<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
/X/ Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 for the fiscal year ended December 31, 1999 or
/ / Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from to
Commission file Number 0-7818
INDEPENDENT BANK CORPORATION
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(Exact name of Registrant as specified in its charter)
MICHIGAN 38-2032782
- --------------------------------------------- -------------------------
(State or other jurisdiction of incorporation) (I.R.S. employer
identification no.)
230 W. Main St., P.O. Box 491, Ionia, Michigan 48846
- ---------------------------------------------- ---------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (616) 527-9450
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $1.00 Par Value
-----------------------------
(Title of class)
9.25% Cumulative Trust Preferred Securities, $25.00 Liquidation Amount
----------------------------------------------------------------------
(Title of class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
State the aggregate market value of the voting stock held by non-affiliates of
the Registrant. (For this purpose only, the affiliates of the Registrant have
been assumed to be the executive officers and directors of the Registrant and
their associates.)
Common Stock, $1.00 Par Value - $105,274,448
--------------------------------------------
(Based on $10.88 per common share, the last reported sales price on The Nasdaq
Stock Market on March 14, 2000. Reference is made to Part II, Item 5 for further
information).
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date.
Common stock, $1.00 par value - 11,196,482 shares at March 14, 2000
Documents incorporated by reference
Portions of the Registrant's definitive proxy statement, and appendix thereto
dated March 15, 2000, relating to its
April 18, 2000 Annual Meeting of Shareholders are incorporated by reference into
Part I, Part II and Part III of this form.
The Exhibit Index appears on Page 24
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Included or incorporated by reference in this Form 10-K are certain
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. Such forward-looking statements are based upon the beliefs of the
Registrant's management as well as on assumptions made by and information
currently available to the Registrant at the time such statements were made.
Actual results could differ materially from those included in such
forward-looking statements as a result of, among other things, the factors
included in or incorporated by reference in this Report, general and certain
economic and business factors, which may be beyond the control of the
Registrant. Investors are cautioned that all forward-looking statements involve
risks and uncertainty.
PART I
ITEM 1. BUSINESS
Independent Bank Corporation (the "Registrant") was incorporated under the laws
of the State of Michigan on September 17, 1973, for the purpose of becoming a
bank holding company. The Registrant is registered under the Bank Holding
Company Act of 1956, as amended, and owns the outstanding stock of five banks
(the "Banks") which are all organized under the laws of the State of Michigan.
Aside from the stock of the Banks, the Registrant has no other substantial
assets. The Registrant conducts no business except for the provision of certain
management and operational services to the Banks, the collection of fees and
dividends from the Banks and the payment of dividends to the Registrant's
shareholders. Certain employee retirement plans (including employee stock
ownership and deferred compensation plans) as well as health and other insurance
programs have been established by the Registrant. The proportional costs of
these plans are borne by each of the Banks and their respective subsidiaries.
The Registrant and the Banks have no material patents, trademarks, licenses or
franchises except the corporate franchises of the Banks which permit them to
engage in commercial banking pursuant to Michigan law.
The following table shows each of the Banks and their total loans and deposits
as of December 31, 1999:
<TABLE>
<CAPTION>
Main
Office Total Total
Bank Location Deposits Loans
---- -------- -------- -----
<S> <C> <C> <C>
Independent Bank Ionia $329,150,000 $287,801,000
Independent Bank
West Michigan Rockford 259,744,000 273,733,000
Independent Bank
South Michigan Leslie 157,362,000 148,090,000
Independent Bank
East Michigan Caro 262,130,000 215,202,000
Independent Bank MSB Bay City 304,184,000 378,765,000
</TABLE>
Independent Bank (formerly First Security Bank) affiliated with the Registrant
on June 1, 1974. Independent Bank consolidated with North Bank, the sole banking
subsidiary of North Bank Corporation which was acquired by the Registrant
effective May 31, 1996.
Independent Bank West Michigan is the result of a merger in 1985 of the First
State Bank of Newaygo (acquired December 16, 1974), the Western State Bank,
Howard City (acquired February 7, 1977), and the Bank of Rockford (organized by
the Registrant as a new bank on August 18, 1975).
Independent Bank South Michigan is the result of a merger in 1985 of the Peoples
Bank of Leslie (acquired February 16, 1981) and the Olivet State Bank (acquired
on October 16, 1979).
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ITEM 1. BUSINESS (Continued)
Independent Bank East Michigan is the result of the consolidation of the former
American Home Bank (acquired October 8, 1993), Pioneer Bank (acquired October
15, 1993) and The Kingston State Bank (acquired March 7, 1994). On December 13,
1996 Independent Bank East Michigan purchased eight offices from First of
America Bank--Michigan N.A..
Independent Bank MSB (formerly Mutual Savings Bank, f.s.b.) affiliated with the
Registrant on September 15, 1999.
On November 7, 1996, the Registrant formed IBC Capital Finance, a Delaware
statutory business trust ("IBC Capital"). IBC Capital's business and affairs are
conducted by its property trustee, a Delaware trustee, and three individual
administrative trustees who are employees or officers of or affiliated with the
Registrant. IBC Capital exists for the sole purposes of selling and issuing its
preferred and common securities, using the proceeds from the sale of those
securities to acquire subordinated debentures issued by the Registrant and
certain related services. As a result, the sole assets of IBC Capital are the
subordinated debentures of the Registrant.
The Banks transact business in the single industry segment of commercial
banking. Most of the Banks' offices provide full-service lobby and drive-in
services in the communities which they serve. Automatic teller machines are also
provided at most locations.
The Banks' activities cover all phases of commercial banking, including checking
and savings accounts, commercial and agricultural lending, direct and indirect
consumer financing, mortgage lending and deposit box services. The Banks'
mortgage lending activities are primarily conducted through separate mortgage
bank subsidiaries formed during 1998. The Banks also offer title insurance
services through a separate subsidiary. The Banks do not offer trust services.
The principal markets are the rural and suburban communities across lower
Michigan that are served by the Banks' branch networks. The local economies of
the communities served by the Banks are relatively stable and reasonably
diversified. The Banks serve their markets through their five main offices and a
total of 77 branch and 8 loan production offices.
The Banks compete with other commercial banks, savings and loan associations,
credit unions, mortgage banking companies, securities brokerage companies,
insurance companies, and money market mutual funds. Many of these competitors
have substantially greater resources than the Registrant and the Banks and offer
certain services that the Registrant and Banks do not currently provide. Such
competitors may also have greater lending limits than the Banks. The number of
competitors may increase as a result of the easing of restrictions on interstate
banking effected under the Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994 (the "Riegle-Neal Act"). In addition, non-bank
competitors are generally not subject to the extensive regulations applicable to
the Registrant and the Banks.
Price (the interest charged on loans and/or paid on deposits) remains a
principal means of competition within the financial services industry. The Banks
also compete on the basis of service and convenience, utilizing the strengths
and benefits of the Registrant's decentralized structure to providing financial
services.
The principal sources of revenue, on a consolidated basis, are interest and fees
on loans, other interest income and non-interest income. The sources of income
for the three most recent years are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Interest and fees on loans 74.7% 70.5% 67.1%
Other interest income 13.1 16.3 23.6
Non-interest income 12.2 13.2 9.3
----- ----- -----
100.0% 100.0% 100.0%
===== ===== =====
</TABLE>
As of December 31, 1999, the Registrant and the Banks had 766 full-time
employees and 259 part-time employees.
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ITEM 1. BUSINESS (Continued)
Supervision and Regulation
The following is a summary of certain statutes and regulations affecting the
Registrant and the Banks. This summary is qualified in its entirety by reference
to the particular statutes and regulations. A change in applicable laws or
regulations may have a material effect on the Registrant, the Banks and the
businesses of the Registrant and the Banks.
General
Financial institutions and their holding companies are extensively regulated
under Federal and state law. Consequently, the growth and earnings performance
of the Registrant and the Banks can be affected not only by management decisions
and general and local economic conditions, but also by the statutes administered
by, and the regulations and policies of, various governmental regulatory
authorities. Those authorities include, but are not limited to, the Board of
Governors of the Federal Reserve System (the "Federal Reserve"), the Federal
Deposit Insurance Corporation (the "FDIC"), the Commissioner of the Michigan
Financial Institutions Bureau ("Commissioner"), the Internal Revenue Service,
and state taxing authorities. The effect of such statutes, regulations and
policies and any changes thereto can be significant and cannot be predicted.
Federal and state laws and regulations generally applicable to financial
institutions and their holding companies regulate, among other things, the scope
of business, investments, reserves against deposits, capital levels, lending
activities and practices, the nature and amount of collateral for loans, the
establishment of branches, mergers, consolidations and dividends. The system of
supervision and regulation applicable to the Registrant and the Banks
establishes a comprehensive framework for their operations and is intended
primarily for the protection of the FDIC's deposit insurance funds, the
depositors of the Banks, and the public, rather than shareholders of the
Registrant.
Federal law and regulations establish supervisory standards applicable to the
lending activities of the Banks, including internal controls, credit
underwriting, loan documentation and loan-to-value ratios for loans secured by
real property.
Recent Legislation
The Gramm-Leach-Bliley Act of 1999 (the "GLB Act"), modifies many of the
principal federal laws which regulate financial institutions and removes large
parts of a regulatory framework that had its origins in the Depression Era of
the 1930s.
Effective March 11, 2000, new opportunities will be available for banking
organizations, other depository institutions, insurance companies and securities
firms to enter into combinations that permit a single financial services
organization to offer customers more financial products and services.
Specifically, the GLB Act provides two new vehicles through which a banking
organization can engage in a variety of activities which, prior to the Act, they
were not allowed to engage in. First, a bank holding company meeting certain
requirements may elect to become a financial holding company ("FHC"). FHCs are
generally authorized to engage in all "financial activities" and, under certain
circumstances, to make equity investments in other companies (i.e., merchant
banking). In order to be eligible to elect to become a FHC, a bank holding
company and all of its depository financial institutions must: (1) be "well
capitalized"; (2) be "well managed"; and (3) have a rating of "satisfactory" or
better in their most recent Community Reinvestment Act examination. Both the
bank holding company and all of its depository financial institutions must also
continue to satisfy these requirements after the bank holding company elects to
become a FHC or else the FHC will be subject to various restrictions. The
Federal Reserve Board will be the umbrella regulator of FHCs, but functional
regulation of a FHC's separately regulated subsidiaries will be conducted by
their primary functional regulator.
Second, the GLB Act also provides that a national bank (and a state bank, so
long as otherwise allowable under its state's law), which satisfies certain
requirements, may own a new type of subsidiary called a financial subsidiary
("FS"). The GLB Act authorizes FSs to engage in many (but not all) of the
activities that FHCs are authorized to engage in. In order to be eligible to own
a FS, a bank must satisfy the three requirements noted above, plus several
additional requirements.
The GLB Act also imposes several rules that are designed to protect the privacy
of the customers of financial institutions. For example, the GLB Act requires
financial institutions to adopt and disseminate annually a privacy
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ITEM 1. BUSINESS (Continued)
policy and prohibits financial institutions from disclosing certain customer
information to "non-affiliated third parties" for certain uses. All financial
institutions, regardless of whether they elect to utilize FHCs or FSs, are
subject to the GLB Act's privacy provisions. The Registrant and the Banks are
also subject to certain state laws that deal with the use and distribution of
non-public personal information. In addition to its privacy provisions, the GLB
Act also contains various other provisions that apply to banking organizations,
regardless of whether they elect to utilize FHCs or FSs.
The Registrant
General. The Registrant is a bank holding company and, as such, is registered
with, and subject to regulation by, the Federal Reserve under the Bank Holding
Company Act, as amended (the "BHCA"). Under the BHCA, the Registrant is subject
to periodic examination by the Federal Reserve, and is required to file periodic
reports of its operations and such additional information as the Federal Reserve
may require.
In accordance with Federal Reserve policy, a bank holding company is expected to
act as a source of financial strength to its subsidiary banks and to commit
resources to support the subsidiary banks in circumstances where the bank
holding company might not do so absent such policy. In addition, if the
Commissioner deems a bank's capital to be impaired, the Commissioner may require
a bank to restore its capital by special assessment upon a bank holding company,
as the bank's sole shareholder. If the bank holding company were to fail to pay
such assessment, the directors of that bank would be required, under Michigan
law, to sell the shares of that bank stock owned by the bank holding company to
the highest bidder at either public or private auction and use the proceeds of
the sale to restore the bank's capital.
Any capital loans by a bank holding company to a subsidiary bank are subordinate
in right of payment to deposits and to certain other indebtedness of such
subsidiary bank. In the event of a bank holding company's bankruptcy, any
commitment by the bank holding company to a federal bank regulatory agency to
maintain the capital of a subsidiary bank will be assumed by the bankruptcy
trustee and entitled to a priority of payment.
Investments and Activities. In general, any direct or indirect acquisition by a
bank holding company of any voting shares of any bank which would result in the
bank holding company's direct or indirect ownership or control of more than 5%
of any class of voting shares of such bank, and any merger or consolidation of
the bank holding company with another bank holding company, will require the
prior written approval of the Federal Reserve under the BHCA. In acting on such
applications, the Federal Reserve must consider various statutory factors
including the effect of the proposed transaction on competition in relevant
geographic and product markets, and each party's financial condition, managerial
resources, and record of performance under the Community Reinvestment Act.
In addition and subject to certain exceptions, the Change in the Bank Control
Act ("Control Act") and regulations promulgated thereunder by the Federal
Reserve, require any person acting directly or indirectly, or through or in
concert with one or more persons, to give the Federal Reserve 60 days' written
notice before acquiring control of a bank holding company. Transactions which
are presumed to constitute the acquisition of control include the acquisition of
any voting securities of a bank holding company having securities registered
under Section 12 of the Securities Exchange Act of 1934, as amended, if, after
the transaction, the acquiring person (or persons acting in concert) owns,
controls or holds with power to vote 25% or more of any class of voting
securities of the institution. The acquisition may not be consummated subsequent
to such notice if the Federal Reserve issues a notice within 60 days, or within
certain extensions of such period, disapproving the acquisition.
The merger or consolidation of an existing bank subsidiary of a bank holding
company with another bank, or the acquisition by such a subsidiary of the assets
of another bank, or the assumption of the deposit and other liabilities by such
a subsidiary requires the prior written approval of the responsible Federal
depository institution regulatory agency under the Bank Merger Act, based upon a
consideration of statutory factors similar to those outlined above with respect
to the BHCA. In addition, in certain cases an application to, and the prior
approval of, the Federal Reserve under the BHCA and/or Commissioner under
Michigan banking laws, may be required.
With certain limited exceptions, the BHCA prohibits any bank holding company
from engaging, either directly or indirectly through a subsidiary, in any
activity other than managing or controlling banks unless the proposed
non-banking activity is one that the Federal Reserve has determined, as of the
day before the enactment of the GLB Act, to be so closely related to banking as
to be a proper incident thereto. Under current Federal Reserve regulations, such
permissible non-banking activities include such things as mortgage banking,
equipment leasing, securities brokerage, and consumer and commercial finance
company operations. Well-capitalized and well-managed bank
4
<PAGE> 6
ITEM 1. BUSINESS (Continued)
holding companies may, however, engage de novo in certain types of non-banking
activities without prior notice to, or approval of, the Federal Reserve,
provided that written notice of the new activity is given to the Federal Reserve
within 10 business days after the activity is commenced. If a bank holding
company wishes to engage in a non-banking activity by acquiring a going concern,
prior notice and/or prior approval will be required, depending upon the
activities in which the company to be acquired is engaged, the size of the
company to be acquired and the financial and managerial condition of the
acquiring bank company.
In evaluating a proposal to engage (either de novo or through the acquisition
of a going concern) in a non-banking activity, the Federal Reserve will consider
various factors, including among others the financial and managerial resources
of the bank holding company, and the relative public benefits and adverse
effects which may be expected to result from the performance of the activity by
an affiliate of the bank holding company. The Federal Reserve may apply
different standards to activities proposed to be commenced de novo and
activities commenced by acquisition, in whole or in part, of a going concern.
Capital Requirements. The Federal Reserve uses capital adequacy guidelines in
its examination and regulation of bank holding companies. If capital falls below
minimum guidelines, a bank holding company may, among other things, be denied
approval to acquire or establish additional banks or non-bank businesses.
The Federal Reserve's capital guidelines establish the following minimum
regulatory capital requirements for bank holding companies: (i) a leverage
capital requirement expressed as a percentage of total assets, and (ii) a
risk-based requirement expressed as a percentage of total risk-weighted assets.
The leverage capital requirement consists of a minimum ratio of Tier 1 capital
(which consists principally of shareholders' equity) to total assets of 3% for
the most highly rated companies with minimum requirements of 4% to 5% for all
others. The risk-based requirement consists of a minimum ratio of total capital
to total risk-weighted assets of 8%, of which at least one-half must be Tier 1
capital.
The risk-based and leverage standards presently used by the Federal Reserve are
minimum requirements, and higher capital levels will be required if warranted by
the particular circumstances or risk profiles of individual banking
organizations. For example, Federal Reserve regulations provide that additional
capital may be required to take adequate account of, among other things,
interest rate risk and the risks posed by concentrations of credit,
nontraditional activities or securities trading activities. Further, any banking
organization experiencing or anticipating significant growth would be expected
to maintain capital ratios, including tangible capital positions (i.e., Tier 1
capital less all intangible assets), well above the minimum levels. The Federal
Reserve has not advised the Registrant of any specific minimum Tier 1 Capital
leverage ratio applicable to it.
FDICIA requires the Federal bank regulatory agencies biennially to review
risk-based capital standards to ensure that they adequately address interest
rate risk, concentration of credit risk and risks from non-traditional
activities.
Dividends. The Registrant is a corporation separate and distinct from the Banks.
Most of the Registrant's revenues will be received by it in the form of
dividends, if any, paid by the Banks. Thus, the Registrant's ability to pay
dividends to its shareholders will indirectly be limited by statutory
restrictions on the ability of its Banks to pay dividends. Further, the Federal
Reserve has issued a policy statement on the payment of cash dividends by bank
holding companies. In the policy statement, the Federal Reserve expressed its
view that a bank holding company experiencing earnings weaknesses should not pay
cash dividends exceeding its net income or which can only be funded in ways that
weakened the bank holding company's financial health, such as by borrowing.
Additionally, the Federal Reserve possesses enforcement powers over bank holding
companies and their non-bank subsidiaries to prevent or remedy actions that
represent unsafe or unsound practices or violations of applicable statutes and
regulations. Among these powers is the ability to proscribe the payment of
dividends by banks and bank holding companies. Similar enforcement powers over
subsidiary banks are possessed by the FDIC. The "prompt corrective action"
provisions of federal law and regulation authorizes the Federal Reserve to
restrict the payment of dividends by the Registrant for an insured bank which
fails to meet specified capital levels.
In addition to the restrictions on dividends imposed by the Federal Reserve,
the Michigan Business Corporation Act provides that dividends may be legally
declared or paid only if after the distribution, a corporation can pay its debts
as they come due in the usual course of business and its total assets equal or
exceed the sum of its liabilities plus the amount that would be needed to
satisfy the preferential rights upon dissolution of any holders of preferred
stock whose preferential rights are superior to those receiving the
distribution. The Registrant does not have any holders of its preferred stock.
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ITEM 1. BUSINESS (Continued)
The Banks
General. The Banks are Michigan banking corporations and their deposit accounts
are principally insured by the Bank Insurance Fund ("BIF") of the FDIC. As
BIF-insured Michigan chartered banks, the Banks are subject to the examination,
supervision, reporting and enforcement requirements of the Commissioner, as the
chartering authority for Michigan banks, and the FDIC, as administrator of the
BIF. These agencies and the federal and state laws applicable to the banks and
their operations, extensively regulate various aspects of the banking business
including, among other things, permissible types and amounts of loans,
investments and other activities, capital adequacy, branching, interest rates on
loans and on deposits, the maintenance of non-interest bearing reserves on
deposit accounts, and the safety and soundness of banking practices.
Deposit Insurance. As FDIC-insured institutions, banks are required to pay
deposit insurance premium assessments to the FDIC. The FDIC has adopted a
risk-based assessment system under which all insured depository institutions are
placed into one of nine categories and assessed insurance premiums, based upon
their level of capital and supervisory evaluation. Institutions classified as
well-capitalized and considered healthy pay the lowest premium while
institutions that are less than adequately capitalized and considered of
substantial supervisory concern pay the highest premium. Risk classification of
all insured institutions is made by the FDIC for each semi-annual assessment
period. FDICIA requires the FDIC to establish assessment rates at levels which
will maintain the Deposit Insurance Fund at a mandated reserve ratio of not less
than 1.25% of estimated insured deposits. Accordingly, the FDIC established the
schedule of BIF insurance assessments, ranging from 0% of deposits for
institutions in the lowest risk category to .27% of deposits for institutions in
the highest risk category.
The FDIC may terminate the deposit insurance of any insured depository
institution if the FDIC determines, after a hearing, that the institution or its
directors have engaged or are engaging in unsafe or unsound practices, or have
violated any applicable law, regulation, order, or any condition imposed in
writing by, or written agreement with, the FDIC, or if the institution is in an
unsafe or unsound condition to continue operations. The FDIC may also suspend
deposit insurance temporarily during the hearing process for a permanent
termination of insurance if the institution has no tangible capital.
Capital Requirements. The FDIC has established the following minimum capital
standards for state-chartered, FDIC-insured non-member banks, such as the Banks:
a leverage requirement consisting of a minimum ratio of Tier 1 capital to total
assets of 3% for the most highly-rated banks with minimum requirements of 4% to
5% for all others, and a risk-based capital requirement consisting of a minimum
ratio of total capital to total risk-weighted assets of 8%, at least one-half of
which must be Tier 1 capital. Tier 1 capital consists principally of
shareholders' equity. These capital requirements are minimum requirements.
Higher capital levels will be required if warranted by the particular
circumstances or risk profiles of individual institutions. For example, FDIC
regulations provide that higher capital may be required to take adequate account
of, among other things, interest rate risk and the risks posed by concentrations
of credit, nontraditional activities or securities trading activities.
Federal law provides the federal banking regulators with broad power to take
prompt corrective action to resolve the problems of undercapitalized
institutions. The extent of the regulators' powers depends on whether the
institution in question is "well capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized," or "critically
undercapitalized." Federal regulations define these capital categories as
follows:
<TABLE>
<CAPTION>
TOTAL TIER 1
RISK-BASED RISK-BASED
CAPITAL RATIO CAPITAL RATIO LEVERAGE RATIO
------------- ------------- --------------
<S> <C> <C> <C>
Well capitalized 10% or above 6% or above 5% or above
Adequately capitalized 8% or above 4% or above 4% or above
Undercapitalized Less than 8% Less than 4% Less than 4%
Significantly undercapitalized Less than 6% Less than 3% Less than 3%
Critically undercapitalized -- -- A ratio of tangible equity
to total assets of 2% or
less
</TABLE>
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ITEM 1. BUSINESS (Continued)
At December 31, 1999, each of the Banks' ratios exceeded minimum requirements
for the well-capitalized category. (See note 17 to the 1999 consolidated
financial statements on pages A-29 through A-30 of the Appendix to the
Registrant's definitive proxy statement, dated March 15, 2000, relating to the
April 18, 2000 Annual Meeting of Shareholders (as filed with the commission and
filed as exhibit 13 to this report on Form 10-K.))
Depending upon the capital category to which an institution is assigned, the
regulators' corrective powers include: requiring the submission of a capital
restoration plan; placing limits on asset growth and restrictions on activities;
requiring the institution to issue additional capital stock (including
additional voting stock) or to be acquired; restricting transactions with
affiliates; restricting the interest rate the institution may pay on deposits;
ordering a new election of directors of the institution; requiring that senior
executive officers or directors be dismissed; prohibiting the institution from
accepting deposits from correspondent banks; requiring the institution to divest
certain subsidiaries; prohibiting the payment of principal or interest on
subordinated debt; and ultimately, appointing a receiver for the institution.
In general, a depository institution may be reclassified to a lower category
than is indicated by its capital levels if the appropriate federal depository
institution regulatory agency determines the institution to be otherwise in an
unsafe or unsound condition or to be engaged in an unsafe or unsound practice.
This could include a failure by the institution, following receipt of a
less-than-satisfactory rating on its most recent examination report, to correct
the deficiency.
Commissioner Assessments. Michigan banks are required to pay supervisory fees to
the Commissioner to fund the operations of the Michigan Financial Institutions
Bureau. The amount of supervisory fees paid by a bank is based upon the bank's
total assets, as reported to the Commissioner.
FICO Assessments. The Banks, as members of BIF, are subject to assessments to
cover the payments on outstanding obligations of the financing corporation
("FICO"). FICO was created in 1987 to finance the recapitalization of the
Federal Savings and Loan Insurance Corporation, the predecessor to the FDIC's
Savings Association Insurance Fund (the "SAIF"), which insures the deposits of
thrift institutions. Through January 1, 2000, the FICO assessments made against
BIF members may not exceed 20 percent of the amount of FICO assessments made
against SAIF members. Through 1999, SAIF members paid FICO assessments at a rate
equal to approximately 0.063 percent of deposits, while BIF members paid FICO
assessments at a rate equal to approximately 0.013 percent of deposits. Between
January 1, 2000, and the maturity of the outstanding FICO obligations in 2019,
BIF members and SAIF members will share the cost of the interest on the FICO
bonds on a pro rata basis. Such cost is anticipated to approximate .021 percent
of deposits.
Dividends. Under Michigan law, banks are restricted as to the maximum amount of
dividends they may pay on their common stock.
Banks may not pay dividends except out of net profits after deducting its
losses and bad debts. A Michigan state bank may not declare or pay a dividend
unless the bank will have a surplus amounting to at least 20% of its capital
after the payment of the dividend. If the bank has a surplus less than the
amount of its capital, it may not declare or pay any dividend until an amount
equal to at least 10% of net profits for the preceding one-half year (in the
case of quarterly or semi-annual dividends) or full-year (in the case of annual
dividends) has been transferred to surplus. A Michigan state bank may, with the
approval of the Commissioner, by vote of shareholders owning two thirds of the
stock eligible to vote increase its capital stock by a declaration of a stock
dividend, provided that after the increase the bank's surplus equals at least
20% of its capital stock, as increased. The bank may not declare or pay any
dividend until the cumulative dividends on preferred stock (should any such
stock be issued and outstanding) have been paid in full.
Federal law generally prohibits a depository institution from making any capital
distribution (including payment of a dividend) or paying any management fee to
its holding company if the depository institution would thereafter be
undercapitalized. The FDIC may prevent an insured bank from paying dividends if
the bank is in default of payment of any assessment due to the FDIC. In
addition, the FDIC may prohibit the payment of dividends by the Bank, if such
payment is determined, by reason of the financial condition of the bank, to be
an unsafe and unsound banking practice.
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<PAGE> 9
ITEM 1. BUSINESS (Continued)
Insider Transactions. The Banks are subject to certain restrictions imposed by
the Federal Reserve Act on "covered transactions" with the Registrant or its
subsidiaries on investments in the stock or other securities of the Registrant
or its subsidiaries and the acceptance of the stock or other securities of the
Registrant or its subsidiaries as collateral for loans. Certain limitations and
reporting requirements are also placed on extensions of credit by the banks to
their directors and officers, to directors and officers of the Registrant and
its subsidiaries, to principal shareholders of the Registrant, and to "related
interests" of such directors, officers and principal shareholders. In addition,
federal law and regulations may affect the terms upon which any person becoming
a director or officer of the Registrant or one of its subsidiaries or a
principal shareholder of the Registrant may obtain credit from banks with which
the Banks maintain a correspondent relationship.
Safety and Soundness Standards. Pursuant to FDICIA, the FDIC adopted guidelines
to establish operational and managerial standards to promote the safety and
soundness of federally insured depository institutions. The guidelines establish
standards for internal controls, information systems, internal audit systems,
loan documentation, credit underwriting, interest rate exposure, asset growth,
compensation, fees and benefits, asset quality and earnings. In general, the
guidelines prescribe the goals to be achieved in each area, and each institution
will be responsible for establishing its own procedures to achieve those goals.
If an institution fails to comply with any of the standards set forth in the
guidelines, the institution's primary federal regulator may require the
institution to submit a plan for achieving and maintaining compliance. The
preamble to the guidelines states that the agencies expect to require a
compliance plan from an institution whose failure to meet one or more of the
standards is of such severity that it could threaten the safe and sound
operation of the institution. Failure to submit an acceptable compliance plan,
or failure to adhere to a compliance plan that has been accepted by the
appropriate regulator, would constitute grounds for further enforcement action.
State Bank Activities. Under FDICIA, as implemented by final regulations adopted
by the FDIC, FDIC-insured state banks are prohibited, subject to certain
exceptions, from making or retaining equity investments of a type, or in an
amount, that are not permissible for a national bank. FDICIA, as implemented by
FDIC regulations, also prohibits FDIC-insured state banks and their
subsidiaries, subject to certain exceptions, from engaging as a principal in any
activity that is not permitted for a national bank or its subsidiary,
respectively, unless the bank meets, and continues to meet, its minimum
regulatory capital requirements and the FDIC determines the activity would not
pose a significant risk to the deposit insurance fund of which the bank is a
member. Impermissible investments and activities must be otherwise divested or
discontinued within certain time frames set by the FDIC in accordance with
FDICIA. These restrictions are not currently expected to have a material impact
on the operations of the Banks.
Consumer Banking. The Banks' business includes making a variety of types of
loans to individuals. In making these loans, the Banks are subject to State
usury and regulatory laws and to various Federal statutes, such as the Equal
Credit Opportunity Act, Fair Credit Reporting Act, Truth in Lending Act, Real
Estate Settlement Procedures Act, and Home Mortgage Disclosure Act, and the
regulations promulgated thereunder, which prohibit discrimination, specify
disclosures to be made to borrowers regarding credit and settlement costs, and
regulate the mortgage loan servicing activities of the banks, including the
maintenance and operation of escrow accounts and the transfer of mortgage loan
servicing. In receiving deposits, the Banks are subject to extensive regulation
under state and Federal law and regulations, including the Truth in Savings Act,
the Expedited Funds Availability Act, the Bank Secrecy Act, the Electronic Funds
Transfer Act, and the Federal Deposit Insurance Act. Violation of these laws
could result in the imposition of significant damages and fines upon the Banks
and their respective directors and officers.
Other. The Riegle-Neal Act allows bank holding companies to acquire banks
located in any state in the United States without regard to geographic
restrictions or reciprocity requirements imposed by state law, but subject to
certain conditions, including limitations on the aggregate amount of deposits
that may be held by the acquiring holding company and all of its insured
depository institution affiliates. The Riegle-Neal Act also allows banks to
establish interstate branch networks through acquisitions of other banks,
subject to certain conditions that include limitations on the aggregate amount
of deposits that may be held by the surviving bank and all of its insured
depository institution affiliates. The establishment of de novo interstate
branches or the acquisition of individual branches of a bank in another state
(rather than the acquisition of an out-of-state bank in its entirety) is allowed
by the Riegle-Neal Act only if specifically authorized by state law. The
legislation allowed individual states to "opt-out" of certain provisions of the
Riegle-Neal Act if appropriate legislation was enacted prior to June 1, 1997.
Michigan did not opt out of the Riegle-Neal Act, and now permits both U.S. and
non-U.S. banks to establish branch offices in Michigan. The Michigan Banking
Code permits, in appropriate circumstances and with the approval of
8
<PAGE> 10
ITEM 1. BUSINESS (Continued)
the Commissioner, (i) the acquisition of all or substantially all of the assets
of a Michigan-chartered bank by an FDIC-insured bank, savings bank, or savings
and loan association located in another state, (ii) the acquisition by a
Michigan-chartered bank of all or substantially all of the assets of an
FDIC-insured bank, savings bank or savings and loan association located in
another state, (iii) the consolidation of one or more Michigan-chartered banks
and FDIC-insured banks, savings banks or savings and loan associations located
in other states having laws permitting such consolidation, with the resulting
organization chartered by Michigan, (iv) the establishment by a foreign bank,
which has not previously designated any other state as its home state under the
International Banking Act of 1978, of branches located in Michigan, and (v) the
establishment or acquisition of branches in Michigan by FDIC-insured banks
located in other states, the District of Columbia or U.S. territories or
protectorates having laws permitting Michigan-chartered banks to establish
branches in such jurisdiction. Further, the Michigan Banking Code permits, upon
written notice to the Commissioner, (i) the acquisition by a Michigan-chartered
bank of one or more branches (not comprising all or substantially all of the
assets) of an FDIC-insured bank, savings bank or savings and loan association
located in another state, the District of Columbia, or a U.S. territory or
protectorate, (ii) the establishment by Michigan-chartered banks of branches
located in other states, the District of Columbia, or U.S. territories or
protectorates, and (iii) the consolidation of one or more Michigan-chartered
banks and FDIC-insured banks, savings banks or savings and loan associations
located in other states, with the resulting organization chartered by one of
such other states.
In addition to the authorization of interstate banking discussed above, Michigan
law permits banks to consolidate on a state-wide basis and to operate the
offices of merged banks as branches of a surviving bank. Also, with the written
approval of the Commissioner, banks may relocate their main office to any
location in the state, establish and operate branch banks anywhere in the state
and contract with other banks to act as branches thereof. To better serve their
customers, the Banks have entered into interbank branching agreements, whereby
each of the Banks may act as a branch of the other four Banks.
9
<PAGE> 11
ITEM 1. BUSINESS -- STATISTICAL DISCLOSURE
I. (A) DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY;
(B) INTEREST RATES AND INTEREST DIFFERENTIAL
(C) INTEREST RATES AND DIFFERENTIAL
The information set forth in the tables captioned "Average Balances and Tax
Equivalent Rates" and "Change in Tax Equivalent Net Interest Income" on page A-4
of the Appendix to the Registrant's definitive proxy statement, dated March 15,
2000, relating to the April 18, 2000 Annual Meeting of Shareholders (as filed
with the commission and filed as exhibit 13 to this report on Form 10-K) is
incorporated herein by reference.
II. INVESTMENT PORTFOLIO
(A) The following table sets forth the book value of securities at December
31:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Held to maturity
U.S. Government agencies $ 997
States and political subdivisions $ 11,148 $ 16,563 18,353
Mortgage-backed securities 59,467 130,060 224,177
Other securities 500 14,678 390
-------- -------- --------
Total $ 71,115 $161,301 $243,917
======== ======== ========
Available for sale
U.S. Treasury $ 301 $ 4,328 $ 7,105
U.S. Government agencies 1,874 11,040 15,492
States and political subdivisions 115,120 42,326 26,849
Mortgage-backed securities 55,646 83,469 125,300
Other securities 22,359 14,461 8,176
-------- -------- --------
Total $195,300 $155,624 $182,922
======== ======== ========
</TABLE>
10
<PAGE> 12
ITEM 1. BUSINESS -- STATISTICAL DISCLOSURE (Continued)
II. INVESTMENT PORTFOLIO (Continued)
(B) The following table sets forth contractual maturities of securities at
December 31, 1999 and the weighted average yield of such securities:
<TABLE>
<CAPTION>
Maturing Maturing
Maturing After One After Five Maturing
Within But Within But Within After
One Year Five Years Ten Years Ten Years
------------------- ------------------ ------------------- -------------------
Amount Yield Amount Yield Amount Yield Amount Yield
---------- ------- ----------- -------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Held to Maturity
States and political $ 2,959 8.97% $6,652 9.43% $1,168 9.25% $369 10.45%
subdivisions
Mortgage-backed securities --
guaranteed or issued by
U.S. Government agencies 56,608 5.46 2,630 6.22 212 8.94 17 9.94
Other securities 500 5.12
------- ------ ------ ----
Total $60,067 5.63% $9,282 8.52% $1,380 9.20% $386 10.42%
======= ====== ====== ====
Tax equivalent adjustment
for calculations of yield $93 $220 $38 $14
=== ==== === ===
Available for sale
U.S. Treasury $ 301 4.87%
U.S. Government agencies $1,874 6.37%
States and political 1,036 8.91 $6,857 8.89% 35,506 7.66 $71,721 7.83%
subdivisions
Mortgage backed securities
Guaranteed or issued by U.S.
Government agencies 2,480 6.24 9,917 7.55 3,094 7.22 6,275 7.20
Other mortgage-backed
securities 3,443 6.81 10,553 7.68 14,639 7.99 5,245 7.93
Other securities 7,965 6.74 14,394 7.58
------ ------- ------- -------
Total $7,260 6.83% $35,292 7.67% $55,113 7.68% $97,635 7.76%
====== ======= ======= =======
Tax equivalent adjustment
for calculations of yield $32 $213 $952 $1,965
=== ==== ==== ======
</TABLE>
The rates set forth in the tables above for obligations of state and political
subdivisions have been restated on a tax equivalent basis assuming a marginal
tax rate of 35%. The amount of the adjustment is as follows:
<TABLE>
<CAPTION>
Tax-Exempt Rate on Tax
Held to maturity Rate Adjustment Equivalent Basis
---------- ---------- ----------------
<S> <C> <C> <C>
Under 1 year 5.83% 3.14% 8.97%
1-5 years 6.13 3.30 9.43
5-10 years 6.01 3.24 9.25
After 10 years 6.79 3.66 10.45
Available for sale
Under 1 year 5.79% 3.12% 8.91%
1-5 years 5.78 3.11 8.89
5-10 years 4.98 2.68 7.66
After 10 years 5.09 2.74 7.83
</TABLE>
11
<PAGE> 13
ITEM 1. BUSINESS -- STATISTICAL DISCLOSURE (Continued)
III. LOAN PORTFOLIO
(A) The following table sets forth loans outstanding at December 31:
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(in thousands)
<S> <C> <C> <C> <C> <C>
Loans held for sale $ 12,950 $ 45,699 $ 23,625 $ 12,599 $ 18,453
Real estate mortgage 757,019 695,489 658,429 547,999 398,326
Commercial and agricultural 334,212 277,024 222,726 178,348 119,117
Installment 199,410 179,626 180,097 135,860 96,084
---------- ---------- ---------- -------- --------
Total Loans $1,303,591 $1,197,838 $1,084,877 $874,806 $631,980
========== ========== ========== ======== ========
</TABLE>
The loan portfolio is periodically and systematically reviewed and the
results of these reviews are reported to the Boards of Directors of the
Registrant and the Banks. The purpose of these reviews is to assist in assuring
proper loan documentation, to facilitate compliance with consumer protection
laws and regulations, to provide for the early identification of potential
problem loans (which enhances collection prospects) and to evaluate the adequacy
of the allowance for loan losses.
(B) The following table sets forth scheduled loan repayments (excluding 1-4
family residential mortgages and installment loans) at December 31, 1999:
<TABLE>
<CAPTION>
Due
Due After One Due
Within But Within After
One Year Five Years Five Years Total
--------- ---------- ---------- -------
(in thousands)
<S> <C> <C> <C> <C>
Real estate mortgage $ 27,951 $ 62,898 $28,442 $119,291
Commercial and agricultural 115,932 172,890 45,390 334,212
-------- -------- ------- --------
Total $143,883 $235,788 $73,832 $453,503
======== ======== ======= ========
</TABLE>
The following table sets forth loans due after one year which have
predetermined (fixed) interest rates and/or adjustable (variable) interest rates
at December 31, 1999:
<TABLE>
<CAPTION>
Fixed Variable
Rate Rate Total
------------- ------------- -----------
(in thousands)
<S> <C> <C> <C>
Due after one but within five years $183,611 $52,177 $235,788
Due after five years 56,826 17,006 73,832
-------- ------- --------
Total $240,437 $69,183 $309,620
======== ======= ========
</TABLE>
12
<PAGE> 14
ITEM 1. BUSINESS -- STATISTICAL DISCLOSURE (Continued)
III. LOAN PORTFOLIO (Continued)
(C) The following table sets forth non-performing loans at December 31:
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(in thousands)
<S> <C> <C> <C> <C> <C>
(a) Loans accounted for on a
non-accrual basis (1, 2) $ 2,980 $4,302 $3,559 $ 2,124 $ 2,327
(b) Aggregate amount of loans
ninety days or more past due
(excludes loans in (a) above) 2,029 2,240 1,904 1,994 427
(c) Loans not included above which
are "troubled debt restructurings"
as defined in Statement of Financial
Accounting Standards No. 15 (2) 270 295 184 197 247
-------- ------- ------ ------- -------
Total non-performing loans $ 5,279 $ 6,837 $5,647 $ 4,315 $ 3,001
======== ======= ====== ======= =======
</TABLE>
(1) The accrual of interest income is discontinued when a loan becomes 90 days
past due and the borrower's capacity to repay the loan and collateral
values appear insufficient. Non-accrual loans may be restored to accrual
status when interest and principal payments are current and the loan
appears otherwise collectible.
(2) Interest in the amount of $571,000 would have been earned in 1999 had loans
in categories (a) and (c) remained at their original terms, however, only
$280,000 was included in interest income for the year with respect to these
loans.
Other loans of concern identified by the loan review department which are
not included as non-performing totaled approximately $1,000,000 at December 31,
1999. These loans involve circumstances which have caused management to place
increased scrutiny on the credits and may, in some instances, represent an
increased risk of loss to the Banks.
At December 31, 1999, there was no concentration of loans exceeding 10% of
total loans which is not already disclosed as a category of loans in this
section "Loan Portfolio" (Item III(A)).
There were no other interest-bearing assets at December 31, 1999, that
would be required to be disclosed above (Item III(C)), if such assets were
loans.
There were no foreign loans outstanding at December 31, 1999.
13
<PAGE> 15
ITEM 1. BUSINESS -- STATISTICAL DISCLOSURE (Continued)
IV. SUMMARY OF LOAN LOSS EXPERIENCE
(A) The following table sets forth loan balances and summarizes the changes
in the allowance for loan losses for each of the years ended December 31:
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Loans outstanding at the end of
the year (net of unearned fees) $1,303,591 $1,197,838 $1,084,877 $874,807 $631,980
========== ========== ========== ======== ========
Average loans outstanding for
the year (net of unearned fees) $1,222,564 $1,124,847 $ 975,476 $738,421 $559,747
========== ========== ========= ======== ========
Balance of allowance for loan losses
at beginning of year $11,557 $ 9,639 $8,815 $6,966 $6,626
------ ----- ----- ----- -----
Loans charged-off
Real estate 100 84 96 44 24
Commercial and agricultural 176 410 262 79 196
Installment 1,704 1,871 1,383 1,066 575
----- ----- ----- ----- ---
Total loans charged-off 1,979 2,365 1,741 1,189 795
----- ----- ----- ----- ---
Recoveries of loans previously
charged-off
Real estate 7 4 1 8 64
Commercial and agricultural 299 196 151 142 142
Installment 441 455 438 295 124
--- --- --- --- ---
Total recoveries 746 655 590 445 330
--- --- --- --- ---
Net loans charged-off 1,233 1,710 1,151 744 465
Additions to allowance charged to
operating expense 2,661 3,628 1,975 1,413 805
Allowance on loans acquired 1,180
------- ------- ------ ------- ------
Balance at end of year $12,985 $11,557 $9,639 $ 8,815 $6,966
======= ======= ====== ======= ======
Net loans charged-off as a percent of
average loans outstanding for the year .10% .15% .12% .10% .08%
Allowance for loan losses as a
percent of loans outstanding at
the end of the year 1.00 .96 .89 1.01 1.10
</TABLE>
The allowance for loan losses reflected above is a valuation allowance in
its entirety and the only allowance available to absorb future loan losses.
Further discussion of the provision and allowance for loan losses as well
as non-performing loans is presented in Management's Discussion and Analysis of
Financial Condition and Results of Operations, incorporated herein by reference
to Item 7, Part II of this report.
14
<PAGE> 16
ITEM 1. BUSINESS -- STATISTICAL DISCLOSURE (Continued)
IV. SUMMARY OF LOAN LOSS EXPERIENCE (Continued)
(B) The Banks have allocated the allowance for loan losses to provide for
the possibility of losses being incurred within the categories of loans set
forth in the table below. The amount of the allowance that is allocated and the
ratio of loans within each category to total loans at December 31 follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
Percent Percent Percent
Allowance of Loans to Allowance of Loans to Allowance of Loans to
Amount Total Loans Amount Total Loans Amount Total Loans
-------------- ------------- -------------- ------------- -------------- -------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Commercial and
agricultural $ 4,210 25.9% $ 3,774 23.4% $2,920 20.8%
Real estate -- -- --
mortgage 1,208 58.8 965 61.6 1,080 62.6
Installment 1,783 15.3 1,437 15.0 1,383 16.6
Unallocated 5,784 5,381 4,256
------- ----- ------- ----- ------ -----
Total $12,985 100.0% $11,557 100.0% $9,639 100.0%
======= ===== ======= ===== ====== =====
</TABLE>
<TABLE>
<CAPTION>
1996 1995
---- ----
Percent Percent
Allowance of Loans to Allowance of Loans to
Amount Total Loans Amount Total Loans
-------------- ------------- -------------- -------------
(dollars in thousands)
<S> <C> <C> <C> <C>
Commercial and
agricultural $3,129 20.4% $2,574 18.8%
Real estate
mortgage 868 64.1 746 66.0
Installment 1,125 15.5 774 15.2
Unallocated 3,693 2,872
------ ----- ------ -----
Total $8,815 100.0% $6,966 100.0%
====== ===== ====== =====
</TABLE>
15
<PAGE> 17
ITEM 1. BUSINESS -- STATISTICAL DISCLOSURE (Continued)
V. DEPOSITS
The following table sets forth average deposit balances and the
weighted-average rates paid thereon for the years ended December 31:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
Average Average Average
Balance Rate Balance Rate Balance Rate
------- ---- ------- ---- ------- ----
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Non-interest bearing demand $ 125,936 $ 107,403 $ 91,440
Savings and NOW 576,194 2.38% 525,638 2.65% 501,548 2.76%
Time deposits 578,294 5.26 535,861 5.47 490,382 5.47
---------- ---------- ---------
Total $1,280,424 3.45% $1,168,902 3.70% $1,083,370 3.75%
========== ========== ==========
</TABLE>
The following table summarizes time deposits in amounts of $100,000 or more
by time remaining until maturity at December 31, 1999:
<TABLE>
<CAPTION>
(in thousands)
<S> <C>
Three months or less $ 55,930
Over three through six months 14,742
Over six months through one year 13,442
Over one year 97,953
--------
Total $182,067
========
</TABLE>
VI. RETURN ON EQUITY AND ASSETS
The ratio of net income to average shareholders' equity and to average
total assets, and certain other ratios, for the years ended December 31 follow:
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net income as a percent of
Average common equity 7.26% 10.72% 1.37% 7.80% 6.00%
Average total assets .52 0.72 .09 .55 .41
Dividends declared per share as a
percent of net income per share 60.00 31.43 223.08 36.62 45.10
Average shareholders' equity as a percent
of average total assets 7.16 6.76 6.69 7.06 6.87
</TABLE>
Additional performance ratios are set forth in Selected Consolidated
Financial Data, incorporated herein by reference in Item 6, Part II of this
report. Any significant changes in the current trend of the above ratios are
reviewed in Management's Discussion and Analysis of Financial Condition and
Results of Operations, incorporated herein by reference in Item 7, Part II of
this report.
VII. SHORT-TERM BORROWINGS
Short-term borrowings are discussed in note 8 to the consolidated financial
statements incorporated herein by reference in Item 8, Part II of this report.
16
<PAGE> 18
ITEM 2. PROPERTIES
The Registrant and the Banks operate a total of 93 facilities in Michigan. The
individual properties are not materially significant to the Registrants' or the
Banks' business or to the consolidated financial statements.
With the exception of the potential remodeling of certain facilities to provide
for the efficient use of work space or to maintain an appropriate appearance,
each property is considered reasonably adequate for current and anticipated
needs.
ITEM 3. LEGAL PROCEEDINGS
Due to the nature of their business, the Banks are often subject to numerous
legal actions. These legal actions, whether pending or threatened, arise through
the normal course of business and are not considered unusual or material.
During 1999 and 1997, the Registrant settled lawsuits against Mutual Savings
Bank, f.s.b. 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 Mutual Savings Bank, f.s.b. which alleged certain violations
of federal and state securities laws.
Currently, no material legal procedures are pending which involve the Registrant
or the Banks.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
17
<PAGE> 19
ADDITIONAL ITEM - EXECUTIVE OFFICERS
Executive officers of the Registrant are appointed annually by the Board of
Directors at the meeting of Directors following the Annual Meeting of
Shareholders. There are no family relationships among these officers and/or the
Directors of the Registrant nor any arrangement or understanding between any
officer and any other person pursuant to which the officer was elected.
The following sets forth certain information with respect to the Registrant's
executive officers and certain key officers of its subsidiaries (included for
information purposes only) at December 31, 1999.
<TABLE>
<CAPTION>
First elected
as an officer of
Name (Age) Position with Registrant the Registrant
- ---------- ------------------------ --------------
<S> <C> <C>
Charles C. Van Loan (52) President, Chief Executive 1984
Officer and Director
William R. Kohls (42) Executive Vice President and 1985
Chief Financial Officer
Edward B. Swanson (46) President and Chief Executive 1989
Officer - Independent Bank
South Michigan
Michael M. Magee, Jr. (44) President and Chief Executive 1993
Officer - Independent Bank
Ronald L. Long (40) President and Chief Executive 1993
Officer - Independent Bank
East Michigan
David C. Reglin (40) President and Chief Executive 1998
Officer - Independent Bank
West Michigan
Robert N. Shuster (42) President and Chief Executive 1999
Officer - Independent Bank MSB
Peter R. Graves (42) Senior Vice President, Commercial 1999
Loans - Independent Bank
Corporation
Richard E. Butler (48) Senior Vice President, Operations - 1998
Independent Bank Corporation
</TABLE>
Prior to being named President and Chief Executive Officer in 1998, Mr. Reglin
was Senior Vice President of Independent Bank West Michigan since 1991.
Prior to being named President and Chief Executive Officer in 1999, Mr. Shuster
was President and CEO of Mutual Savings Bank, f.s.b since 1994.
The President and Chief Executive Officer of each of the Registrant's subsidiary
banks serve as members of various committees of the Registrant.
Prior to being named Senior Vice President in 1999, Mr. Graves was Vice
President of the Registrants commercial loan services department.
Mr. Butler joined the Registrant in 1998 as Senior Vice President. Prior to that
time Mr. Butler was Vice President, Mortgage Servicing Operations at The former
First of America Bank - Michigan, N.A.
18
<PAGE> 20
PART II.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The information set forth under the caption "Quarterly Summary " on Page A-34 of
the Appendix to the Registrant's definitive proxy statement, dated March 15,
2000, relating to the April 18, 2000 Annual Meeting of Shareholders (as filed
with the commission and as filed as exhibit 13 to this report on Form 10-K) is
incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
The information set forth under the caption "Selected Consolidated Financial
Data" on Page A-12 of the Appendix to the Registrant's definitive proxy
statement, dated March 15, 2000, relating to the April 18, 2000 Annual Meeting
of Shareholders (as filed with the commission and as filed as exhibit 13 to this
report on Form 10-K) is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information set forth under the caption "Management's Discussion and
Analysis of Financial Condition and Results of Operations" on pages A-2 through
A-11 of the Appendix to the Registrant's definitive proxy statement, dated March
15, 2000, relating to the April 18, 2000 Annual Meeting of Shareholders (as
filed with the commission and as filed as exhibit 13 to this report on Form
10-K) is incorporated herein by reference.
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information set forth in the caption "Asset/liability management" on pages
A-10 through A-11 of the Appendix to the Registrant's definitive proxy
statement, dated March 15, 2000, relating to the April 18, 2000 Annual Meeting
of Shareholders (as filed with the commission and filed as exhibit 13 to this
report on Form 10-K) is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following consolidated financial statements of the Registrant and the
independent auditor's report are set forth on pages A-13 through A-33 of the
Appendix to the Registrant's definitive proxy statement, dated March 15, 2000,
relating to the April 20, 2000 Annual Meeting of Shareholders (as filed with the
commission and as filed as exhibit 13 to this report on Form 10-K) is
incorporated herein by reference.
Independent Auditor's Report
Consolidated Statements of Financial Condition at
December 31, 1999 and 1998
Consolidated Statements of Operations for the years ended
December 31, 1999, 1998 and 1997
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998 and 1997
Consolidated Statements of Shareholders' Equity
for the years ended December 31, 1999, 1998 and 1997
Consolidated Statements of Comprehensive Income
for the years ended December 31, 1999, 1998 and 1997
Notes to Consolidated Financial Statements
19
<PAGE> 21
PART II.
The supplementary data required by this item set forth under the caption
"Quarterly Financial Data" on page A-34 of the Appendix to the Registrant's
definitive proxy statement, dated March 15, 2000, relating to the April 18, 2000
Annual Meeting of Shareholders (as filed with the commission and as filed as
exhibit 13 to this report on Form 10-K) is incorporated herein by reference.
The portions of the Appendix to the Registrant's definitive proxy statement,
dated March 15, 2000, relating to the April 18, 2000 Annual Meeting of
Shareholders (as filed with the commission and as filed as exhibit 13 to this
report on Form 10-K) which are not specifically incorporated by reference as
part of this Form 10-K are not deemed to be a part of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS - The information with respect to Directors of the Registrant, set
forth under the caption "Election of Directors" on pages 2 through 4 of the
Registrant's definitive proxy statement, dated March 15, 2000, relating to the
April 18, 2000 Annual Meeting of Shareholders (as filed with the commission) is
incorporated herein by reference.
EXECUTIVE OFFICERS - Reference is made to additional item under Part I of this
report on Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
The information set forth under the captions "Summary Compensation Table",
"Option Grants in 1999" and "Aggregated Stock Option Exercises in 1999 and Year
End Option Values" on pages 11 through 13 of the Registrant's definitive proxy
statement, dated March 15, 2000, relating to the April 18, 2000 Annual Meeting
of Shareholders (as filed with the commission) is incorporated herein by
reference. Information under the caption "Committee Report on Executive
Compensation" on pages 9 through 10 of the definitive proxy statement is not
incorporated by reference herein and is not deemed to be filed with the
Securities and Exchange Commission.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information set forth under the captions "Voting Securities and Record
Date", "Election of Directors" and "Securities Ownership of Management" on pages
1, 2 and 11, respectively, of the Registrant's definitive proxy statement, dated
March 15, 2000, relating to the April 18, 2000 Annual Meeting of Shareholders
(as filed with the commission) is incorporated herein by reference. Information
under the captions "Shareholder Return Performance Graph" and "Committee Report
on Executive Compensation" on pages 8 through 10 of the definitive proxy
statement is not incorporated by reference herein and is not deemed to be filed
with the Securities and Exchange Commission.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information set forth under the caption "Transactions Involving Management"
on page 13 of the Registrant's definitive proxy statement, dated March 15, 2000,
relating to the April 18, 2000 Annual Meeting of Shareholders (as filed with the
commission) is incorporated herein by reference.
20
<PAGE> 22
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements All financial statements of the Registrant are
incorporated herein by reference as set forth in the Appendix to the
Registrant's definitive proxy statement, dated March 15, 2000, relating
to the April 18, 2000 Annual Meeting of Shareholders (filed as exhibit
13 to this report on Form 10-K.)
2. Financial Statement Schedules Not applicable
3. Exhibits (Numbered in accordance with Item 601 of Regulation S-K) The
Exhibit Index is located on the final page of this report on Form 10-K.
(b) Reports on Form 8-K A report of Form 8-K was filed on November 15,
1999, under items 2 and 7, including the required financial statements
relating to acquisition of Mutual Savings Bank, f.s.b.
21
<PAGE> 23
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, dated March 14, 2000.
INDEPENDENT BANK CORPORATION
<TABLE>
<S> <C>
s/Charles C. Van Loan Charles C. Van Loan, President and Chief Executive Officer
- ------------------------------------- (Principal Executive Officer)
s/William R. Kohls William R. Kohls, Executive Vice President and Chief Financial
- ------------------------------------- Officer (Principal Financial Officer)
s/James J. Twarozynski James J. Twarozynski, Vice President and Controller
- ------------------------------------- (Principal Accounting Officer)
</TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated. Each director of the Registrant,
who's signature appears below hereby appoints Charles C. Van Loan and William R.
Kohls and each of them severally, as his attorney-in-fact, to sign in his name
and on his behalf, as a director of the Registrant, and to file with the
Commission any and all amendments to this Report on Form 10-K.
Keith E. Bazaire, Director s/Keith E. Bazaire
-------------------------------
Terry L. Haske, Director s/Terry L. Haske
-------------------------------
Thomas F. Kohn, Director s/Thomas F. Kohn
-------------------------------
Robert J. Leppink, Director s/Robert J. Leppink
-------------------------------
Charles A. Palmer, Director
-------------------------------
Charles C. Van Loan, Director s/Charles C. Van Loan
-------------------------------
Arch V. Wright, Jr., Director s/Arch V. Wright, Jr.
-------------------------------
Jeffrey A. Bratsburg, Director s/Jeffrey A. Bratsburg
-------------------------------
22
<PAGE> 24
EXHIBIT INDEX
Exhibit number and description
EXHIBITS FILED HEREWITH
13 Appendix to the Registrant's definitive proxy statement, dated March 15,
2000, relating to the April 18, 2000 Annual Meeting of Shareholders. This
appendix was filed with the Commission as part of the Company's proxy
statement and was delivered to the Company's shareholders in compliance
with Rule 14(a)-3 of the Securities Exchange Act of 1934, as amended.
21 List of Subsidiaries.
23 Consent of Independent Accountants
24 Power of Attorney (Included on page 22).
27 Financial Data Schedule
EXHIBITS INCORPORATED BY REFERENCE
2 Agreement and plan of reorganization between Independent Bank Corporation
and Mutual Savings Bank, f.s.b., dated March 24, 1999 (incorporated herin
by reference to Exhibit 2.1 to the Registrants Form S-4 Registration
Statement dated May 28, 1999, filed under Registation No. 333-79679).
3.1 Restated Articles of Incorporation (incorporated herein by reference to
Exhibit 3(i) to the Registrant's report on Form 10-Q for the quarter
ended June 30, 1994).
3.2 Amended and Restated Bylaws (incorporated herein by reference to Exhibit
3(ii) to the Registrant's report on Form 10-Q for the quarter ended June
30, 1994).
4 Automatic Dividend Reinvestment and Stock Purchase Plan, as amended
(incorporated herein by reference to the Registrant's Form S-3
Registration Statement dated September 17, 1998, filed under Registration
No. 3380088).
4.1 Form of Indenture, dated as of December 17, 1996 (incorporated herein by
reference to the Registrant's Form S-2 Registration Statement dated
December 6, 1996, filed under Registration No. 33-14507).
4.2 Form of Subordinated Debenture (included as an exhibit to Exhibit 4.1),
(incorporated herein by reference to the Registrant's Form S-2
Registration Statement dated December 6, 1996, filed under Registration
No. 33- 14507).
4.3 Certificate of Trust of IBC Capital Finance (incorporated herein by
reference to the Registrant's Form S-2 Registration Statement dated
December 6, 1996, filed under Registration No. 33-14507).
4.4 Trust Agreement of IBC Capital Finance dated as of November 7, 1996
(incorporated herein by reference to the Registrant's Form S-2
Registration Statement dated December 6, 1996, filed under Registration
No. 33-14507).
4.5 Form of Amended and Restated Trust Agreement of IBC Capital Finance dated
as of December 17, 1996 (incorporated herein by reference to the
Registrant's Form S-2 Registration Statement dated December 6, 1996,
filed under Registration No. 33-14507).
4.6 Form of Preferred Security Certificate of IBC Capital Finance (included
as an exhibit to Exhibit 4.5.), (incorporated herein by reference to the
Registrant's Form S-2 Registration Statement dated December 6, 1996,
filed under Registration No. 33-14507).
23
<PAGE> 25
EXHIBIT INDEX (Continued)
4.7 Form of Preferred Securities Guarantee Agreement for IBC Capital Finance
(incorporated herein by reference to the Registrant's Form S-2
Registration Statement dated December 6, 1996, filed under Registration
No. 33-14507).
4.8 Form of Agreement as to Expenses and Liabilities (included as an exhibit
to Exhibit 4.5), (incorporated herein by reference to the Registrant's
Form S-2 Registration Statement dated December 6, 1996, filed under
Registration No. 33-14507).
10.1* Deferred Benefit Plan for Directors (incorporated herein by reference to
Exhibit 10(C) to the Registrant's report on Form 10-K for the year ended
December 31, 1984).
10.2 The form of Indemnity Agreement approved by the Registrant's shareholders
at its April 19, 1988 Annual Meeting, as executed with all of the
Directors of the Registrant (incorporated herein by reference to Exhibit
10(F) to the Registrant's report on Form 10-K for the year ended December
31, 1988).
10.3* Incentive Share Grant Plan, as amended, approved by the Registrant's
shareholders at its April 21, 1992 Annual Meeting (incorporated herein by
reference to Exhibit 10 to the Registrant's report on Form 10-K for the
year ended December 31, 1992).
10.4* Non-Employee Director Stock Option Plan, as amended, approved by the
Registrant's shareholders at its April 15, 1997 Annual Meeting
(incorporated herein by reference to Exhibit 4 to the Registrant's Form
S-8 Registration Statement dated July 28, 1997, filed under registration
No. 333-32269).
10.5* Employee Stock Option Plan, as amended, approved by the Registrant's
shareholders at its April 15, 1997 Annual Meeting (incorporated herein by
reference to Exhibit 4 to the Registrant's Form S-8 Registration
Statement dated July 28, 1997, filed under registration No. 333-32267).
10.6 The form of Management Continuity Agreement as executed with executive
officers and certain senior managers (incorporated herein by reference to
Exhibit 10 to the Registrant's report on Form 10-K for the year ended
December 31, 1998).
* Represents a compensation plan.
24
<PAGE> 1
EXHIBIT 13
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> 2
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management's discussion and analysis of financial condition and results of
operations contains forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. Actual results could differ materially
from those projected in such forward-looking statements.
The following section presents additional information to assess the
financial condition and results of operations of the Company and 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> 3
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> 4
<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> 5
<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> 6
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> 7
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> 8
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> 9
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> 10
<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> 11
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> 12
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> 13
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> 14
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> 15
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> 16
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> 17
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> 18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies and practices of Independent Bank
Corporation and subsidiaries conform with 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> 19
ALLOWANCE FOR LOAN LOSSES - Some loans will not be repaid in full.
Therefore, an allowance for loan losses is maintained at a level which
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> 20
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> 21
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> 22
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> 23
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> 24
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> 25
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> 26
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> 27
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> 28
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> 29
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> 30
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> 31
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> 32
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> 33
<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> 34
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> 35
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> 1
EXHIBIT 21
INDEPENDENT BANK CORPORATION
Subsidiaries of the Registrant
<TABLE>
<CAPTION>
State of Incorporation
----------------------
<S> <C>
IBC Capital Finance
Ionia, Michigan Delaware
Independent Bank
Ionia, Michigan Michigan
Independent Bank West Michigan
Rockford, Michigan Michigan
Independent Bank South Michigan
Leslie, Michigan Michigan
Independent Bank East Michigan
Caro, Michigan Michigan
Independent Bank MSB
Bay City, Michigan Michigan
IBC Financial Services, Inc. (a subsidiary of Independent Bank)
Ionia, Michigan Michigan
Independent Title Services, Inc. (a subsidiary of Independent Bank,
Independent Bank West Michigan, Independent Bank
South Michigan and Independent Bank East Michigan)
Rockford, Michigan Michigan
First Home Financial (a subsidiary of Independent Bank)
Grand Rapids, Michigan Michigan
MSB Investment and Insurance Services, Inc. (a subsidiary of
Independent Bank MSB)
Bay City, Michigan Michigan
MSB Service Corporation (a subsidiary of Independent Bank MSB)
Bay City, Michigan Michigan
Independent Mortgage Company-Central Michigan
(a subsidiary of Independent Bank)
South Ionia, Michigan Michigan
Independent Mortgage Company-West Michigan
(a subsidiary of Independent Bank West Michigan)
Rockford, Michigan Michigan
Independent Mortgage Company-South Michigan
(a subsidiary of Independent Bank South Michigan)
Leslie, Michigan Michigan
Independent Mortgage Company-East Michigan
(a subsidiary of Independent Bank East Michigan)
Caro, Michigan Michigan
</TABLE>
<PAGE> 1
EXHIBIT 23
The Board of Directors
Independent Bank Corporation:
We consent to incorporation by reference in the registration statements (No.
33-80088) on Form S-3 and (Nos. 333-32267 and 333-32269) on Forms S-8 of
Independent Bank Corporation of our report dated February 4, 2000, relating to
the 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, which report is incorporated by reference in the December 31,
1999 annual report on Form 10-K of Independent Bank Corporation.
/s/ KPMG LLP
Detroit, Michigan
March 28, 2000
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 58,646
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 195,300
<INVESTMENTS-CARRYING> 71,115
<INVESTMENTS-MARKET> 70,486
<LOANS> 1,290,641
<ALLOWANCE> 12,985
<TOTAL-ASSETS> 1,725,205
<DEPOSITS> 1,310,602
<SHORT-TERM> 264,420
<LIABILITIES-OTHER> 16,687
<LONG-TERM> 19,750
0
0
<COMMON> 11,235
<OTHER-SE> 102,511
<TOTAL-LIABILITIES-AND-EQUITY> 1,725,205
<INTEREST-LOAN> 106,733
<INTEREST-INVEST> 17,200
<INTEREST-OTHER> 1,577
<INTEREST-TOTAL> 125,510
<INTEREST-DEPOSIT> 44,106
<INTEREST-EXPENSE> 58,730
<INTEREST-INCOME-NET> 66,780
<LOAN-LOSSES> 2,661
<SECURITIES-GAINS> (912)
<EXPENSE-OTHER> 69,480
<INCOME-PRETAX> 11,962
<INCOME-PRE-EXTRAORDINARY> 11,962
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,669
<EPS-BASIC> 0.76
<EPS-DILUTED> 0.75
<YIELD-ACTUAL> 4.47
<LOANS-NON> 2,980
<LOANS-PAST> 2,029
<LOANS-TROUBLED> 270
<LOANS-PROBLEM> 3,400
<ALLOWANCE-OPEN> 11,557
<CHARGE-OFFS> 1,979
<RECOVERIES> 746
<ALLOWANCE-CLOSE> 12,985
<ALLOWANCE-DOMESTIC> 7,201
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 5,784
</TABLE>
