>
A-2
<PAGE> 21
Excluding consideration of these non-recurring charges, the Company's
earnings would have increased by 21% to $14,419,000 in 1999. A year earlier, net
income would have increased by 25% to $11,949,000 from $9,594,000 in 1997. These
increases principally reflect increases in net interest income. The increase in
operating earnings during 1999 also reflects a decline in the provision for loan
losses.
<TABLE>
<CAPTION>
OPERATING EARNINGS Year Ended December 31,
1999 1998 1997
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income ............................. $ 8,669,000 $11,949,000 $ 1,469,000
Non-recurring charges .................. 8,000,000 9,650,000
Federal income tax benefit ............. (2,250,000) (1,525,000)
----------- ----------- ------------
Operating earnings .............. $14,419,000 $11,949,000 $ 9,594,000
=========== =========== ============
</TABLE>
<TABLE>
<CAPTION>
KEY PERFORMANCE RATIOS Year ended December 31,
1999 1998 1997
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income to
Average equity .......................... 7.26% 10.72% 1.37%
Average assets .......................... .52 .72 .09
Net income per share
Basic ................................... $ .76 $ 1.06 $ .13
Diluted ................................. .75 1.05 .13
Operating earnings to(1)
Average equity .......................... 12.08% 10.72% 8.92%
Average assets .......................... .87 .72 .60
Operating earnings per share(1)
Basic ................................... $1.27 $ 1.06 $ .86
Diluted ................................. 1.25 1.05 .86
</TABLE>
(1)Operating earnings exclude certain merger-related charges and settlement
costs associated with lawsuits against the former Mutual Savings Bank, f.s.b.
incurred during 1999 and 1997.
NET INTEREST INCOME. Tax equivalent net interest income totaled $69,222,000
during 1999, compared to $62,792,000 and $55,301,000 during 1998 and 1997,
respectively. Tax equivalent net interest income was equal to 4.47% of average
earning assets in 1999 compared to 4.08% and 3.66% in 1998 and 1997. These
increases may be attributed to the scheduled maturity of certain low-yield
assets and high-cost liabilities at MSB. Increases in loans, excluding loans
held for sale ("Portfolio Loans"), as a percent of average earning assets also
contributed to the increase in tax equivalent net interest income. Management
believes that the implementation of new loan and deposit pricing strategies as
well as its efforts to restructure MSB's securities portfolios also had a
positive impact on tax equivalent net interest income in 1999.
A-3
<PAGE> 22
<TABLE>
<CAPTION>
1999 1998 1997
AVERAGE ------------------------------------------------------------------------------------------------
BALANCES AND TAX Average Average Average
EQUIVALENT RATES Balance Interest Rate Balance Interest Rate Balance Interest Rate
- ----------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Loans--all domestic(1,2).... $ 1,222,564 $ 106,233 8.69% $ 1,124,847 $ 101,852 9.05% $ 975,476 $ 88,322 9.05%
Taxable securities.......... 215,550 12,808 5.94 334,927 19,282 5.76 460,225 26,982 5.86
Tax-exempt securities(2).... 90,185 7,334 8.13 55,056 4,665 8.47 52,139 4,423 8.48
Other investments........... 19,627 1,577 8.03 24,557 1,660 6.76 22,865 1,592 6.96
----------- --------- ----------- --------- ----------- --------
Interest earning assets... 1,547,926 127,952 8.27 1,539,387 127,459 8.28 1,510,705 121,319 8.03
--------- --------- --------
Cash and due from banks..... 44,910 37,289 33,608
Other assets, net........... 73,660 72,298 64,754
----------- ----------- -----------
Total assets............ $ 1,666,496 $ 1,648,974 $ 1,609,067
=========== =========== ===========
LIABILITIES
Savings and NOW............. $ 576,194 13,704 2.38 $ 525,638 13,912 2.65 $ 501,548 13,825 2.76
Time deposits............... 578,294 30,402 5.26 535,861 29,291 5.47 490,382 26,834 5.47
Long-term debt.............. 4,245 268 6.31 6,749 457 6.77 8,245 602 7.30
Other borrowings............ 243,519 14,356 5.90 329,525 21,007 6.37 387,692 24,757 6.39
----------- --------- ----------- --------- ----------- --------
Interest bearing
liabilities............. 1,402,252 58,730 4.19 1,397,773 64,667 4.63 1,387,867 66,018 4.76
--------- --------- --------
Demand deposits............. 125,936 107,403 91,440
Other liabilities........... 18,937 32,316 22,165
Shareholders' equity........ 119,371 111,482 107,595
Total liabilities and ----------- ----------- -----------
shareholders' equity... $ 1,666,496 $ 1,648,974 $ 1,609,067
=========== =========== ===========
Net interest income..... $ 69,222 $ 62,792 $ 55,301
========= ========= ========
Net interest income
as a percent of
earning assets......... 4.47% 4.08% 3.66%
==== ==== ====
</TABLE>
(1)Interest on loans includes net origination fees totaling $6,301,000,
$6,244,000 and $3,911,000 in 1999, 1998 and 1997, respectively.
(2)Interest on tax-exempt securities has been adjusted to reflect preferential
taxation. The adjustment assumes a marginal tax rate of 35%. For purposes of
analysis, tax-exempt loans are included in tax-exempt securities.
<TABLE>
<CAPTION>
CHANGE IN TAX EQUIVALENT 1999 compared to 1998 1998 compared to 1997
NET INTEREST INCOME Volume Rate Net Volume Rate Net
- -----------------------------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Increase (decrease) in interest income(1)
Loans--all domestic........................................ $ 8,604 $(4,223) $ 4,381 $ 13,525 $ 5 $ 13,530
Taxable securities......................................... (7,075) 601 (6,474) (7,222) (478) (7,700)
Tax-exempt securities(2)................................... 2,864 (195) 2,669 247 (5) 242
Other investments.......................................... (366) 283 (83) 115 (47) 68
-------- ------- ------- -------- ----- --------
Total interest income.................................... 4,027 (3,534) 493 6,665 (525) 6,140
-------- ------- ------- -------- ----- --------
Increase (decrease) in interest expense(1)
Savings and NOW............................................ 1,272 (1,480) (208) 650 (563) 87
Time deposits.............................................. 2,261 (1,150) 1,111 2,485 (28) 2,457
Long-term debt............................................. (160) (29) (189) (104) (41) (145)
Other borrowings........................................... (5,163) (1,488) (6,651) (3,707) (43) (3,750)
-------- ------- ------- -------- ----- --------
Total interest expense................................... (1,790) (4,147) (5,937) (676) (675) (1,351)
-------- ------- ------- -------- ----- --------
Net interest income.................................... $ 5,817 $ 613 $ 6,430 $ 7,341 $ 150 $ 7,491
======== ======= ======= ======== ===== ========
</TABLE>
(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%.
Average earning assets totaled $1.55 billion in 1999 compared to $1.54
billion and $1.51 billion in 1998 and 1997, respectively. The moderate increases
in average earning assets principally reflect efforts to restructure the balance
sheet and manage capital resources at MSB.
A-4
<PAGE> 23
<TABLE>
<CAPTION>
COMPOSITION OF AVERAGE EARNING ASSETS Year Ended December 31,
AND INTEREST PAYING LIABILITIES 1999 1998 1997
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
As a percent of average earning assets
Loans--all domestic.............................. 79.0% 73.1% 64.6%
Other earning assets............................. 21.0 26.9 35.4
----------------------------------------
Average earning assets....................... 100.0% 100.0% 100.0%
========================================
Savings and NOW.................................. 37.2% 34.1% 33.2%
Time deposits.................................... 33.0 32.6 32.2
Brokered CDs..................................... 4.4 2.3 0.3
Other borrowings and long-term debt.............. 16.0 21.8 26.2
----------------------------------------
Average interest bearing liabilities......... 90.6% 90.8% 91.9%
========================================
Earning asset ratio ................................ 92.9% 93.4% 93.9%
Free-funds ratio ................................... 9.4 9.2 8.1
</TABLE>
PROVISION FOR LOAN LOSSES. The provision for loan losses was $2,661,000
during 1999 compared to $3,628,000 and $1,975,000 during 1998 and 1997,
respectively. The decrease in the provision reflects Management's assessment of
the allowance for loan losses, which is based upon the composition of the loan
portfolio, an evaluation of specific credits, historical loss experience as well
as the level of non-performing and impaired loans. (See "Portfolio loans and
asset quality.")
NON-INTEREST INCOME. Non-interest income totaled $17,323,000 during 1999
compared to $19,118,000 and $12,288,000 in 1998 and 1997. The $1,795,000 decline
in non-interest income during 1999 principally reflects a decrease in net gains
on the sale of real estate mortgage loans. A net loss on the sale of securities,
which was principally related to the restructuring of MSB's securities
portfolios also contributed to the decline in non-interest income. Increases in
service charges on deposit accounts and fees associated with the origination of
manufactured home loans partially offset the decline. The $6,830,000 increase in
non-interest income during 1998 principally reflects an increase in net gains on
the sale of real estate mortgage loans as well as the purchase of FHF.
<TABLE>
<CAPTION>
NON-INTEREST INCOME Year Ended December 31,
1999 1998 1997
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service charges on deposit accounts................... $ 5,696,000 $ 4,554,000 $ 3,692,000
Net gains (losses) on asset sales
Real estate mortgage loans......................... 4,247,000 7,052,000 2,899,000
Securities......................................... (912,000) 267,000 273,000
FHF origination fees and commissions.................. 2,009,000 1,304,000
Title insurance fees.................................. 844,000 872,000 585,000
Mutual fund and annuity commissions................... 1,370,000 941,000 551,000
Real estate mortgage loan servicing fees.............. 1,300,000 1,154,000 1,647,000
Other................................................. 2,769,000 2,974,000 2,641,000
-----------------------------------------------
Total non-interest income...................... $17,323,000 $19,118,000 $ 12,288,000
===============================================
</TABLE>
Service charges on deposit accounts increased by 25% to $5,696,000 during
1999 and by 23% to $4,554,000 during 1998. These increases principally reflect
the impact of certain deposit account promotions, which include direct mail
solicitations, at two of the Banks.
The Banks realized net gains of $4,247,000 on the sale of real estate
mortgage loans totaling $271.1 million during 1999. During 1998 and 1997, the
Banks realized net gains of $7,052,000 and $2,899,000 on the sale of loans
totaling $500.9 million and $181.0 million, respectively.
<TABLE>
<CAPTION>
NET GAINS ON THE SALE OF REAL ESTATE Year ended December 31,
MORTGAGE LOANS 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Real estate mortgage loans originated................................ $ 508,700,000 $804,000,000 $ 401,300,000
Real estate mortgage loans sold...................................... 271,100,000 500,900,000 181,000,000
Real estate mortgage loan servicing rights sold...................... 20,800,000 56,200,000 24,200,000
Net gains on the sale of real estate mortgage loans.................. 4,247,000 7,052,000 2,899,000
Net gains as a percent of real estate mortgage loans sold............ 1.57% 1.41% 1.60%
</TABLE>
A-5
<PAGE> 24
The volume of loans sold is dependent upon the Banks' ability to originate
real estate mortgage loans. The demand for real estate mortgage loans is
particularly sensitive to the absolute level of interest rates. In 1998,
approximately 60% of the $804.0 million of loans originated was the result of
refinancing activity. Management estimates that refinancing activities accounted
for approximately 38% and 35% of the real estate mortgage loans originated
during 1999 and 1997, respectively.
The volume of loans sold is further dependent upon the demand for fixed-rate
obligations and other loans that the Banks cannot profitably fund within
established interest-rate risk parameters. (See "Portfolio loans and asset
quality.") Net gains on the sale of real estate mortgage loans are also
dependent upon economic and competitive factors as well as the Banks' ability to
effectively manage exposure to changes in interest rates. Given a decline in
loans held for sale, together with a substantial decline in refinancing
activity, net gains on the sale of real estate mortgage loans during subsequent
periods may not be commensurate with the amount recorded during 1999.
The Banks recognized a net loss on the sale of securities totaling $912,000
during 1999, compared to net gains of $267,000 and $273,000 during 1998 and
1997, respectively. Approximately $772,000 of the net losses in 1999 relate to
balance sheet restructuring efforts at MSB. (See "Securities.")
NON-INTEREST EXPENSE. Merger-related restructuring charges and the cost to
settle shareholder suits against MSB are included in non-interest expense. Such
expenses totaled $7,228,000 and $9,650,000 in 1999 and 1997, respectively.
Excluding these non-recurring charges, non-interest expense totaled $62,252,000
in 1999 compared to $59,726,000 in 1998 and $51,152,000 in 1997.
<TABLE>
<CAPTION>
NON-INTEREST EXPENSE Year ended December 31,
1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Salaries............................................................ $23,788,000 $ 21,544,000 $ 18,289,000
Performance-based compensation and benefits......................... 5,166,000 5,960,000 4,241,000
Other benefits...................................................... 5,335,000 4,845,000 3,985,000
-------------------------------------------------
Salaries and benefits............................................ 34,289,000 32,349,000 26,515,000
Occupancy, net...................................................... 4,607,000 4,194,000 3,906,000
Furniture and fixtures.............................................. 4,230,000 3,659,000 3,354,000
Computer processing................................................. 3,356,000 2,912,000 2,411,000
Advertising......................................................... 2,545,000 2,176,000 1,905,000
Communications...................................................... 2,257,000 2,160,000 1,826,000
Amortization of intangible assets................................... 1,742,000 1,692,000 1,523,000
Supplies............................................................ 1,661,000 1,431,000 1,185,000
FDIC insurance...................................................... 1,392,000 1,410,000 1,536,000
Loan and collection................................................. 1,348,000 1,554,000 1,146,000
Merger-related...................................................... 5,203,000
Litigation settlement............................................... 2,025,000 9,650,000
Other............................................................... 4,825,000 6,189,000 5,845,000
-------------------------------------------------
Total non-interest expense................................... $69,480,000 $ 59,726,000 $ 60,802,000
=================================================
</TABLE>
In addition to increases in salaries and benefits, increases in non-interest
expense reflect direct-mail and other marketing expenses related to deposit
account promotions at two of the Banks. Management is considering the
introduction of similar promotions at the remaining Banks. Costs associated with
FHF and the operation of the GLNB offices also contributed to the increase in
non-interest expense.
The Company and each of the Banks maintain performance-based compensation
plans. In addition to commissions and cash incentive awards, such plans include
its employee stock ownership and employee stock option plans and, prior to 1999,
the Incentive Share Grant Plan. Management believes that these equity-based
plans help align the interests of the Company's officers and employees with
those of its shareholders.
During 1999, the Board of Directors elected to replace the Incentive Share
Grant Plan with a combination of cash payments and the grant of incentive stock
options. The Board believes that such cash payments and option grants provide
the Company's executives with a greater incentive and means of retaining the
Company's common stock as compared to the Incentive Share Grant Plan. This
action by the Board of Directors during the fourth quarter of 1999, accounts for
$350,000 of the $794,000 decline in performance-based compensation. A decline in
commissions paid in conjunction with the origination of real estate mortgage
loans also contributed to the decline in performance-based compensation.
A-6
<PAGE> 25
FINANCIAL CONDITION
SUMMARY. Portfolio Loans increased by 12% to $1.29 billion at December 31,
1999. An increase in residential real estate mortgage loans accounts for 44% of
the $138.5 million increase in Portfolio Loans. Commercial and agricultural
loans and installment loans accounted for 41% and 15% of the increase,
respectively. (See "Portfolio loans and asset quality.")
An increase in deposits and a decline in loans held for sale principally
funded the increase in Portfolio Loans. Proceeds from the sale or maturity of
securities also funded a portion of the increase in Portfolio Loans. (See
"Securities.")
Deposits grew by 4% to $1.31 billion at December 31, 1999. Time deposit
accounts grew by $35.8 million and account for the majority of the $55.1 million
increase in total deposits. The increase in time deposits reflects the Banks'
use of brokered certificates of deposits. (See "Deposits and borrowings.")
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
securities 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.")
<TABLE>
<CAPTION>
SECURITIES Amortized Unrealized Fair
Cost Gains Losses Value
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Securities available for sale
December 31, 1999 ......................... $198,764,000 $ 1,234,000 $ 4,698,000 $195,300,000
December 31, 1998 ......................... 152,622,000 3,131,000 129,000 155,624,000
Securities held to maturity
December 31, 1999 ......................... $ 71,115,000 $ 237,000 $ 866,000 $ 70,486,000
December 31, 1998 ......................... 161,301,000 762,000 119,000 161,944,000
</TABLE>
The purchase or sale of securities is dependent upon Management's assessment
of reinvestment opportunities as well as the Banks' asset/liability management
needs. The Banks sold securities with an aggregate market value of $112.9
million during the year ended December 31, 1999, compared to $11.3 million
during 1998. The increase in the sale of securities principally relates to
Management's efforts to restructure MSB's securities portfolios.
Mortgage pass-thru securities issued by government-sponsored agencies
comprise the majority of the securities sold during 1999. Such securities had a
weighted-average life of approximately 2 years and have been sold to yield
approximately 6.34%. Proceeds have been utilized to fund increases in Portfolio
Loans or to purchase higher-yielding securities, including securities issued by
states and political subdivisions and corporate securities.
PORTFOLIO LOANS AND ASSET QUALITY. 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 may also purchase real estate mortgage loans
from third-party originators.
<TABLE>
<CAPTION>
LOAN PORTFOLIO COMPOSITION December 31,
1999 1998
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Real estate
Residential first mortgages ............................................. $ 603,714,000 $ 587,246,000
Residential home equity and other junior mortgages ...................... 138,682,000 100,069,000
Construction and land development ....................................... 130,373,000 104,660,000
Other(1) ................................................................ 230,005,000 171,262,000
Consumer ................................................................... 108,054,000 110,216,000
Commercial ................................................................. 60,637,000 57,093,000
Agricultural ............................................................... 19,176,000 21,593,000
-------------- --------------
Total loans ......................................................... $1,290,641,000 $1,152,139,000
============== ==============
</TABLE>
(1) Includes loans secured by multi-family residential and non-farm,
non-residential property.
Although the Management and Board of Directors of each Bank retain authority
and responsibility for credit decisions, each of the Banks has adopted uniform
underwriting standards. The Company's loan committee as well as the
centralization of commercial loan credit services and loan review functions
promote compliance with such established underwriting standards. The
centralization of retail loan services also provides for consistent service
quality and facilitates compliance with consumer protection laws and
regulations.
A-7
<PAGE> 26
Management has determined that the retention of certain real estate mortgage
loans, generally 15- and 30-year fixed-rate obligations, is inconsistent with
its goal to maintain profitable leverage or the Banks' interest-rate risk
profiles. Accordingly, the majority of such loans is sold to mitigate exposure
to changes in interest rates. Adjustable-rate and balloon real estate mortgage
loans may often be profitably funded within established risk parameters. The
retention of such loans, together with commercial and agricultural loans, has
been a principal focus of the Banks' balance sheet management strategies. (See
"Asset/liability management.")
<TABLE>
<CAPTION>
NON-PERFORMING ASSETS December 31,
1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Non-accrual loans ......................................................... $2,980,000 $4,302,000 $3,559,000
Loans 90 days or more past due and still accruing interest ................ 2,029,000 2,240,000 1,904,000
Restructured loans ........................................................ 270,000 295,000 184,000
--------------------------------------------
Total non-performing loans ............................................. 5,279,000 6,837,000 5,647,000
Other real estate ......................................................... 1,315,000 1,265,000 523,000
--------------------------------------------
Total non-performing assets ........................................ $6,594,000 $8,102,000 $6,170,000
============================================
As a percent of Portfolio Loans
Non-performing loans ................................................... .41% .59% .53%
Non-performing assets .................................................. .51 .70 .57
Allowance for loan losses .............................................. 1.01 1.00 .91
Allowance for loan losses as a percent of non-performing loans ............ 246 169 171
</TABLE>
Residential real estate mortgages and home equity loans comprise a
substantial portion of the Banks' lending activities. The increase in
residential real estate mortgage loans reflects an increase in the relative
demand for adjustable-rate and balloon loans that accompanied the increase in
interest rates. A decline in prepayment rates also contributed to the increase
in residential real estate mortgage loans. (See "Non-interest income.")
<TABLE>
<CAPTION>
ALLOWANCE FOR LOAN LOSSES Year ended December 31,
1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of period .......................... $ 11,557,000 $ 9,639,000 $ 8,815,000
Provision charged to operating expense ............... 2,661,000 3,628,000 1,975,000
Recoveries credited to allowance ..................... 746,000 655,000 590,000
Loans charged against allowance ...................... (1,979,000) (2,365,000) (1,741,000)
----------------------------------------------------------
Balance at end of period ................................ $ 12,985,000 $ 11,557,000 $ 9,639,000
==========================================================
Net loans charged against the allowance
to average Portfolio Loans ........................... 0.10% .15% .12%
</TABLE>
Management's assessment of the allowance for loan losses is based on the
composition of the loan portfolio, an evaluation of specific credits, historical
loss experience as well as the level of non-performing and impaired loans. Loans
charged against the allowance for loan losses, net of recoveries, were equal to
.10% of average loans during 1999 compared to .15% and .12% during 1998 and
1997, respectively. (See "Provision for loan losses.")
DEPOSITS AND BORROWINGS. The Banks' competitive position within many of the
markets served by the branch networks limits the ability to materially increase
deposits without adversely impacting the weighted-average cost of core deposits.
Accordingly, 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 finance a portion of the
Portfolio Loans. The use of such alternate sources of funds is also an integral
part of the Banks' asset/liability management efforts.
<TABLE>
<CAPTION>
AVERAGE CORE DEPOSIT BALANCES Year ended December 31,
1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Demand ........................................................ $ 125,936,000 $ 107,403,000 $ 91,440,000
Savings and Now ............................................... 576,194,000 525,638,000 501,548,000
Time, excluding brokered certificates of deposits ............. 510,034,000 501,225,000 486,303,000
--------------------------------------------------------
Total average Core Deposits ............................ $1,212,164,000 $1,134,266,000 $1,079,291,000
========================================================
</TABLE>
A-8
<PAGE> 27
Average deposits, excluding brokered certificates of deposit ("Core
Deposits"), grew to $1.21 billion during 1999 from $1.13 billion and $1.08
billion in 1998 and 1997, respectively. Savings and Now increased by 10% to
$576.2 million and accounts for 65% of the $77.9 million increase in total
average Core Deposits during 1999. During that period, average demand deposits
grew by 17% to $125.9 million.
<TABLE>
<CAPTION>
ALTERNATE SOURCES OF FUNDS December 31,
1999 1998
----------------------------------------------------------------------------------
Average Average
Amount Maturity Rate Amount Maturity Rate
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Brokered CDs ............................... $101,029,000 6.0 years 6.24% $ 54,885,000 4.4 years 5.64%
Fixed-rate FHLB advances(1) ................ 131,592,000 3.2 years 5.98 103,854,000 4.3 years 6.04
Variable-rate FHLB advances(2) ............. 59,056,000 0.4 years 4.63 68,500,000 .5 years 5.21
</TABLE>
(1)Advances totaling $20 million and $28 million, at December 31, 1999 and 1998,
respectively, have provisions that allow the FHLB to convert fixed-rate
advances to adjustable rates prior to stated maturity.
(2)The rate paid on variable-rate advances at December 31, 1999, reflects
overnight advances totaling $39 million with an average rate of 4.05%. The
rate paid on such advances averaged 5.54% during January of 2000.
Other borrowed funds, principally advances from the Federal Home Loan Bank
(the "FHLB"), totaled $224.6 million at December 31, 1999, compared to $229.2
million a year earlier. The decline in other borrowed funds reflects the
competitive cost of Brokered CDs as well as Management's efforts to diversify
the Banks' funding sources. Brokered CDs totaled $101.0 million and $54.9
million at December 31, 1999 and 1998, respectively. Derivative financial
instruments are employed to reduce the cost of alternate funding sources and to
manage the Banks' exposure to changes in interest rates. (See "Asset/liability
management.")
<TABLE>
<CAPTION>
INTEREST-RATE DERIVATIVE FINANCIAL INSTRUMENTS December 31, 1999
Swaps
-------------------------------
Caps Floors Collars Pay Fixed Pay Variable
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Notional amount ................... $ 29,000,000 $ 8,000,000 $ 7,000,000 $ 69,500,000 $ 81,000,000
Weighted-average maturity ......... 4.0 years 2.3 years 1.0 years 2.7 years 7.4 years
Cap strike ........................ 6.51% 6.38%
Floor strike ...................... 5.17% 5.75
Rate paying ....................... 5.51% 5.96%
Rate receiving .................... 6.10 6.40
Premium paid ...................... $ 958,000 $ 31,000
Annual cost ....................... .50% .14%
Amortized cost .................... $ 792,000 $ 27,000
Fair value ........................ 900,000 9,000 $ 13,000 $ 1,485,000 $ (2,446,000)
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES. Effective management of the Company's
capital resources is critical to Management's mission to create value for the
Company's shareholders. The cost of capital is an important factor in creating
shareholder value and, accordingly, the Company's capital structure includes
unsecured debt and trust preferred securities. To profitably deploy capital
within existing markets, the Banks have implemented balance sheet management
strategies that combine efforts to originate Portfolio Loans with disciplined
funding strategies.
On October 21, 1999, the Company announced that its board of directors had
adopted a share repurchase plan. The plan authorizes the Company to acquire up
to 325,000 shares of its common stock in open market transactions. The Company's
authority to purchase shares of its common stock expires on March 15, 2000.
A-9
<PAGE> 28
<TABLE>
<CAPTION>
CAPITALIZATION December 31,
1999 1998
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Unsecured debt ........................................................... $ 12,500,000 $ 10,000,000
Trust preferred securities ............................................... 17,250,000 17,250,000
Shareholders' equity
Common stock .......................................................... 11,235,000 10,815,000
Capital surplus ....................................................... 71,672,000 66,406,000
Retained earnings ..................................................... 33,921,000 38,639,000
Accumulated other comprehensive income (loss) ......................... (2,283,000) 1,981,000
Unearned employee stock ownership plan shares ......................... (799,000) (799,000)
------------- -------------
Total shareholders' equity .......................................... 113,746,000 117,042,000
------------- -------------
Total capitalization .............................................. $ 143,496,000 $ 144,292,000
============= =============
</TABLE>
Shareholders' equity totaled $113.7 million at December 31, 1999, a $3.3
million decrease from $117.0 million at December 31, 1998. Unrealized losses on
securities available for sale and the purchase of common stock pursuant to the
Company's share repurchase plan account for the decline in shareholders' equity.
The retention of earnings and the issuance of common stock pursuant to various
equity-based incentive compensation plans limited the decline in shareholders'
equity. Shareholders' equity was equal to 6.59% of total assets at December 31,
1999, compared to 7.05% at December 31, 1998.
<TABLE>
<CAPTION>
CAPITAL RATIOS December 31,
1999 1998
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Equity capital ................................................................... 6.59% 7.05%
Average shareholders' equity to average assets ................................... 7.16 6.76
Tier 1 leverage (tangible equity capital) ........................................ 6.52 6.65
Tier 1 risk-based capital ........................................................ 9.33 9.97
Total risk-based capital ......................................................... 10.41 11.04
</TABLE>
ASSET/LIABILITY MANAGEMENT. Interest-rate risk is created by differences in
the cash flow characteristics of the Banks' assets and liabilities. Options
embedded in certain financial instruments, including caps on adjustable-rate
loans as well as borrowers' rights to prepay fixed-rate loans also create
interest-rate risk.
The asset/liability management efforts of the Company and the Banks identify
and evaluate opportunities to structure the balance sheet in a manner that is
consistent with Management's mission to maintain profitable financial leverage
within established risk parameters. Management's evaluations of various
opportunities and alternate balance sheet strategies carefully consider the
likely impact on the Banks' risk profile as well as the anticipated contribution
to earnings. The marginal cost of funds is a principal consideration in the
implementation of the Banks' balance sheet management strategies, but such
evaluations further consider interest-rate and liquidity risk as well as other
pertinent factors.
The Banks have established parameters for interest-rate risk. Management
continually monitors the Banks' interest-rate risk and reports quarterly to the
respective Bank's board of directors.
Management employs simulation analyses to monitor the Banks' interest-rate
risk profiles and evaluate potential changes in the Banks' net interest income
and market value of portfolio equity that result from changes in interest rates.
The purpose of these simulations is to identify sources of interest-rate risk
inherent in the Banks' balance sheets. The simulations do not anticipate any
actions that Management might initiate in response to changes in interest rates
and, accordingly, the simulations do not provide a reliable forecast of
anticipated results. The simulations are predicated on immediate, permanent and
parallel shifts in interest rates and generally assume that current loan and
deposit pricing relationships remain constant. The simulations further
incorporate assumptions relating to changes in customer behavior, including
changes in prepayment rates on certain assets and liabilities.
A-10
<PAGE> 29
CHANGES IN MARKET VALUE OF PORTFOLIO EQUITY AND NET INTEREST INCOME
<TABLE>
<CAPTION>
Market Value of Percent Net Interest Percent
Change in Interest Rates Portfolio Equity(1) Change Income(2) Change
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
400 basis point rise ................... $ 84,700,000 (45.53)% $ 52,600,000 (18.58)%
300 basis point rise ................... 101,700,000 (34.60) 56,400,000 (12.69)
200 basis point rise ................... 120,700,000 (22.38) 60,200,000 (6.81)
100 basis point rise ................... 140,100,000 (9.90) 62,700,000 (2.94)
Base-rate scenario ..................... 155,500,000 64,600,000
100 basis point decline ................ 165,600,000 6.50 66,000,000 2.17
200 basis point decline ................ 170,000,000 9.32 67,600,000 4.64
300 basis point decline ................ 171,000,000 9.97 68,900,000 6.66
400 basis point decline ................ 175,000,000 12.54 70,500,000 9.13
</TABLE>
(1)Simulation analyses calculate the change in the net present value of the
Company's assets and liabilities under parallel shifts in interest rates by
discounting the estimated future cash flows using a market-based discount
rate. Cash flow estimates incorporate anticipated changes in prepayment
speeds and other embedded options.
(2)Simulation analyses calculate the change in net interest income under
parallel shifts in interest rates over the next twelve months, are based upon
a static balance sheet and do not consider loan fees.
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, which has been subsequently amended by SFAS #137, requires
companies to record derivatives on the balance sheet as assets and liabilities
measured at fair value. The accounting for increases and decreases in the value
of those derivatives will depend upon the use of those derivatives and whether
or not they qualify for hedge accounting.
This statement is effective for all fiscal quarters of fiscal years
beginning after June 15, 2000 with earlier application allowed and is to be
applied prospectively. Management does not believe that the adoption of the SFAS
#133 during 2001 will have a material impact on the Company's consolidated
financial statements.
A-11
<PAGE> 30
SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
Year Ended December 31,
1999 1998(1) 1997(1) 1996(1) 1995(1)
- ----------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS
Interest income ..................................... $ 125,510 $ 125,908 $ 119,911 $ 102,350 $ 93,558
Interest expense .................................... 58,730 64,667 66,018 56,984 54,368
------------------------------------------------------------------
Net interest income ............................... 66,780 61,241 53,893 45,366 39,190
Provision for loan losses ........................... 2,661 3,628 1,975 1,413 805
Net gains on the sale of real estate
mortgage loans .................................... 4,247 7,052 2,899 2,480 1,337
Other non-interest income ........................... 13,848 12,066 9,389 6,950 4,694
Non-recurring charges ............................... 8,000 9,650
Other non-interest expenses ......................... 62,252 59,726 51,152 42,365 36,792
------------------------------------------------------------------
Income before federal income tax expense .......... 11,962 17,005 3,404 11,018 7,624
Federal income tax expense .......................... 3,293 5,056 1,935 3,239 2,040
------------------------------------------------------------------
Net income .................................... $ 8,669 $ 11,949 $ 1,469 $ 7,779 $ 5,584
==================================================================
PER COMMON SHARE DATA (2)
Income
Basic ................................................ $ .76 $ 1.06 $ .13 $ .71 $ .51
Diluted .............................................. .75 1.05 .13 .71 .51
Cash dividends declared ................................ .45 .33 .29 .26 .23
Book value ............................................. 10.12 10.31 9.35 9.36 8.92
Cash basis income (3)
Basic ................................................ .89 1.18 .24 .76 .54
Diluted .............................................. .88 1.17 .24 .75 .53
SELECTED BALANCES
Assets ................................................. $1,725,205 $1,660,893 $1,640,879 $1,564,307 $1,321,813
Loans .................................................. 1,290,641 1,152,139 1,061,252 862,207 613,527
Allowance for loan losses .............................. 12,985 11,557 9,693 8,815 6,966
Deposits ............................................... 1,310,602 1,255,544 1,121,298 1,082,841 838,747
Shareholders' equity ................................... 113,746 117,042 104,625 103,367 98,007
Long-term debt ......................................... 1,000 3,000 5,000 7,000
SELECTED RATIOS
Tax equivalent net interest income
to average earning assets ............................ 4.47% 4.08% 3.66% 3.46% 3.09%
Net income to
Average equity ....................................... 7.26 10.72 1.37 7.80 6.00
Average assets ....................................... .52 .72 .09 .55 .41
Cash basis income to (3)
Average tangible equity .............................. 9.94 14.31 3.01 8.99 6.49
Average tangible assets .............................. .61 .82 .17 .59 .44
Average shareholders' equity to
average assets ....................................... 7.16 6.76 6.69 7.06 6.87
Tier 1 leverage (tangible equity capital) ratio ........ 6.52 6.65 6.11 6.40 7.04
Non-performing loans to Portfolio Loans ................ .41 .59 .53 .50 .49
</TABLE>
(1)Restated to reflect an acquisition accounted for as a pooling of interests.
(See note 2 to consolidated financial statements.)
(2)Per share data has been adjusted for three-for-two stock splits in 1998 and
1997 and 5% stock dividends in each of the years presented.
(3)Cash basis financial data excludes intangible assets and the related
amortization expense.
A-12
<PAGE> 31
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,
1999 and 1998, 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, 1999. 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, 1999 and 1998, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1999, in conformity with generally accepted
accounting principles.
/s/ KPMG LLP
KPMG LLP
Detroit, Michigan
February 4, 2000
A-13
<PAGE> 32
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
December 31,
1999 1998
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Cash and due from banks ........................................................... $ 58,646,000 $ 53,943,000
Securities available for sale ..................................................... 195,300,000 155,624,000
Securities held to maturity (fair value of $70,486,000 at December 31, 1999 and
$161,944,000 at December 31, 1998) .............................................. 71,115,000 161,301,000
Federal Home Loan Bank stock, at cost ............................................. 19,612,000 19,612,000
Loans held for sale ............................................................... 12,950,000 45,699,000
Loans
Commercial and agricultural ..................................................... 334,212,000 277,024,000
Real estate mortgage ............................................................ 757,019,000 695,489,000
Installment ..................................................................... 199,410,000 179,626,000
-----------------------------------
Total Loans ................................................................... 1,290,641,000 1,152,139,000
Allowance for loan losses ....................................................... (12,985,000) (11,557,000)
-----------------------------------
Net Loans ..................................................................... 1,277,656,000 1,140,582,000
Property and equipment, net ....................................................... 37,582,000 35,272,000
Accrued income and other assets ................................................... 52,344,000 48,860,000
-----------------------------------
Total Assets ................................................................ $ 1,725,205,000 $ 1,660,893,000
===================================
Liabilities and Shareholders' Equity
Deposits
Non-interest bearing ............................................................ $ 135,868,000 $ 127,669,000
Savings and NOW ................................................................. 567,108,000 556,049,000
Time ............................................................................ 607,626,000 571,826,000
-----------------------------------
Total Deposits ................................................................ 1,310,602,000 1,255,544,000
Federal funds purchased ........................................................... 42,350,000 22,650,000
Other borrowings .................................................................. 224,570,000 229,249,000
Guaranteed preferred beneficial interests in Company's subordinated debentures .... 17,250,000 17,250,000
Accrued expenses and other liabilities ............................................ 16,687,000 19,158,000
-----------------------------------
Total Liabilities ............................................................. 1,611,459,000 1,543,851,000
-----------------------------------
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: 11,235,088 shares at December 31, 1999 and 10,814,723 shares
at December 31, 1998 .......................................................... 11,235,000 10,815,000
Capital surplus ................................................................. 71,672,000 66,406,000
Retained earnings ............................................................... 33,921,000 38,639,000
Accumulated other comprehensive income (loss) ................................... (2,283,000) 1,981,000
Unearned employee stock ownership plan shares ................................... (799,000) (799,000)
-----------------------------------
Total Shareholders' Equity .................................................... 113,746,000 117,042,000
-----------------------------------
Total Liabilities and Shareholders' Equity .................................. $ 1,725,205,000 $ 1,660,893,000
===================================
</TABLE>
See notes to consolidated financial statements
A-14
<PAGE> 33
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year ended December 31,
1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest Income
Interest and fees on loans ...................................... $ 106,733,000 $ 102,227,000 $ 88,674,000
Securities available for sale ................................... 10,246,000 10,506,000 13,824,000
Securities held to maturity
Taxable ....................................................... 6,127,000 10,433,000 14,615,000
Tax-exempt .................................................... 827,000 1,082,000 1,206,000
Other investments ............................................... 1,577,000 1,660,000 1,592,000
----------------------------------------------------
Total Interest Income ......................................... 125,510,000 125,908,000 119,911,000
----------------------------------------------------
Interest Expense
Deposits ........................................................ 44,106,000 43,203,000 40,659,000
Other borrowings ................................................ 14,624,000 21,464,000 25,359,000
----------------------------------------------------
Total Interest Expense ........................................ 58,730,000 64,667,000 66,018,000
----------------------------------------------------
Net Interest Income ........................................... 66,780,000 61,241,000 53,893,000
Provision for loan losses .......................................... 2,661,000 3,628,000 1,975,000
----------------------------------------------------
Net Interest Income After Provision for Loan Losses ........... 64,119,000 57,613,000 51,918,000
----------------------------------------------------
Non-interest Income
Service charges on deposit accounts ............................. 5,696,000 4,554,000 3,692,000
Net gains (losses) on asset sales
Real estate mortgage loans .................................... 4,247,000 7,052,000 2,899,000
Securities .................................................... (912,000) 267,000 273,000
Other income .................................................... 8,292,000 7,245,000 5,424,000
----------------------------------------------------
Total Non-interest Income ..................................... 17,323,000 19,118,000 12,288,000
----------------------------------------------------
Non-interest Expense
Salaries and employee benefits .................................. 34,289,000 32,349,000 26,515,000
Occupancy, net .................................................. 4,607,000 4,194,000 3,906,000
Furniture and fixtures .......................................... 4,230,000 3,659,000 3,354,000
Merger-related .................................................. 5,203,000
Settlement of lawsuits .......................................... 2,025,000 9,650,000
Other expenses .................................................. 19,126,000 19,524,000 17,377,000
----------------------------------------------------
Total Non-interest Expense .................................... 69,480,000 59,726,000 60,802,000
----------------------------------------------------
Income Before Federal Income Tax .............................. 11,962,000 17,005,000 3,404,000
Federal income tax expense ......................................... 3,293,000 5,056,000 1,935,000
----------------------------------------------------
Net Income .................................................. $ 8,669,000 $ 11,949,000 $ 1,469,000
====================================================
Income per common share
Basic ........................................................... $ .76 $ 1.06 $ .13
====================================================
Diluted ......................................................... $ .75 $ 1.05 $ .13
====================================================
Cash dividends declared per common share ........................... $ .45 $ .33 $ .29
====================================================
</TABLE>
See notes to consolidated financial statements
A-15
<PAGE> 34
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Income ............................................................. $ 8,669,000 $ 11,949,000 $ 1,469,000
-------------------------------------------------
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH
FROM OPERATING ACTIVITIES
Proceeds from sales of loans held for sale .......................... 275,364,000 507,944,000 183,943,000
Disbursements for loans held for sale ............................... (238,368,000) (525,202,000) (191,918,000)
Provision for loan losses ........................................... 2,661,000 3,628,000 1,975,000
Deferred federal income tax expense (credit) ........................ 913,000 (688,000) (314,000)
Deferred loan fees .................................................. 443,000 163,000 472,000
Depreciation, amortization of intangible assets and premiums and
accretion of discounts on securities and loans .................... 6,134,000 4,886,000 5,278,000
Net gains on sales of real estate mortgage loans .................... (4,247,000) (7,052,000) (2,899,000)
Net (gains) losses on sales of securities ........................... 912,000 (267,000) (273,000)
Increase in accrued income and other assets ......................... (6,133,000) (1,096,000) (407,000)
Increase (decrease) in accrued expenses and other liabilities ....... (109,000) (6,845,000) 10,371,000
-------------------------------------------------
Total Adjustments ................................................ 37,570,000 (24,529,000) 6,228,000
-------------------------------------------------
Net Cash from Operating Activities ............................... 46,239,000 (12,580,000) 7,697,000
-------------------------------------------------
CASH FLOW FROM INVESTING ACTIVITIES
Proceeds from the sale of securities available for sale ............. 86,136,000 11,271,000 59,727,000
Proceeds from the maturity of securities available for sale ......... 35,045,000 28,973,000 4,053,000
Proceeds from the sale of securities held to maturity ............... 26,735,000
Proceeds from the maturity of securities held to maturity ........... 572,356,000 929,517,000 173,466,000
Principal payments on securities available for sale ................. 16,628,000 20,579,000 11,643,000
Principal payments on securities held to maturity ................... 5,690,000 1,723,000 799,000
Purchases of securities available for sale .......................... (187,255,000) (31,257,000) (51,035,000)
Purchases of securities held to maturity ............................ (512,330,000) (850,057,000) (78,750,000)
Portfolio loans made to customers, net of principal payments ........ (142,250,000) (86,342,000) (173,683,000)
Portfolio loans purchased ........................................... (18,916,000) (29,758,000)
Principal payments on portfolio loans purchased ..................... 2,073,000 14,695,000 2,572,000
Acquisition of branch offices, less cash received ................... 16,168,000
Acquisition of business ............................................. 1,459,000
Capital expenditures ................................................ (6,542,000) (8,852,000) (6,186,000)
-------------------------------------------------
Net Cash from Investing Activities ................................ (103,714,000) 28,961,000 (87,152,000)
-------------------------------------------------
CASH FLOW FROM FINANCING ACTIVITIES
Net increase in total deposits ...................................... 55,058,000 125,308,000 25,675,000
Net increase (decrease) in other borrowings ......................... 8,693,000 (52,686,000) (27,114,000)
Proceeds from Federal Home Loan Bank advances ....................... 236,751,000 124,463,000 187,079,000
Payments of Federal Home Loan Bank advances ......................... (228,423,000) (198,652,000) (117,529,000)
Retirement of long-term debt ........................................ (2,000,000) (2,000,000) (2,000,000)
Dividends paid ...................................................... (4,587,000) (3,587,000) (3,186,000)
Repurchase of common stock .......................................... (4,331,000)
Proceeds from issuance of common stock .............................. 1,017,000 948,000 806,000
-------------------------------------------------
Net Cash from Financing Activities ................................ 62,178,000 (6,206,000) 63,731,000
-------------------------------------------------
Net Increase (Decrease) in Cash and Cash Equivalents .............. 4,703,000 10,175,000 (15,724,000)
Cash and Cash Equivalents at Beginning of Period ....................... 53,943,000 43,768,000 59,492,000
-------------------------------------------------
Cash and Cash Equivalents at End of Period .................... $ 58,646,000 $ 53,943,000 $ 43,768,000
=================================================
Cash paid during the period for
Interest ............................................................ $ 58,627,000 $ 64,445,000 $ 66,432,000
Income taxes ........................................................ 2,600,000 5,300,000 3,743,000
Transfer of loans to other real estate ................................. 1,534,000 1,151,000 705,000
Transfer of portfolio loans to held for sale ........................... 10,000,000
</TABLE>
See notes to consolidated financial statements
A-16
<PAGE> 35
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Accumulated
Other
Compre- Unearned Total
Common Capital Retained hensive ESOP Shareholders'
Stock Surplus Earnings Income (Loss) Shares Equity
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balances at January 1, 1997 .............. $ 4,231,000 $47,352,000 $ 53,160,000 $ (25,000) $ (1,351,000) $103,367,000
Net income for 1997 ...................... 1,469,000 1,469,000
Cash dividends declared, $.29 per share .. (3,261,000) (3,261,000)
5% stock dividend ........................ 326,000 10,356,000 (10,703,000) (21,000)
Issuance of 68,250 shares of common stock 68,000 1,369,000 1,437,000
Three-for-two stock split ................ 2,134,000 (2,142,000) (8,000)
Net change in unrealized loss on
securities available for sale, net of
$726,000 of related tax effect ........ 1,410,000 1,410,000
ESOP loan guarantee payment and
valuation adjustment .................. (116,000) 348,000 232,000
-----------------------------------------------------------------------------------
Balances at December 31, 1997 ............ 6,759,000 56,819,000 40,665,000 1,385,000 (1,003,000) 104,625,000
Net income for 1998 ...................... 11,949,000 11,949,000
Cash dividends declared, $.33 per share .. (3,688,000) (3,688,000)
5% stock dividend ........................ 514,000 9,759,000 (10,287,000) (14,000)
Issuance of 112,613 shares of common stock 113,000 3,373,000 3,486,000
Three-for-two stock split ................ 3,429,000 (3,442,000) (13,000)
Net change in unrealized gain on
securities available for sale, net of
$307,000 of related tax effect ........ 596,000 596,000
ESOP loan guarantee payment and
valuation adjustment .................. (103,000) 204,000 101,000
-----------------------------------------------------------------------------------
Balances at December 31, 1998 ............ 10,815,000 66,406,000 38,639,000 1,981,000 (799,000) 117,042,000
Net income for 1999 ...................... 8,669,000 8,669,000
Cash dividends declared, $.45 per share .. (5,181,000) (5,181,000)
5% stock dividend ........................ 546,000 7,651,000 (8,206,000) (9,000)
Issuance of 142,774 shares of common stock 143,000 1,725,000 1,868,000
Repurchase of 268,736 shares of
common stock .......................... (269,000) (4,062,000) (4,331,000)
Net change in unrealized gain on
securities available for sale, net of
$2,196,000 of related tax effect ...... (4,264,000) (4,264,000)
ESOP loan valuation adjustment ........... (48,000) (48,000)
-----------------------------------------------------------------------------------
Balances at December 31, 1999 ..... $11,235,000 $71,672,000 $ 33,921,000 $(2,283,000) $ (799,000) $113,746,000
===================================================================================
</TABLE>
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income .............................................................. $ 8,669,000 $11,949,000 $ 1,469,000
Other comprehensive income
Net change in unrealized gain (loss) on securities available for sale,
net of related tax effect .......................................... (4,264,000) 596,000 1,410,000
----------------------------------------
Comprehensive income ............................................. $ 4,405,000 $12,545,000 $ 2,879,000
========================================
</TABLE>
See notes to consolidated financial statements
A-17
<PAGE> 36
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. The economies of these communities are relatively stable and reasonably
diversified. Subject to established underwriting criteria, the Banks also
participate in commercial lending transactions with certain non-affiliated banks
and purchase real estate mortgage loans from third-party originators. At
December 31, 1999, approximately 85% of the Banks' loan portfolios were secured
by real estate.
Management is required to make estimates and assumptions in the preparation
of the financial statements which affect the amounts reported. Material
estimates that are particularly susceptible to changes in the near-term relate
to the evaluation of the allowance for loan losses. While Management uses
relevant information to recognize losses on loans, additional provisions for
related losses may be necessary based on changes in economic conditions 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
net change in unrealized gain or loss on securities available for sale in 1999
reflect net realized losses of $912,000 and net realized gains of $267,000 and
$273,000, in 1998 and 1997, respectively. The reclassification of these amounts
from comprehensive income resulted in federal income tax benefit of $319,000 in
1999 and federal income tax expense of $93,000 and $95,000 in 1998 and 1997,
respectively.
LOANS HELD FOR SALE - Loans held for sale are carried at the lower of
aggregate amortized cost or market value. Lower of cost or market value
adjustments, as well as realized gains and losses, are recorded in current
earnings. The Banks recognize as separate assets the rights to service mortgage
loans for others. The fair value of originated mortgage servicing rights has
been determined based upon market value indications for similar servicing. These
mortgage servicing rights are amortized in proportion to and over the period of
estimated net loan servicing income. The Banks assess mortgage servicing rights
for impairment based on the fair value of those rights. For purposes of
measuring impairment, the characteristics used by the Banks include interest
rate, term and type.
SECURITIES - The Company classifies its securities as trading, held to
maturity or available for sale. Trading securities are bought and held
principally for the purpose of selling them in the near-term and are reported at
fair value with realized and unrealized gains and losses included in earnings.
The Company does not have any trading securities. Securities held to maturity
represent those securities for which the Banks have the positive intent and
ability to hold until maturity and are reported at cost, adjusted for
amortization of premiums and accretion of discounts computed on the level yield
method. Securities available for sale represent those securities not classified
as trading or held to maturity and are reported at fair value with unrealized
gains and losses, net of applicable income taxes reported 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 and 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 revenue over its life.
A-18
<PAGE> 37
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 is 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 $1,315,000 and $1,265,000 at December 31, 1999 and
1998, 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 $8,282,000 and $9,015,000 as of December 31, 1999 and
1998, respectively. Other intangible assets, including core deposit intangibles,
are amortized using both straight-line and accelerated methods over 10 to 15
years. Other intangible assets amounted to $8,719,000 and $9,728,000 as of
December 31, 1999 and 1998, respectively.
INCOME TAXES - The Company employs the asset and liability method of
accounting for income taxes. This method establishes deferred tax assets and
liabilities for the temporary differences between the financial reporting basis
and the tax basis of the Company's assets and liabilities at tax rates expected
to be in effect when such amounts are realized or settled. Under this method,
the effect of a change in tax rates is recognized in the period that includes
the enactment date. The deferred tax asset is subject to a valuation allowance
for that portion of the asset for which it is more likely than not that it will
not be realized.
The Company and its subsidiaries file a consolidated federal income tax
return. Intercompany tax liabilities are settled as if each subsidiary filed a
separate return.
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE - Securities sold under
agreements to repurchase are treated as debt and the obligations to repurchase
securities sold are reflected as a liability in the consolidated statements of
financial condition. The book value of securities pledged to secure the
repurchase agreements remains in the securities portfolio.
DERIVATIVE FINANCIAL INSTRUMENTS - Derivative financial instruments are
employed to reduce the cost of certain liabilities as well as to manage
interest-rate risk. Such instruments include interest-rate swaps, collars,
floors and caps. Provided these instruments meet specific criteria they are
considered hedges and accounted for using the accrual or deferral methods of
accounting. Fees paid on caps and floors are amortized over the life of the
derivative financial instrument and included in interest expense.
COMMON STOCK - At December 31, 1999, 228,028 shares of common stock were
reserved for issuance under the Incentive Share Grant Plan, 288,614 shares of
common stock were reserved for issuance under the dividend reinvestment plan and
714,663 shares of common stock were reserved for issuance under stock option
plans.
RECLASSIFICATION - Certain amounts in the 1998 and 1997 financial statements
have been reclassified to conform with the 1999 presentation.
A-19
<PAGE> 38
NOTE 2 - ACQUISITIONS
On September 15, 1999, the Company acquired Mutual Savings Bank, f.s.b,
("MSB"). On that date MSB's total assets and shareholders' equity approximated
$580 million and $44 million, respectively. The Company issued 3,608,000 shares
of common stock in exchange for all the outstanding common stock of MSB. The
acquisition was accounted for as a pooling of interests and, accordingly, the
accompanying financial statements have been restated to include the accounts and
operations of MSB for all periods prior to the acquisition.
Separate results of operations of the combining entities as of December 31,
follows:
<TABLE>
<CAPTION>
1999 1998 1997
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net interest income after provision for loan losses
Independent Bank Corporation ........................... $ 55,212,000 $ 46,190,000 $ 40,889,000
Mutual Savings Bank, f.s.b.(1) ......................... 8,907,000 11,423,000 11,029,000
------------ ------------ ------------
Total .............................................. $ 64,119,000 $ 57,613,000 $ 51,918,000
============ ============ ============
Net income
Independent Bank Corporation ........................... $ 7,035,000 $ 10,221,000 $ 8,924,000
Mutual Savings Bank, f.s.b.(1)(2) ...................... 1,634,000 1,728,000 (7,455,000)
------------ ------------ ------------
Total .............................................. $ 8,669,000 $ 11,949,000 $ 1,469,000
============ ============ =============
</TABLE>
(1) Amounts are through the acquisition date of September 15, 1999.
(2) Federal income tax expense or benefit has been adjusted to reflect the
estimated tax expense or benefit that would have been recognized by Mutual
Savings Bank, f.s.b. if no deferred tax asset valuation allowance had been
recognized during the periods presented.
The Company expensed approximately $5.2 million in merger-related costs
relating to the acquisition of MSB, which are classified as such in the
financial statements. Such costs included data-processing and related costs,
legal and professional, severance and write-off of duplicate fixed assets. As of
December 31, 1999, substantially all of these costs have been paid.
On April 17, 1998, the Company purchased the outstanding capital stock of
First Home Financial, Inc., an originator of manufactured home loans. Aggregate
consideration consisted of 76,000 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.
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.
NOTE 3 - RESTRICTIONS ON CASH AND DUE FROM BANKS
The Banks' legal reserve requirements were satisfied by average vault cash
of $10,932,000 during 1999. During 1998, such requirements were satisfied by
average vault cash and by maintaining non-interest earning balances with the
Federal Reserve Bank of $10,450,000 and $2,745,000, respectively. The Banks do
not maintain compensating balances with correspondent banks.
NOTE 4-SECURITIES
Securities available for sale consist of the following at December 31:
<TABLE>
<CAPTION>
Amortized Unrealized Fair
Cost Gains Losses Value
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1999
U.S. Treasury ........................................... $ 303,000 $ 2,000 $ 301,000
U.S. Government agencies ................................ 1,970,000 $ 30,000 126,000 1,874,000
Mortgage-backed securities .............................. 55,148,000 824,000 326,000 55,646,000
Obligations of states and political subdivisions ........ 118,955,000 320,000 4,155,000 115,120,000
Other securities ........................................ 22,388,000 60,000 89,000 22,359,000
------------ ------------ ------------ ------------
Total ............................................... $198,764,000 $ 1,234,000 $ 4,698,000 $195,300,000
============ ============ ============ ============
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 .............................. 82,526,000 1,047,000 $ 104,000 83,469,000
Obligations of states and political subdivisions ........ 40,826,000 1,525,000 25,000 42,326,000
Other securities ........................................ 14,304,000 157,000 14,461,000
------------ ------------ ------------ ------------
Total ............................................... $152,622,000 $ 3,131,000 $ 129,000 $155,624,000
============ ============ ============ ============
</TABLE>
A-20
<PAGE> 39
Securities held to maturity consist of the following at December 31:
<TABLE>
<CAPTION>
Amortized Unrealized Fair
Cost Gains Losses Value
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1999
Mortgage-backed securities ................................. $ 59,467,000 $ 1,000 $ 865,000 $ 58,603,000
Obligations of states and political subdivisions ........... 11,148,000 236,000 1,000 11,383,000
Other securities ........................................... 500,000 500,000
------------ ------------ ----------- ------------
Total .................................................. $ 71,115,000 $ 237,000 $ 866,000 $ 70,486,000
============ ============ =========== ============
1998
Mortgage-backed securities ................................. $130,060,000 $ 80,000 $ 119,000 $130,021,000
Obligations of states and political subdivisions ........... 16,563,000 682,000 17,245,000
Other securities ........................................... 14,678,000 14,678,000
------------ ------------ ----------- ------------
Total .................................................. $161,301,000 $ 762,000 $ 119,000 $161,944,000
============ ============ =========== ============
</TABLE>
The amortized cost and approximate fair value of securities at December 31,
1999, by contractual maturity, follow. The actual maturity will differ from the
contractual maturity because issuers may have the right to call or prepay
obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
Available For Sale Held To Maturity
Amortized Fair Amortized Fair
Cost Value Cost Value
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Maturing within one year ............................... $ 1,350,000 $ 1,337,000 $ 2,959,000 $ 2,978,000
Maturing after one year but within five years .......... 14,757,000 14,822,000 6,652,000 6,798,000
Maturing after five years but within ten years ......... 37,801,000 37,380,000 1,168,000 1,212,000
Maturing after ten years ............................... 86,205,000 82,612,000 369,000 395,000
------------ ------------ ------------ ------------
140,113,000 136,151,000 11,148,000 11,383,000
Mortgage-backed securities ............................. 55,148,000 55,646,000 59,467,000 58,603,000
Other securities ....................................... 3,503,000 3,503,000 500,000 500,000
------------ ------------ ------------ ------------
Total ........................................... $198,764,000 $195,300,000 $ 71,115,000 $ 70,486,000
============ ============ ============ ============
</TABLE>
A summary of proceeds from the sale of securities and realized gains and
losses follows:
<TABLE>
<CAPTION>
Realized Realized
Proceeds Gains Losses
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1999 ..................................... $112,871,000 $ 23,000 $ 935,000
1998 ..................................... 11,271,000 267,000
1997 ..................................... 59,727,000 354,000 81,000
</TABLE>
During 1999, proceeds from the sale of securities held to maturity
approximated $26,700,000 and are included in the table above. Such sales
occurred in conjunction with the acquisition of MSB to address its interest-rate
risk position.
Securities with a book value of $56,388,000 and $86,760,000 at December 31,
1999 and 1998, 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,
1999 or 1998.
A-21
<PAGE> 40
NOTE 5 - LOANS
An analysis of the allowance for loan losses for the years ended December 31
follows:
<TABLE>
<CAPTION>
1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of period ................................ $ 11,557,000 $ 9,639,000 $ 8,815,000
Provision charged to operating expense ..................... 2,661,000 3,628,000 1,975,000
Recoveries credited to allowance ........................... 746,000 655,000 590,000
Loans charged against allowance ............................ (1,979,000) (2,365,000) (1,741,000)
------------ ------------ ------------
Balance at end of period ...................................... $ 12,985,000 $ 11,557,000 $ 9,639,000
============ ============ ============
</TABLE>
Loans are presented net of deferred fees of $1,993,000 at December 31,
1999, and $1,683,000 at December 31, 1998.
Loans on non-accrual status, 90 days or more past due and still accruing
interest, or restructured amounted to $5,279,000, $6,837,000 and $5,647,000 at
December 31, 1999, 1998 and 1997, respectively. If these loans had continued to
accrue interest in accordance with their original terms, approximately $571,000,
$588,000, and $442,000 of interest income would have been realized in 1999, 1998
and 1997, respectively. Interest income realized on these loans was
approximately $280,000, $229,000 and $222,000 in 1999, 1998 and 1997,
respectively.
Impaired loans totaled approximately $3,400,000, $4,000,000 and $3,200,000
at December 31, 1999, 1998 and 1997, respectively. The Banks' average investment
in impaired loans was approximately $3,300,000, $4,300,000 and $3,700,000 in
1999, 1998 and 1997, respectively. Cash receipts on impaired loans on
non-accrual status are generally applied to the principal balance. Interest
income recognized on impaired loans in 1999, 1998 and 1997 was approximately
$160,000, $199,000 and $197,000, respectively. Certain impaired loans with a
balance of approximately $1,200,000, $1,800,000 and $1,700,000 had specific
allocations of the allowance for loan losses calculated in accordance with SFAS
#114 totaling approximately $400,000, $300,000 and $500,000 at December 31,
1999, 1998 and 1997, respectively.
The Banks capitalized approximately $2,009,000, $3,451,000 and $1,057,000 of
servicing rights relating to loans that were originated and sold during the
years ended December 31, 1999, 1998 and 1997, respectively. Amortization of
capitalized servicing rights during those years was $1,243,000, $1,014,000 and
$389,000, respectively. The book value of capitalized mortgage servicing rights
was $4,712,000 at December 31, 1999. The fair value of capitalized servicing
rights at that same date was approximately $8,000,000, and therefore, no
valuation allowance was considered necessary. The capitalized servicing rights
relate to approximately $760,000,000 of loans sold and serviced at December 31,
1999.
At December 31, 1999, 1998 and 1997, the Banks serviced loans totaling
approximately $995,000,000, $905,000,000 and $749,000,000, respectively, for the
benefit of third parties.
NOTE 6 - PROPERTY AND EQUIPMENT
A summary of property and equipment at December 31 follows:
<TABLE>
<CAPTION>
1999 1998
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Land ....................................................................... $ 5,663,000 $ 5,442,000
Buildings .................................................................. 32,152,000 28,982,000
Equipment .................................................................. 24,969,000 21,836,000
------------ ------------
62,784,000 56,260,000
Accumulated depreciation and amortization .................................. (25,202,000) (20,988,000)
------------ ------------
Property and equipment, net ......................................... $ 37,582,000 $ 35,272,000
============ ============
</TABLE>
NOTE 7 - DEPOSITS
A summary of interest expense on deposits for the years ended December 31
follows:
<TABLE>
<CAPTION>
1999 1998 1997
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Savings and NOW ............................................ $13,704,000 $13,912,000 $13,825,000
Time deposits under $100,000 ............................... 22,227,000 24,415,000 24,259,000
Time deposits of $100,000 or more .......................... 8,175,000 4,876,000 2,575,000
----------- ----------- -----------
Total ............................................... $44,106,000 $43,203,000 $40,659,000
=========== =========== ===========
</TABLE>
Aggregate certificates of deposit and other time deposits in denominations
of $100,000 or more amounted to $182,067,000, $117,286,000, and $61,531,000 at
December 31, 1999, 1998 and 1997, respectively.
A-22
<PAGE> 41
A summary of the maturity of certificates of deposit at December 31, 1999
follows:
<TABLE>
<S> <C>
2000 ........................................................................... $378,046,000
2001 ........................................................................... 91,259,000
2002 ........................................................................... 35,400,000
2003 ........................................................................... 11,535,000
2004 ........................................................................... 20,935,000
2005 and thereafter ............................................................ 70,451,000
------------
Total ................................................................... $607,626,000
============
</TABLE>
NOTE 8 - OTHER BORROWINGS
A summary of other borrowings at December 31 follows:
<TABLE>
<CAPTION>
1999 1998
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Advances from Federal Home Loan Bank ..................................... $190,648,000 $172,354,000
Repurchase agreements .................................................... 20,000,000 45,000,000
Notes payable ............................................................ 12,500,000 10,000,000
U.S. Treasury demand notes ............................................... 1,380,000 1,883,000
Other .................................................................... 42,000 12,000
------------ ------------
Total ............................................................. $224,570,000 $229,249,000
============ ============
</TABLE>
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. Advances are
also secured by FHLB stock owned by the Banks. Interest expense on advances
amounted to $9,031,000, $13,953,000 and $13,793,000 for the years ending
December 31, 1999, 1998 and 1997, 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, 1999, 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,
1999, advances totaling $10,000,000, with a stated maturity in 2002, are
convertible in 2000 and advances totaling $10,000,000, with a stated maturity in
2008, are convertible in 2003.
The maturity and weighted average interest rates of FHLB advances at
December 31 follow:
<TABLE>
<CAPTION>
1999 1998
Amount Rate Amount Rate
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Fixed-rate advances
1999 .............................................. $ 8,059,000 5.97%
2000 .............................................. $ 84,580,000 6.11% 59,895,000 6.21
2001 .............................................. 3,230,000 5.90 2,000,000 5.86
2002 .............................................. 10,000,000 5.65
2003 .............................................. 9,515,000 5.36 9,515,000 5.36
2005 and thereafter ............................... 24,267,000 5.95 24,385,000 5.95
------------ ---- ------------ ----
Total fixed-rate advances ....................... 131,592,000 5.98 103,854,000 6.04
------------ ---- ------------ ----
Variable-rate advances
1999 .............................................. 68,500,000 5.21
2000 .............................................. 59,056,000 4.63
------------ ---- ------------ ----
Total variable-rate advances .................... 59,056,000 4.63 68,500,000 5.21
------------ ---- ------------ ----
Total advances ................................ $190,648,000 5.56% $172,354,000 5.71%
============ ==== ============ ====
</TABLE>
Repurchase agreements are secured by mortgage-backed securities with book
values of approximately $20.7 million and $47.4 million at December 31, 1999 and
1998, respectively. Such mortgage-backed securities were delivered to the
primary dealers, including Merrill Lynch and Lehman Brothers, who arranged or
were parties to the transactions.
Repurchase agreements averaged $40.8 million and $64.5 million during 1999
and 1998. The maximum amounts outstanding at any month end during 1999 and 1998
were $45.0 million and $85.0 million, respectively. Interest expense on
repurchase agreements totaled to $2,423,000, $3,925,000 and $7,251,000 for the
years ending 1999, 1998 and 1997, respectively.
A-23
<PAGE> 42
The maturity and weighted average interest rates of repurchase agreements at
December 31 follow:
<TABLE>
<CAPTION>
1999 1998
Amount Rate Amount Rate
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
2000 ................................................... $10,000,000 5.69%
2001 ................................................... 15,000,000 5.99
2002 ................................................... $20,000,000 5.69% 20,000,000 5.69
----------- ---- ----------- ----
Total repurchase agreements ..................... $20,000,000 5.69% $45,000,000 5.79%
=========== ==== =========== ====
</TABLE>
At December 31, 1999 and 1998, the $20,000,000 repurchase agreement with a
stated maturity in 2002 has an initial call by the other party of June 1998,
followed by quarterly call options thereafter.
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, 1999,
the term note and the revolving credit facility had unpaid principal balances of
$3,000,000 and $9,500,000, respectively. The term note and the revolving credit
facility accrue interest at LIBOR, plus 1.00% and federal funds, plus .75%,
respectively.
The maturity of the notes payable at December 31, 1999 follow:
<TABLE>
- --------------------------------------------------------------------
<S> <C>
2000 ........................................... $ 11,500,000
2001 ........................................... 1,000,000
-------------
Total ................................... $ 12,500,000
=============
</TABLE>
NOTE 9 - GUARANTEED PREFERRED BENEFICIAL INTERESTS IN COMPANY'S SUBORDINATED
DEBENTURES
IBC Capital Finance, a trust subsidiary of the Company, has issued and
outstanding, 690,000 shares of cumulative trust preferred securities ("Preferred
Securities") with a liquidation preference of $25 per security. The preferred
securities represent an interest in the Company's subordinated debentures, which
have terms that are similar to the Preferred Securities. Distributions on the
securities are payable quarterly at the annual rate of 9.25% of the liquidation
preference and are included in interest expense in the consolidated financial
statements.
The Preferred Securities are subject to mandatory redemption at the
liquidation preference, in whole or in part, upon repayment of the subordinated
debentures at maturity or their earlier redemption. The subordinated debentures
are redeemable prior to the maturity date of December 31, 2026, at the option of
the Company on or after December 31, 2001, in whole at any time or in part from
time to time. The subordinated debentures are also redeemable at any time, in
whole, but not in part, upon the occurrence of specific events defined within
the trust indenture. The Company has the option to defer distributions on the
subordinated debentures from time to time for a period not to exceed 20
consecutive quarters.
NOTE 10 - COMMITMENTS AND CONTINGENT LIABILITIES
The Company and the Banks are routinely engaged in legal proceedings and
regulatory matters that have occurred in the ordinary course of business and do
not involve amounts in the aggregate that are believed by management to be
material to the financial condition of the Company.
During 1999 and 1997, the Company settled lawsuits against MSB for $2.0
million and $9.7 million, respectively. Such amounts were included in net income
in the respective year. These lawsuits represent actions by shareholders of MSB
which alleged certain violations of federal and state securities laws.
NOTE 11 - EARNINGS PER SHARE
A reconciliation of basic and diluted earnings per share for the years ended
December 31 follows:
<TABLE>
<CAPTION>
1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income ................................................................... $ 8,669,000 $ 11,949,000 $ 1,469,000
============ ============ ============
Shares outstanding(1) ........................................................ 11,417,000 11,312,000 11,156,000
ESOP shares not committed to be released .................................. (32,000) (42,000) (55,000)
------------ ------------ ------------
Shares outstanding for calculation of basic earnings per share .......... 11,385,000 11,270,000 11,101,000
Effect of stock options ................................................... 125,000 157,000 83,000
------------ ------------ ------------
Shares outstanding for calculation of diluted earnings per share(1) ..... 11,510,000 11,427,000 11,184,000
============ ============ ============
Earning per share
Basic ..................................................................... $ .76 $ 1.06 $ .13
============ ============ ============
Diluted ................................................................... $ .75 $ 1.05 $ .13
============ ============ ============
</TABLE>
(1) Shares outstanding have been adjusted for three-for-two stock splits in 1998
and 1997 and 5% stock dividends in each year.
A-24
<PAGE> 43
NOTE 12 - FEDERAL INCOME TAX
The composition of federal income tax expense for the years ended December
31 follows:
<TABLE>
<CAPTION>
1999 1998 1997
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current ..................................................... $ 2,380,000 $ 5,744,000 $ 2,249,000
Deferred .................................................... 913,000 (688,000) (314,000)
----------- ----------- -----------
Federal income tax expense ........................... $ 3,293,000 $ 5,056,000 $ 1,935,000
=========== =========== ===========
</TABLE>
A reconciliation of federal income tax expense to the amount computed by
applying the statutory federal income tax rate of 35% in 1999, 1998 and 1997 to
income before federal income tax for the years ended December 31 follows:
<TABLE>
<CAPTION>
1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory rate applied to income before federal income tax ............. $ 4,187,000 $ 5,952,000 $ 1,191,000
Tax-exempt interest income ............................................. (1,506,000) (961,000) (906,000)
Amortization of goodwill ............................................... 265,000 270,000 226,000
Non-deductible costs ................................................... 466,000 1,504,000
Other, net ............................................................. (119,000) (205,000) (80,000)
----------- ----------- -----------
Federal income tax expense ...................................... $ 3,293,000 $ 5,056,000 $ 1,935,000
=========== =========== ===========
</TABLE>
The deferred federal income tax expense of $913,000 in 1999 and the deferred
federal income tax benefit of $688,000 and $314,000 in 1998 and 1997,
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:
<TABLE>
<CAPTION>
1999 1998
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets
Net operating loss carryforward ............................................. $10,707,000 $11,429,000
Allowance for loan losses ................................................... 3,967,000 3,479,000
Unrealized loss on securities available for sale ............................ 1,180,000
Deferred compensation ....................................................... 695,000 856,000
Alternative minimum tax credit carryforwards ................................ 617,000 617,000
Purchase discounts .......................................................... 462,000 415,000
Deferred credit life premiums ............................................... 117,000 206,000
Other ....................................................................... 736,000 744,000
----------- -----------
Gross deferred tax assets ................................................. 18,481,000 17,746,000
----------- -----------
Deferred tax liabilities
Mortgage servicing rights ................................................... 1,569,000 1,297,000
Fixed assets ................................................................ 402,000 452,000
Deferred loan fees .......................................................... 342,000 96,000
Unrealized gain on securities available for sale ............................ 1,020,000
-----------
Gross deferred tax liabilities ............................................ 2,313,000 2,865,000
----------- -----------
Net deferred tax assets ................................................. $16,168,000 $14,881,000
=========== ===========
</TABLE>
At December 31, 1999, the Company had a net operating loss ("NOL")
carryforward of approximately $31,500,000 which, if not used against taxable
income, will expire as follows:
<TABLE>
<S> <C>
2004 .................................................................. $ 4,429,000
2007 .................................................................. 164,000
2008 .................................................................. 15,260,000
2009 .................................................................. 81,000
2010 .................................................................. 6,779,000
2011 .................................................................. 929,000
2012 .................................................................. 411,000
2018 .................................................................. 3,437,000
-----------
Total .......................................................... $31,490,000
===========
</TABLE>
A-25
<PAGE> 44
The use of the $31,500,000 NOL carryforward, which was acquired from MSB, is
limited to $2,900,000 per year. Such limitations are the result of changes in
control as defined in the Internal Revenue Code.
Management believes that the tax benefits associated with the deferred tax
assets acquired from MSB will more likely than not be realized, and therefore no
valuation allowance is considered necessary. As a result, and in conjunction
with pooling of interests accounting, prior period financial statements have
been restated as if no valuation allowance had been recognized by MSB.
NOTE 13 - EMPLOYEE BENEFIT PLANS
The Company maintains stock option plans for its non-employee directors as
well as certain officers of the Company and the Banks. An aggregate of 945,000
shares of common stock has been authorized for issuance under the plans. Certain
option grants are contingent upon the approval of additional authorized shares
by the Company's shareholders. Options that were granted under these plans are
exercisable not earlier than one year after the date of grant, at a price equal
to the fair market value of the common stock on the date of grant, and expire
not more than ten years after the date of grant.
The Company has elected to provide pro forma disclosures for its net income
and earnings per share as if it had adopted the fair value accounting method for
stock-based compensation.
The per share weighted-average fair value of stock options was obtained
using the Black Scholes options pricing model. A summary of the assumptions used
and values obtained follows:
<TABLE>
<CAPTION>
1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Expected dividend yield ........................................................ 3.35% 1.98% 2.86%
Risk-free interest rate ........................................................ 5.04 5.65 6.76
Expected life .................................................................. 5 years 5 years 5 years
Expected volatility ............................................................ 15.52% 23.78% 14.41%
Per share weighted-average fair value .......................................... $4.21 $6.12 $2.81
</TABLE>
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:
<TABLE>
<CAPTION>
1999 1998 1997
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income
As reported ................................ $ 8,669,000 $ 11,949,000 $ 1,469,000
Pro-forma .................................. 8,353,000 11,424,000 1,255,000
Income per share
Basic
As reported .............................. $ .76 $ 1.06 $ .13
Pro-forma ................................ .73 1.01 .11
Diluted
As reported .............................. $ .75 $ 1.05 $ .13
Pro-forma ................................ .73 1.00 .11
</TABLE>
A summary of outstanding stock option grants and transactions follows:
<TABLE>
<CAPTION>
Number Average
Of Exercise
Shares Price
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Outstanding at January 1, 1997 .......................................... 506,837 $ 9.66
Granted .............................................................. 117,039 15.04
Exercised ............................................................ (81,768) 6.34
-------- ------
Outstanding at December 31, 1997 ........................................ 542,108 11.32
Granted .............................................................. 132,034 21.58
Exercised ............................................................ (43,066) 6.85
-------- ------
Outstanding at December 31, 1998 ........................................ 631,076 13.77
Granted .............................................................. 115,298 15.95
Exercised ............................................................ (89,883) 6.18
-------- ------
Outstanding at December 31, 1999 ........................................ 656,491 $15.19
======== ======
</TABLE>
At December 31, 1999, the range of exercise prices of outstanding options
was $5.21 to $23.89.
A-26
<PAGE> 45
The Company maintains 401(k) and employee stock ownership plans covering
substantially all full-time employees of the Company and its subsidiaries.
The Company matches employee contributions to the 401(k) up to a maximum of 3%
of participating employees' eligible wages. At December 31, 1999, the Company is
in the process of merging the employee stock ownership plan of MSB ("MSB ESOP")
with the Company's plan. The merger of these plans is dependent upon the receipt
of a favorable determination by the Internal Revenue Service, which is expected
to be received during 2000. Upon merger of these plans, the outstanding loan
balance of the MSB ESOP, which is shown as a reduction to shareholders' equity
at December 31, 1999 and 1998, will be retired. Contributions to the employee
stock ownership plan are determined annually and require approval of the
Company's Board of Directors. During 1999, 1998 and 1997, $1,388,000, $1,564,000
and $1,389,000 respectively, was expensed for these retirement plans.
Officers of the Company and subsidiaries participate in various
performance-based compensation plans. Prior to 1999, the Company maintained the
Incentive Share Grant Plan which provided that the Board of Directors, at its
sole discretion, 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 was equal to twice
the amount of the cash incentive otherwise payable. The Incentive Share Grant
plan was terminated during 1999 in favor of cash incentive payments and stock
option grants. Amounts expensed for all incentive plans totaled $1,920,000,
$1,943,000, and $1,639,000, in 1999, 1998 and 1997, respectively.
Substantially all salaried employees of MSB were covered by the
multi-employer Financial Institutions Retirement Fund ("FIRF"). Effective
January 1, 2000, MSB withdrew as a participant in the FIRF and all employees
became 100% vested. As of June 30, 1999, the aggregate market value of the
assets held by the FIRF exceeded the value of the vested benefits.
There was no pension expense or required contribution for 1999, 1998 or
1997. The FIRF does not segregate the assets, liabilities or costs by
participating employer. Significant actuarial assumptions include a 5.5% rate of
compensation increase for 1999, 1998 and 1997. The return on assets held by the
FIRF and the weighted-average discount rate was 8% in 1999, 1998 and 1997.
The Company also provides certain health care and life insurance programs to
substantially all full-time employees. These insurance programs are available to
retired employees at their expense.
A-27
<PAGE> 46
NOTE 14 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
In the normal course of business, the Banks enter into financial
instruments with off-balance sheet risk to meet the financing needs of customers
or to reduce exposure to fluctuations in interest rates. These financial
instruments may include commitments to extend credit, standby letters of credit
and interest-rate derivatives. Financial instruments involve varying degrees of
credit and interest-rate risk in excess of amounts reflected in the consolidated
balance sheets. Exposure to credit risk in the event of non-performance by the
counterparties to the financial instruments for loan commitments to extend
credit and letters of credit is represented by the contractual amounts of those
instruments. Management does not, however, anticipate material losses as a
result of these financial instruments.
A summary of financial instruments with off-balance sheet risk at December
31 follows:
<TABLE>
<CAPTION>
1999 1998
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Financial instruments whose risk is represented by contract amounts
Commitments to extend credit ............................................ $ 134,103,000 $ 192,463,000
Standby letters of credit ............................................... 26,518,000 32,924,000
Interest-rate derivative financial instruments
Interest-rate cap agreements
Notional amount ....................................................... $ 29,000,000 $ 26,000,000
Strike(1) ............................................................. 6.51% 6.69%
Weighted-average maturity ............................................. 4.0 years 1.2 years
Amortized cost ........................................................ $ 792,000 $ 70,000
Fair value ............................................................ 900,000 10,000
Interest-rate floor agreements
Notional amount ....................................................... $ 8,000,000
Strike(1) ............................................................. 5.17%
Weighted-average maturity ............................................. 2.3 years
Amortized cost ........................................................ $ 27,000
Fair value ............................................................ 9,000
Interest-rate collar agreements
Notional amount ....................................................... $ 7,000,000 $ 10,000,000
Cap strike(1) ......................................................... 6.38% 6.42%
Floor strike(1) ....................................................... 5.75 5.71
Weighted-average maturity ............................................. 1.0 years 1.7 years
Fair value ............................................................ $ 13,000 $ (137,000)
Interest-rate swap agreements (pay fixed)
Notional amount ....................................................... $ 69,500,000 $ 54,500,000
Rate paying ........................................................... 5.51% 5.28%
Rate receiving ........................................................ 6.10 5.27
Weighted-average maturity ............................................. 2.7 years 2.7 years
Fair value ............................................................ $ 1,485,000 $ (401,000)
Interest-rate swap agreements (pay variable)
Notional amount ....................................................... $ 81,000,000 $ 25,000,000
Rate paying ........................................................... 5.96% 5.10%
Rate receiving ........................................................ 6.40 5.89
Weighted-average maturity ............................................. 7.4 years 9.0 years
Fair value ............................................................ $ (2,446,000) $ (118,000)
</TABLE>
(1) The index used for the strike price is 3 or 6 month LIBOR.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and generally
require payment of a fee. Since commitments may expire without being drawn upon,
the commitment amounts do not represent future cash requirements. Commitments
are issued subject to similar underwriting standards, including collateral
requirements, as are generally involved in the extension of credit facilities.
Standby letters of credit are written conditional commitments issued to
guarantee the performance of a customer to a third party. The credit risk
involved in such transactions is essentially the same as that involved in
extending loan facilities and, accordingly, standby letters of credit are issued
subject to similar underwriting standards, including collateral requirements, as
are generally involved in the extension of credit facilities.
A-28
<PAGE> 47
NOTE 15 - RELATED PARTY TRANSACTIONS
Certain directors and executive officers of the Company and the Banks,
including companies in which they are officers or have significant ownership,
were loan customers of the Banks during 1999 and 1998.
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:
<TABLE>
<CAPTION>
1999 1998
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Balance at beginning of period ....................................... $ 13,872,000 $ 3,754,000
New loans and advances ............................................ 16,099,000 13,859,000
Repayments ........................................................ (13,142,000) (3,741,000)
------------ ------------
Balance at end of period ............................................. $ 16,829,000 $ 13,872,000
============ ============
</TABLE>
NOTE 16 - OTHER NON-INTEREST EXPENSES
Other non-interest expenses for the years ended December 31 follow:
<TABLE>
<CAPTION>
1999 1998 1997
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Computer processing ........................................ $ 3,356,000 $ 2,912,000 $ 2,411,000
Advertising ................................................ 2,545,000 2,176,000 1,905,000
Communications ............................................. 2,257,000 2,160,000 1,826,000
Amortization of intangible assets .......................... 1,742,000 1,692,000 1,523,000
Supplies ................................................... 1,661,000 1,431,000 1,185,000
FDIC insurance ............................................. 1,392,000 1,410,000 1,536,000
Loan and collection ........................................ 1,348,000 1,554,000 1,146,000
Other ...................................................... 4,825,000 6,189,000 5,845,000
----------- ----------- -----------
Total non-interest expense .......................... $19,126,000 $19,524,000 $17,377,000
=========== =========== ===========
</TABLE>
NOTE 17 - REGULATORY MATTERS
Capital guidelines adopted by Federal and State regulatory agencies and
restrictions imposed by law limit the amount of cash dividends the Banks can pay
to the Company. At December 31, 1999, 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 $43,800,000. 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.
A-29
<PAGE> 48
Actual capital amounts and ratios for the Company and the Banks at December
31, 1999 follow:
<TABLE>
<CAPTION>
Minimum Ratios Minimum Ratios For
For Adequately Well-Capitalized
Actual Capitalized Institutions Institutions
Amount Ratio Amount Ratio Amount Ratio
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total capital to risk-weighted assets
Consolidated ............................... $124,749,000 10.41% $ 95,853,000 8.00% $119,817,000 10.00%
Independent Bank ........................... 30,780,000 10.20 24,124,000 8.00 30,178,000 10.00
Independent Bank West Michigan ............. 24,668,000 10.64 18,552,000 8.00 23,190,000 10.00
Independent Bank South Michigan ............ 14,607,000 10.23 11,424,000 8.00 14,280,000 10.00
Independent Bank East Michigan ............. 22,510,000 10.91 16,506,000 8.00 20,633,000 10.00
Independent Bank MSB ....................... 31,614,000 10.36 24,418,000 8.00 30,522,000 10.00
Tier 1 capital to risk-weighted assets
Consolidated ............................... $111,764,000 9.33% $ 47,927,000 4.00% $ 71,890,000 6.00%
Independent Bank ........................... 27,272,000 9.04 12,071,000 4.00 18,107,000 6.00
Independent Bank West Michigan ............. 21,766,000 9.39 9,276,000 4.00 13,914,000 6.00
Independent Bank South Michigan ............ 12,819,000 8.96 5,712,000 4.00 8,568,000 6.00
Independent Bank East Michigan ............. 20,358,000 9.87 8,253,000 4.00 12,380,000 6.00
Independent Bank MSB ....................... 29,403,000 9.63 12,209,000 4.00 18,313,000 6.00
Tier 1 capital to average assets
Consolidated ............................... $111,764,000 6.56% $ 68,162,000 4.00% $ 85,203,000 5.00%
Independent Bank ........................... 27,272,000 6.78 16,092,000 4.00 20,115,000 5.00
Independent Bank West Michigan ............. 21,766,000 6.97 12,497,000 4.00 15,622,000 5.00
Independent Bank South Michigan ............ 12,819,000 6.98 7,341,000 4.00 9,176,000 5.00
Independent Bank East Michigan ............. 20,358,000 7.04 11,565,000 4.00 14,457,000 5.00
Independent Bank MSB ....................... 29,403,000 5.64 20,846,000 4.00 26,057,000 5.00
</TABLE>
NOTE 18 - FAIR VALUES OF FINANCIAL INSTRUMENTS
Most of the Company's assets and liabilities are considered financial
instruments. Many of these financial instruments lack an available trading
market and it is the Company's general practice and intent to hold the majority
of its financial instruments to maturity. Significant estimates and assumptions
were used to determine the fair value of financial instruments. These estimates
are subjective in nature, involving uncertainties and matters of judgment, and
therefore, fair values cannot be determined with precision. Changes in
assumptions could significantly affect the estimates.
Estimated fair values have been determined using available data and
methodologies that are considered suitable for each category of financial
instrument. For instruments with adjustable-interest rates which reprice
frequently and without significant credit risk, it is presumed that estimated
fair values approximate the recorded book balances.
Financial instrument assets actively traded in a secondary market, such as
securities, have been valued using quoted market prices while recorded book
balances have been used for cash and due from banks.
The fair value of loans is calculated by discounting estimated future cash
flows using estimated market discount rates that reflect credit and
interest-rate risk inherent in the loans.
Financial instruments with a stated maturity, such as certificates of
deposit, have been valued based on the discounted value of contractual cash
flows using a discount rate approximating current market rates for liabilities
with a similar maturity.
Financial instrument liabilities without a stated maturity, such as demand
deposits, savings, NOW and money market accounts, have a fair value equal to the
amount payable on demand.
A-30
<PAGE> 49
The estimated fair values and recorded book balances at December 31 follow:
<TABLE>
<CAPTION>
1999 1998
Estimated Recorded Estimated Recorded
Fair Book Fair Book
Value Balance Value Balance
- ---------------------------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C>
ASSETS
Cash and due from banks ............................. $ 58,600 $ 58,600 $ 53,900 $ 53,900
Securities available for sale ....................... 195,300 195,300 155,600 155,600
Securities held to maturity ......................... 70,500 71,100 161,900 161,300
Net loans and loans held for sale ................... 1,267,000 1,290,600 1,201,500 1,186,300
LIABILITIES
Deposits with no stated maturity .................... $ 703,000 $ 703,000 $ 683,700 $ 683,700
Deposits with stated maturity ....................... 604,200 607,600 575,800 571,800
Other borrowings .................................... 281,200 284,200 274,500 269,100
</TABLE>
The fair values for commitments to extend credit and standby letters of
credit are estimated to approximate their aggregate book balance.
Fair value estimates are made at a specific point in time, based on relevant
market information and information about the financial instrument. These
estimates do not reflect any premium or discount that could result from offering
for sale the entire holdings of a particular financial instrument.
Fair value estimates are based on existing on- and off-balance sheet
financial instruments without attempting to estimate the value of anticipated
future business, the value of future earnings attributable to off-balance sheet
activities and the value of assets and liabilities that are not considered
financial instruments.
Fair value estimates for deposit accounts do not include the value of the
substantial core deposit intangible asset resulting from the low-cost funding
provided by the deposit liabilities compared to the cost of borrowing funds in
the market.
A-31
<PAGE> 50
NOTE 19 - OPERATING SEGMENTS
The Company's reportable segments are based upon legal entities. The Company
has five reportable segments: Independent Bank ("IB"), Independent Bank West
Michigan ("IBWM"), Independent Bank South Michigan ("IBSM"), Independent Bank
East Michigan ("IBEM") and Independent Bank MSB ("IBMSB"). The accounting
policies of the segments are the same as those described in Note 1 to the
Consolidated Financial Statements. The Company evaluates performance based
principally on net income of the respective reportable segments.
A summary of selected financial information for the Company's reportable
segments follows:
<TABLE>
<CAPTION>
IB IBWM IBSM IBEM IBMSB Other(1) Total
- ----------------------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
1999
Total assets ............... $ 410,744 $323,847 $ 196,665 $ 308,733 $ 475,475 $ 9,741 $ 1,725,205
Interest income ............ 29,039 25,958 13,562 20,470 36,456 25 125,510
Net interest income ........ 17,740 16,182 8,203 12,495 14,311 (2,151) 66,780
Provision for loan losses .. 600 540 220 615 686 2,661
Income (loss) before
income tax ............... 6,573 6,069 3,074 3,944 (4,104) (3,594) 11,962
Net income (loss) .......... 4,640 4,198 2,345 3,040 (2,966) (2,588) 8,669
1998
Total assets ............... $ 361,936 $276,385 $ 174,396 $ 268,559 $ 575,635 $ 3,982 $ 1,660,893
Interest income ............ 28,439 24,825 13,764 19,012 39,835 33 125,908
Net interest income ........ 17,022 15,107 8,010 11,428 12,008 (2,334) 61,241
Provision for loan losses .. 940 1,050 340 713 585 3,628
Income (loss) before
income tax ............... 6,363 5,456 3,019 3,276 2,658 (3,767) 17,005
Net income (loss) .......... 4,401 3,814 2,205 2,397 1,728 (2,596) 11,949
1997
Total assets ............... $ 346,765 $231,729 $ 152,694 $ 246,815 $ 657,062 $ 5,814 $ 1,640,879
Interest income ............ 27,184 20,105 12,179 17,920 42,497 26 119,911
Net interest income ........ 15,740 12,286 6,835 10,294 11,254 (2,516) 53,893
Provision for loan losses .. 820 260 265 405 225 1,975
Income (loss) before
income tax ............... 5,988 4,588 2,652 2,907 (9,155) (3,576) 3,404
Net income (loss) .......... 4,129 3,225 1,938 2,102 (7,455) (2,470) 1,469
</TABLE>
(1) Includes items relating to the Company and certain insignificant operations.
NOTE 20 - INDEPENDENT BANK CORPORATION (PARENT COMPANY ONLY) FINANCIAL
INFORMATION
Presented below are condensed financial statements for the parent company.
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF FINANCIAL CONDITION December 31,
1999 1998
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks ..................................................... $ 2,268,000 $ 1,543,000
Investment in subsidiaries .................................................. 137,810,000 140,945,000
Other assets ................................................................ 7,157,000 5,381,000
------------ ------------
Total Assets ............................................................ $147,235,000 $147,869,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Notes payable ............................................................... $ 12,500,000 $ 10,000,000
Subordinated debentures ..................................................... 17,783,000 17,783,000
Other liabilities ........................................................... 3,206,000 3,044,000
Shareholders' equity ........................................................ 113,746,000 117,042,000
------------ ------------
Total Liabilities and Shareholders' Equity .............................. $147,235,000 $147,869,000
============ ============
</TABLE>
A-32
<PAGE> 51
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF OPERATIONS Year Ended December 31,
1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING INCOME
Dividends from subsidiaries .............................................. $ 9,100,000 $ 8,175,000 $ 7,400,000
Management fees from subsidiaries and other income ....................... 10,242,000 8,444,000 6,755,000
------------ ------------ ------------
Total Operating Income ................................................. 19,342,000 16,619,000 14,155,000
------------ ------------ ------------
OPERATING EXPENSES
Interest expense ......................................................... 2,176,000 2,367,000 2,542,000
Administrative and other expenses ........................................ 12,078,000 9,962,000 7,871,000
------------ ------------ ------------
Total Operating Expenses ............................................... 14,254,000 12,329,000 10,413,000
------------ ------------ ------------
Income Before Federal Income Tax and Undistributed Net Income
of Subsidiaries ...................................................... 5,088,000 4,290,000 3,742,000
Federal income tax credit ................................................... 1,209,000 1,289,000 1,188,000
------------ ------------ ------------
Income Before Equity in Undistributed Net Income of Subsidiaries ....... 6,297,000 5,579,000 4,930,000
Equity in undistributed net income of subsidiaries .......................... 2,372,000 6,370,000 (3,461,000)
------------ ------------ ------------
Net Income ........................................................... $ 8,669,000 $ 11,949,000 $ 1,469,000
============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF CASH FLOWS Year Ended December 31,
1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Income ................................................................ $ 8,669,000 $ 11,949,000 $ 1,469,000
------------ ------------ ------------
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 ................... 787,000 540,000 437,000
(Increase) decrease in other assets .................................... 993,000 (559,000) (238,000)
Increase in other liabilities .......................................... 213,000 2,975,000 478,000
Equity in undistributed net income of subsidiaries ..................... (2,372,000) (6,370,000) 3,461,000
------------ ------------ ------------
Total Adjustments .................................................... (379,000) (3,414,000) 4,138,000
------------ ------------ ------------
Net Cash from Operating Activities ................................... 8,290,000 8,535,000 5,607,000
------------ ------------ ------------
CASH FLOW FROM INVESTING ACTIVITIES
Purchase of securities available for sale .............................. (100,000)
Maturity of securities available for sale .............................. 100,000
Capital expenditures ................................................... (2,264,000) (2,264,000) (807,000)
Investment in subsidiaries ............................................. (3,383,000)
------------ ------------ ------------
Net Cash from Investing Activities ................................... (2,164,000) (5,747,000) (807,000)
------------ ------------ ------------
CASH FLOW FROM FINANCING ACTIVITIES
Proceeds from short-term borrowings .................................... 4,500,000
Retirement of long-term debt ........................................... (2,000,000) (2,000,000) (2,000,000)
Dividends paid ......................................................... (4,587,000) (3,587,000) (3,186,000)
Repurchase of common stock ............................................. (4,331,000)
Proceeds from issuance of common stock ................................. 1,017,000 948,000 806,000
------------ ------------ ------------
Net Cash from Financing Activities ................................... (5,401,000) (4,639,000) (4,380,000)
------------ ------------ ------------
Net Increase (Decrease) in Cash and Cash Equivalents ................. 725,000 (1,851,000) 420,000
Cash and Cash Equivalents at Beginning of Period .......................... 1,543,000 3,394,000 2,974,000
------------ ------------ ------------
Cash and Cash Equivalents at End of Period ......................... $ 2,268,000 $ 1,543,000 $ 3,394,000
============ ============ ============
</TABLE>
A-33
<PAGE> 52
QUARTERLY SUMMARY
<TABLE>
<CAPTION>
Reported Sale Prices of Common Shares Cash Dividends
1999 1998 Declared
----------------------------------------------------------------
High Low Close High Low Close 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
First quarter .................. $ 20.11 $ 14.76 $ 15.18 $ 26.91 $ 22.83 $ 23.58 $ .09 $ .08
Second quarter ................. 16.61 13.75 16.55 28.73 22.38 26.60 .09 .08
Third quarter .................. 17.14 14.05 14.58 26.53 18.82 20.07 .13 .08
Fourth quarter ................. 17.31 12.75 14.63 23.33 17.14 19.29 .14 .09
</TABLE>
The Company has approximately 2,400 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 17 to the Consolidated Financial Statements.)
QUARTERLY FINANCIAL DATA (UNAUDITED)
A summary of selected quarterly results of operations for the years ended
December 31 follows:
<TABLE>
<CAPTION>
Three Months Ended
March June September December
31, 30, 30, 31,
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1999
Interest income ...................................... $ 30,779,000 $ 30,894,000 $ 31,764,000 $ 32,073,000
Net interest income .................................. 16,176,000 16,552,000 17,139,000 16,913,000
Non-recurring charges ................................ 6,743,000 1,257,000
Provision for loan losses ............................ 666,000 655,000 645,000 695,000
Income (loss) before income tax expense (benefit) .... 4,667,000 4,978,000 (1,564,000) 3,881,000
Net income (loss) .................................... 3,271,000 3,501,000 (1,179,000) 3,076,000
Income (loss) per share
Basic .............................................. $ .29 $ .30 $ (.10) $ .27
Diluted ............................................ .28 .30 (.10) .27
1998
Interest income ...................................... $ 31,197,000 $ 31,672,000 $ 31,635,000 $ 31,404,000
Net interest income .................................. 14,675,000 15,201,000 15,476,000 15,889,000
Provision for loan losses ............................ 743,000 790,000 1,035,000 1,060,000
Income before income tax expense ..................... 3,967,000 4,167,000 4,275,000 4,596,000
Net income ........................................... 2,786,000 2,923,000 3,019,000 3,221,000
Income per share
Basic .............................................. $ .25 $ .26 $ .27 $ .28
Diluted ............................................ .25 .26 .26 .28
</TABLE>
A-34
<PAGE> 53
SHAREHOLDER INFORMATION
HOW TO ORDER FORM 10-K
Shareholders may obtain, without charge, a copy of Form 10-K, the 1999
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
as well as other financial information, are available on the Company's website
at www.ibcp.com.
NOTICE OF ANNUAL MEETING
The Company's Annual Meeting of Shareholders will be held at 3:00 p.m. on
April 18, 2000, 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 Limited Partnership, P.O.
Box 8200, Boston, Massachusetts 02266-8200, #800/426-5523, www.equiserve.com)
serves as transfer agent and registrar of the Company's common stock.
DIVIDEND REINVESTMENT
The Company maintains an Automatic Dividend Reinvestment and Stock Purchase
Plan which provides an opportunity for shareholders of record to reinvest cash
dividends into the Company's common stock. Optional cash purchases up to $5,000
per quarter are also permitted. A prospectus is available by writing to the
Company's Chief Financial Officer.
EXECUTIVE OFFICERS AND DIRECTORS
EXECUTIVE OFFICERS
Charles C. Van Loan, President and Chief Executive Officer, Independent Bank
Corporation
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
Robert N. Shuster, President and Chief Executive Officer, Independent Bank
MSB
Edward B. Swanson, President and Chief Executive Officer, Independent Bank
South Michigan
William R. Kohls, Executive Vice President and Chief Financial Officer,
Independent Bank Corporation
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-35
<PAGE> 54
INDEPENDENT BANK CORPORATION
EMPLOYEE STOCK OPTION PLAN
(AS AMENDED THROUGH NOVEMBER 16, 1999)
1. Name and Purpose. This plan shall be called the Independent Bank
Corporation Employee Stock Option Plan (the "Plan"). The Plan is intended to
encourage stock ownership by certain key employees of Independent Bank
Corporation (the "Company") and of its subsidiaries, and to provide them with
additional incentive to contribute to the success of the Company and to
encourage them to remain in the Company's employ. The term "Company" when used
in the Plan with reference to employment shall include subsidiaries of the
Company.
2. Effective Date and Term of Plan. The effective date of the Plan
shall be April 21, 1992, subject to approval by vote of the shareholders of the
Company at the 1992 annual meeting of shareholders. Any option granted prior to
the approval of the Plan by shareholders of the Company, but after approval of
the Plan by the Board of Directors of the Company, shall be expressly made
subject to the approval of the Plan by the shareholders. Options may not be
granted under the Plan after April 21, 2002; provided, however, that all options
outstanding as of that date shall remain or become exercisable pursuant to their
terms and the terms of the Plan.
3. Administration. The Plan shall be administered by a committee of the
Company's Board of Directors (the "Committee"). The Committee shall consist of
not less than two (2) members of the Company's Board of Directors, each of whom
must be a "Nonemployee Director" as defined in Rule 16b-3(b)(3) of the
Securities Exchange Act of 1934, or any successor definition adopted by the
Securities and Exchange Commission. The Board of Directors may from time to time
remove members from, or add members to, the Committee. Vacancies on the
Committee, however caused, shall be filled by the Board of Directors.
The Committee may establish, from time to time, such regulations,
provisions and procedures, within the terms of the Plan, as in the opinion of
its members may be advisable in the administration of the Plan. The Committee
shall keep minutes of its meetings. A majority of the Committee shall constitute
a quorum, and the acts of a majority of a quorum at any meeting, or acts reduced
to or approved in writing by a majority of the members of the Committee, shall
be the valid acts of the Committee.
The Committee shall from time to time, at its discretion, determine the
key employees of the Company to whom options are to be granted and the number of
shares subject to each such option. The Committee shall also from time to time,
at its discretion, determine such other matters with respect to all options as
may be specified in the Plan.
The interpretation and construction by the Committee of any provisions
of the Plan or of any option granted under it shall be final and binding upon
the Company, the Board of Directors and optionees. No member of the Board of
Directors or the Committee shall be liable for any action or determination made
in good faith with respect to the Plan or any option granted under it.
4. Eligibility. Subject to the limitations contained in this paragraph,
the persons who shall be eligible to receive options to acquire shares of the
Company's common stock, par value $1.00 per share ("Common Stock"), shall be
such key employees (including employee officers, whether or not they are
directors) of the Company as the Committee shall select from time to time. In
making such selections, the
-1-
<PAGE> 55
Committee shall consider the nature of the services rendered by the respective
employees, their present and potential contributions to the Company's success
and such other factors as the Committee in its discretion shall deem relevant.
An optionee may hold more than one option, but only on the terms and subject to
the restrictions set forth in this Plan. Subject to adjustments consistent with
the provisions of Paragraph 6(h), no employee may be granted options covering
more than a total of ten percent (10%) of the Common Stock originally reserved
for issuance under this Plan, as defined in Paragraph 5 hereof, plus such
increases therein as may from time to time be approved by the Company's
shareholders.
5. Stock Available for Options. Subject to adjustments as provided in
Paragraph 6(h), the aggregate number of shares reserved for issuance pursuant to
this Plan shall be 1,100,000 shares of the Company's Common Stock (the
"Shares"). If any outstanding option under the Plan for any reason expires or is
terminated before April 1, 2002, the Shares allocable to the unexercised portion
of such option may again be subject to options under the Plan. Shares tendered
to the Company under Paragraph 6(d) or Paragraph 12, as payment for Shares or
withholding taxes shall not be subject to subsequent option grants under the
Plan. Any options granted under the Plan as a result of the conversion of former
options to acquire shares of common stock of Mutual Savings Bank, f.s.b.
("MSB"), pursuant to the Agreement and Plan of Reorganization dated March 24,
1999, between the Company and MSB are referred to as "Converted MSB Options."
6. Terms and Conditions of Options. Stock options granted pursuant to
the Plan shall be authorized by the Committee. The date on which an option shall
be granted shall be the date of the Committee's authorization of the option or
such later date as shall be determined by the Committee at the time the option
is authorized. Options granted pursuant to the Plan may be incentive stock
options ("ISOs") as defined and to the extent permitted by Section 422 of the
Internal Revenue Code of 1986, as amended (the "Code"), or non-ISO's, as
identified by the Committee. Options granted under this Plan shall be evidenced
by agreements in such form as the Committee shall, from time to time, approve,
which agreements shall comply with and be subject to the following terms and
conditions:
(a) Optionee's Agreement. Each Optionee shall agree to remain
in the continuous employ of the Company for a period of at least twelve
(12) months from the date of grant of the option or until retirement at
or after age 58, if such retirement occurs prior to 12 months from the
date of the option; provided, however, that the foregoing requirement
shall not apply to holders of Converted MSB Options with respect to
their Converted MSB Options. Such agreement shall not impose upon the
Company any obligation to retain the optionee in its employ for any
period.
(b) Number and Maximum Value of Shares. Each option shall
state the number of Shares to which it pertains. With respect to ISOs
granted under the Plan, the aggregate Fair Market Value (determined at
the time the ISO is granted) of the Shares with respect to which ISOs
are exercisable for the first time by any employee during any calendar
year (under this Plan or any other stock option plan of the Company or
of any "parent or subsidiary corporation" [as defined in Subsections
424(e)(f) and (g) of the Code] of the Company) shall not exceed
$100,000.
(c) Option Price. Each option shall state the per share
purchase price at which a Share may be purchased, which shall be one
hundred percent (100%) of the Fair Market Value of a share of Common
Stock on the date of the grant of the option; provided, however, if an
employee owns shares representing more than ten percent (10%) of the
Company's outstanding Common Stock at the time an ISO is granted, the
option price under the ISO granted to such an employee shall be one
hundred ten percent (110%) of the Fair Market Value of the shares on
the date the option is granted. If shares of Common Stock are listed
upon an established stock exchange or exchanges, Fair Market
-2-
<PAGE> 56
Value shall be deemed to be the closing price of the stock on such
stock exchange or exchanges on such day or if no sale shall have been
made on any stock exchange on that day, on the next preceding day on
which there was a sale. If shares of Common Stock are not listed upon
an established stock exchange but are traded in the over-the-counter
market, the Fair Market Value shall be the closing price on the
national market list as quoted in the National Association of
Securities Dealers Automated Quotation System ("Nasdaq") on such day or
if no sale is reflected in Nasdaq on that day, on the next preceding
day on which there was a sale of shares reflected in Nasdaq. The
Committee in fixing the option price shall have full authority and
discretion and be fully protected in doing so.
(d) Medium of Payment. The aggregate option price shall be
payable to the Company either: (i) in United States dollars in cash or
by check, bank draft or money order payable to the order of the
Company; (ii) through the delivery of shares of Common Stock with a
Fair Market Value on the date of the exercise equal to the aggregate
option price; (iii) through the reduction in the number of shares
issuable upon exercise (based on the Fair Market Value of the Common
Stock on the date of exercise); or (iv) by a combination of (i), (ii),
and (iii).
(e) Term and Exercise of Options. The term of each option
granted under the Plan shall be as determined by the Committee;
provided, however, that the term of any option granted under the Plan
shall not exceed ten (10) years from the date the option is granted. No
option shall be exercisable either in whole or in part prior to the
first anniversary of the date of grant of the option; provided,
however, that the Converted MSB Options shall be fully vested and
exercisable as of the effective date of the consolidation of MSB with
and into Independent Bank MSB. Thereafter, an option may be exercised
at any time or from time to time during the term of the option upon
written notice of the optionee's intention to exercise the option to
the Company as to any or all Shares covered by the option until its
termination or expiration. Notwithstanding the foregoing, an option
shall not be exercisable with respect to less than 100 Shares unless
the remaining Shares covered by an option are fewer than 100 Shares.
The purchase price of the Shares shall be paid in full upon delivery to
the optionee of certificates for the Shares. Except as provided in
Paragraph 6(g), an option may be exercised by an optionee only while
the optionee is employed by the Company. Notwithstanding the foregoing,
the Committee, in its sole discretion, shall have the right (but shall
not in any case be obligated) to permit any Converted MSB Option to be
exercised after its expiration date described in Paragraph 6(g),
subject, however, to the limitations described in Paragraph 6(e).
(f) Transferability of Options. No Option may be sold,
transferred, pledged, assigned, or otherwise alienated or hypothecated,
other than by will or by the laws of descent and distribution,
provided, however, the Committee may, in its discretion, authorize all
or a portion of a non-ISO to be granted to an optionee to be on terms
which permit transfer by such optionee to a Permitted Transferee,
provided that (i) there may be no consideration for any such transfer
(other than the receipt of or interest in a family partnership or
limited liability company), (ii) the stock option agreement pursuant to
which such options are granted must be approved by the Committee, and
must expressly provide for transferability in a manner consistent with
this Paragraph 6(f), and (iii) subsequent transfers of transferred
options shall be prohibited except those in accordance with Paragraph
6(g). Following transfer, any such options shall continue to be subject
to the same terms and conditions as were applicable immediately prior
to transfer. The events of termination of service of Paragraph 6(g)
hereof, and the tax withholding obligations of Paragraph 12 shall
continue to be applied with respect to the original optionee, following
which the options shall be exercisable by the Permitted Transferee only
to the extent, and for the periods specified in Paragraph 6(g). The
Company shall not be obligated to notify Permitted Transferee(s) of the
expiration or termination
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<PAGE> 57
of any option. Further, all Options shall be exercisable during the
Participant's lifetime only by such Participant and, in the case of a
non-ISO, by a Permitted Transferee. The designation of a person
entitled to exercise an Option after a person's death will not be
deemed a transfer. "Permitted Transferee" means (i) the spouse,
children or grandchildren of a Participant (each an "Immediate Family
Member"), (ii) a trust or trusts for the exclusive benefit of such
Immediate Family Member, or (iii) a partnership or limited liability
company whose only partners or members are Immediate Family Members.
(g) Termination of Employment. Any option that is not
exercised within whichever of the exercise periods specified in this
Paragraph 6(g) is applicable shall terminate as of the last day of that
exercise period. Subject to the prior expiration of an option and any
other limitation on the exercise of options under the terms of the
Plan, options shall be exercised during the following periods as a
result of termination of employment for the following respective
reasons:
(i) Termination of Employment for Reasons Other Than
Retirement, Disability or Death. In the event an optionee
shall cease to be employed by the Company for any reason other
than retirement or on account of disability or death, each
option held by the optionee or Permitted Transferee shall, to
the extent rights to purchase Shares under such option have
accrued at the date of such termination and shall not have
been fully exercised, be exercisable, in whole or in part, at
any time within a period of three (3) months following
cessation of the optionee's employment.
(ii) Termination of Employment for Retirement or
Disability. In the event an optionee ceases to be employed by
the Company by reason of retirement or on account of
disability, each option held by such optionee or Permitted
Transferee shall, to the extent rights to purchase Shares
under the option have accrued at the date of such retirement
and shall not have been fully exercised, remain exercisable in
whole or in part, during the term of options held by Optionee;
provided, however, that Converted MSB Options shall remain
exercisable in whole or in part, during the longer of (a) the
term of such options or (b) two years following the date of
termination of employment by reason of retirement or on
account of disability.
(iii) Termination of Employment for Death. In the
event of an optionee's death, each option held by such
optionee or Permitted Transferee shall, to the extent rights
to purchase Shares under the options have accrued at the date
of death and shall not have been fully exercised, be
exercisable, in whole or in part, by the personal
representative of the optionee's estate, by any person or
persons who shall have acquired the option directly from the
optionee by bequest or inheritance or Permitted Transferee at
any time (a) with respect to Converted MSB Options, within two
(2) years after the optionee's death, or (b) for all other
options, within one (1) year after the optionee's death.
(h) Adjustment in Shares Covered by Option. The number of
Shares covered by each outstanding option and the price per Share shall
be proportionately adjusted for any increase or decrease in the number
of issued shares of Common Stock resulting from a combination of shares
or the payment of a stock dividend on the shares or any other increase
or decrease in the number of such shares effected without receipt of
consideration by the Company.
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<PAGE> 58
If the Company shall be the surviving corporation in any
merger or consolidation or if the Company is merged into a wholly owned
subsidiary solely for purposes of changing the Company's state of
incorporation, each outstanding option shall pertain to and apply to
the securities to which a holder of the number of shares of stock
subject to the option would have been entitled. A dissolution or
liquidation of the Company or a merger or consolidation in which the
Company is not the surviving corporation, except as above provided,
shall cause each outstanding option to terminate, provided, that each
optionee or Permitted Transferee shall, in such event, have the right
immediately prior to such dissolution or liquidation, or merger or
consolidation in which the Company is not the surviving corporation, to
exercise his or her option in whole or in part. To the extent that the
foregoing adjustments relate to stock or securities of the Company,
such adjustments shall be made by the Committee, whose determination in
that respect shall be final, binding and conclusive. Any such
adjustment may provide for the elimination of any fractional share
which might otherwise become subject to an option.
Except as provided in this Paragraph 6(h), an optionee or
Permitted Transferee shall have no rights by reason of: (i) any
subdivision or combination of shares of stock of any class; (ii) the
payment of any stock dividend or any other increase or decrease in the
number of shares of stock of any class; or (iii) any dissolution,
liquidation, merger or consolidation or spinoff of assets or stock of
another corporation. In addition, except as provided in this Paragraph
6(h), any issue by the Company of shares of stock of any class, or
securities convertible into shares of stock of any class, shall not
affect the number or price of Shares of stock subject to an option. The
grant of an option pursuant to the Plan shall not affect in any way the
right or power of the Company to make adjustments, reclassifications,
reorganizations or changes of its capital or business structure or to
merge or to consolidate or to dissolve, liquidate or sell, or transfer
all or any part of its business or assets.
(i) Rights of a Shareholder. An optionee or Permitted
Transferee shall have no rights as a shareholder with respect to any
Shares covered by his or her option until the date he or she becomes
the holder of record of such Shares. No adjustment shall be made for
dividends, distributions or other rights for which the record date is
prior to the date on which he or she shall have become the holder of
record thereof, except as provided in Paragraph 6(h) hereof.
(j) Modification, Extension and Renewal of Options. Subject to
the terms and conditions and within the limitations of the Plan, the
Committee, subject to approval of the Board of Directors, may modify or
renew outstanding options granted under the Plan, or accept the
surrender of outstanding options (to the extent not theretofore
exercised) and authorize the granting of new options in substitution
therefor (to the extent not theretofore exercised). Notwithstanding the
foregoing, no modification of an option shall, without the consent of
the optionee or Permitted Transferee, alter or impair any rights or
obligations under any option theretofore granted under the Plan.
(k) Postponement of Delivery of Shares and Representations.
The Company, in its discretion, may postpone the issuance and/or
delivery of Shares upon any exercise of an option until completion of
such stock exchange listing, or registration, or other qualification of
such Shares under any state and/or federal law, rule or regulation as
the Company may consider appropriate, and may require any person
exercising an option to make such representations, including a
representation that it is the optionee's or Permitted Transferee's
intention to acquire Shares for investment and not with a view to
distribution thereof, and furnish such information as it may consider
appropriate in connection with the issuance or delivery of the Shares
in compliance with applicable laws, rules and
-5-
<PAGE> 59
regulations. In such event, no Shares shall be issued to such holder
unless and until the Company is satisfied with the correctness of any
such representations.
(l) Other Provisions. The option agreements authorized under
the Plan shall contain such other provisions, including, without
limitation, restrictions upon the exercise of the option, as the
Committee and the Board of Directors shall deem advisable.
(m) Reload Options. The Plan authorizes the Committee to
include reload options under the terms of options granted under the
Plan. A reload option is an option that is automatically granted to an
optionee if the optionee exercises the underlying option by means of
delivering shares of previously owned common stock. More specifically,
a reload option entitles an optionee to purchase a number of shares of
common stock of the Company equal to the number of shares delivered on
exercise of the option plus the number of shares delivered to satisfy
any withholding tax liability incurred upon exercise of the option. The
exercise price of the reload option is required to equal 100 percent of
the per market value of the common stock on the date of grant of the
reload option, and the term of the reload option may not exceed the
remaining term of the underlying option. In addition, the plan provides
that reload options may not be exercised until shares acquired upon
exercise of the underlying option are held for a period of at least one
year. The Committee has the authority to limit the grant of reload
options to certain times of the year.
7. Adjustments in Shares Available for Options. The adjustments in
number and kind of Shares and the substitution of Shares, affecting outstanding
options in accordance with Paragraph 6(h), shall also apply to the number and
kind of Shares reserved for issuance pursuant to the Plan but not yet covered by
options.
8. Amendment of the Plan. The Board of Directors of the Company,
insofar as permitted by law, shall have the right from time to time, with
respect to any Shares at the time not subject to options, to suspend or
discontinue the Plan or revise or amend it in any respect whatsoever except
that, without approval of the shareholders of the Company, no such revision or
amendment shall increase the maximum number of Shares which may be subject to
the Plan, increase the maximum number of Shares which may be optioned to any one
employee, change the designation of the class of employees eligible to receive
options, materially increase the benefits accruing to option holders under the
Plan, decrease the price at which options may be granted, remove the
administration of the Plan from the Committee, or permit the granting of options
under the Plan after April 21, 2002.
9. Application of Funds. The proceeds received by the Company from the
sale of Shares pursuant to options will be used for general corporate purposes.
10. No Obligation to Exercise Option. The granting of an option shall
impose no obligation upon the optionee to exercise such option.
11. Tax Withholding. The exercise of any option under the Plan is
subject to the satisfaction of withholding tax or other withholding liabilities,
if any, under federal, state and local laws in connection with such exercise.
The exercise of an option shall not be effective unless applicable withholding
shall have been effected or obtained in the following manner or in any manner
acceptable to the Committee. Unless otherwise prohibited by the Committee, each
optionee may satisfy any such withholding tax obligation by any of the following
means or by a combination of such means:
(a) Tendering a cash payment;
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<PAGE> 60
(b) Authorizing the Company to withhold from the Shares
otherwise issuable to the optionee as a result of the exercise of a
stock option a number of Shares having a Fair Market Value as of the
date that the amount of tax to be withheld is to be determined ("Tax
Date"), which shall be the date of exercise of the option, less than or
equal to the amount of the withholding tax obligation; or
(c) Delivering to the Company unencumbered shares, owned by
the optionee prior to the date of exercise, having a Fair Market Value,
as of the Tax Date, less than or equal to the amount of the withholding
tax obligation.
12. Construction. This Plan shall be construed under the laws of the
State of Michigan.
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<PAGE> 61
<TABLE>
<S><C>
INDEPENDENT BANK CORPORATION
230 WEST MAIN STREET, IONIA, MICHIGAN
PROXY SOLICITED BY THE BOARD OF DIRECTORS FOR THE
ANNUAL MEETING OF SHAREHOLDERS TO BE HELD APRIL 18, 2000
The undersigned hereby appoints Charles C. Van Loan and William R. Kohls and each of them, Proxies, with power of substitution, to
vote all shares of common stock of Independent Bank Corporation, which the undersigned is entitled to vote at the Annual Meeting of
Shareholders to be held at the Ionia Theater, located at 205 West Main Street, Ionia, Michigan 48846 on Tuesday, April 18, 2000 at
3:00 p.m. (local time), and at all adjournments thereof, as directed on the reverse side.
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED HEREIN BY THE UNDERSIGNED SHAREHOLDER(S). IF NO DIRECTION
IS MADE, THIS PROXY WILL BE VOTED "FOR" THE NOMINEES AS DIRECTORS AND FOR PROPOSALS 3, 4 AND 5.
- ------------------------------------------------------------------------------------------------------------------------------------
PLEASE VOTE, DATE AND SIGN ON REVERSE AND RETURN PROMPTLY IN THE ENCLOSED ENVELOPE.
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Please sign this Proxy exactly as your name(s) appear(s) hereon. Joint owners should each sign personally. Trustees and other
fiduciaries should indicate the capacity in which they sign, and where more than one name appears, a majority must sign. If a
corporation, this signature should be that of an authorized officer who should state his or her title.
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HAS YOUR ADDRESS CHANGED? DO YOU HAVE ANY COMMENTS?
- -------------------------------------------------------- ---------------------------------------------------------------
- -------------------------------------------------------- ---------------------------------------------------------------
- -------------------------------------------------------- ---------------------------------------------------------------
DETACH CARD DETACH CARD
INDEPENDENT BANK CORPORATION
Dear Shareholder,
Please take note of the important information enclosed with this Proxy. Your vote counts, and you are strongly encouraged to
exercise your right to vote your shares.
Mark the boxes on this proxy card to indicate how your shares will be voted. Then sign the card, detach it and return your proxy
vote in the enclosed postage paid envelope. If you wish to register your vote by touch-tone telephone or the internet see the
reverse side for instructions.
Your vote must be received prior to the Annual Meeting of Shareholders to be held April 18, 2000.
Thank you in advance for your prompt consideration of these matters.
Sincerely,
The Board of Directors
INDEPENDENT BANK CORPORATION
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<PAGE> 62
<TABLE>
<S><C>
/X/ PLEASE MARK VOTES
AS IN THIS EXAMPLE
1. Election of Directors
______________________________________ a. Election of one Director for term expiring in 2001. For All With- For All
INDEPENDENT BANK CORPORATION Nominees hold Except
______________________________________
(01) Jeffrey A. Bratsburg / / / / / /
Mark box at right if an address change or
comment has been noted on the reverse side / / b. Election of three Directors for terms expiring in 2003.
of this card.
(02) Robert L. Hetzler
CONTROL NUMBER: (03) Robert J. Leppink
RECORD DATE SHARES: (04) Arch V. Wright, Jr.
NOTE: If you do not wish to vote "For" a particular nominee, mark
the "For All Except" box and strike a line through the name(s) of the
nominee(s). Your shares will be voted for the remaining nominee(s).
For Against Abstain
2. To amend the articles of incorporation to increase
authorized Common Stock to 30 million shares. / / / / / /
3. To amend the articles of incorporation to eliminate
the requirement that certain business combinations be / / / / / /
approved by 75% of the outstanding shares of Common
Stock.
Please be sure to sign
and date this Proxy. Date |
______________________________________________|
| 4. To make an additional 516,000 shares of Common Stock / / / / / /
| available under the Employee Stock Option Plan.
|
| 5. To transact such other business that may properly come before the meeting
Shareholder sign here Co-owner sign here| or at any adjournments thereof.
______________________________________________|
VOTE BY TELEPHONE VOTE BY INTERNET
It's fast, convenient, and immediate! It's fast, convenient, and your vote is immediately
Call Toll-Free on a Touch-Tone Phone confirmed and posted.
FOLLOW THESE FOUR EASY STEPS: FOLLOW THESE FOUR EASY STEPS:
1. READ THE ACCOMPANYING PROXY STATEMENT/ 1. READ THE ACCOMPANYING PROXY STATEMENT/PROSPECTUS AND
PROSPECTUS AND PROXY CARD. PROXY CARD.
2. CALL THE TOLL-FREE NUMBER 2. GO TO THE WEBSITE
1-877-PRX-VOTE (1-877-779-8683). FOR HTTP://WWW.EPROXYVOTE.COM/IBCP
SHAREHOLDERS RESIDING OUTSIDE THE UNITED
STATES CALL COLLECT ON A TOUCH-TONE PHONE 3. ENTER YOUR CONTROL NUMBER LOCATED ON YOUR PROXY CARD.
1-201-536-8073.
THERE IS NO CHARGE FOR THIS CALL. 4. FOLLOW THE INSTRUCTIONS PROVIDED.
3. ENTER YOUR CONTROL NUMBER LOCATED ON YOUR
PROXY CARD.
4. FOLLOW THE RECORDED INSTRUCTIONS.
YOUR VOTE IS IMPORTANT! YOUR VOTE IS IMPORTANT!
Call 1-877-PRX-VOTE anytime! Go to http://www.eproxyvote.com/ibcp anytime!
DO NOT RETURN YOUR PROXY CARD IF YOU ARE VOTING BY TELEPHONE OR INTERNET
</TABLE>
