<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.
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 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 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>
MERGER RELATED CHARGES AND LITIGATION SETTLEMENT Year Ended December 31,
1999
-------------------------------------------------------------------------------
<S> <C>
Litigation settlement.................................... $ 2,025,000
Data processing termination costs(1)..................... 1,210,000
Legal and professional................................... 1,133,000
Severance................................................ 683,000
Write-off of fixed assets................................ 910,000
Loss on sale of securities............................... 772,000
Data processing conversion costs(2)...................... 467,000
Other.................................................... 800,000
------------
Total charges.......................................... 8,000,000
Federal income tax benefit............................... (2,250,000)
------------
Net charges.......................................... $ 5,750,000
============
</TABLE>
(1) Represents costs to terminate MSB's contract with its third party data
processor.
(2) Represents costs to convert MSB's data processing system to the Company's
data processing system.
A-2
<PAGE> 3
Excluding consideration of these 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>
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
</TABLE>
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 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>
In determining the allowance and the related provision for loan losses,
Management considers four principal elements: (i) specific allocations based
upon probable losses identified during the review of the loan portfolio, (ii)
allocations established for other adversely rated loans, (iii) allocations
based principally on historical loan loss experience and (iv) additional
allowances based on subjective factors, including local and general economic
business factors and trends, portfolio concentrations and changes in the size
and/or the general terms of the loan portfolios. Periodically, Management
evaluates and refines this methodology to reflect current trends and
developments.
The first element reflects Management's estimate of probable losses based
upon its systematic review of specific loans. These estimates are based upon a
number of objective factors, such as payment history, financial condition of
the borrower, and discounted collateral exposure.
The second element reflects the application of Management's eight point
rating system. This rating system is similar to those employed by state and
federal banking regulators. Loans that are rated below a certain predetermined
classification are assigned a loss allocation factor for each loan
classification category. The lower the rating assigned to a loan or category,
the greater the allocation percentage is applied.
The third element is determined by assigning loss allocations based
principally upon the ten year average of charge-offs experienced for each type
of loan. These average charge-offs are weighted to place additional emphasis
on the most recent years in the ten year average and may be further adjusted
based on the current delinquency rate. Charge-off analyses are conducted
annually.
The fourth element is based on factors that cannot be associated with a
specific credit or loan category and reflects Management's attempt to ensure
that the overall allowance for loan losses appropriately reflects a margin for
the imprecision necessarily inherent in the estimates of expected credit
losses. Management considers a number of subjective factors when determining
the unallocated portion, including local and general economic business factors
and trends, portfolio concentrations and changes in the size and the general
terms of the loan portfolios. (See "Provision for loan losses.")
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
1999 1998 1997
---------------------------------
<S> <C> <C> <C>
Specific allocations 400,000 300,000 500,000
Other adversely rated loans 2,739,000 2,302,000 1,784,000
Historical loss allocations 4,063,000 3,576,000 2,897,000
Additional allocations based on subjective factors 5,783,000 5,379,000 4,512,000
---------------------------------
12,985,000 11,557,000 9,693,000
=================================
</TABLE>
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, including debt and related financial
derivative instruments, under parallel shifts in interest rates by
discounting the estimated future cash flows using a market-based discount
rate. Cash flow estimates incorporate anticipated changes in prepayment
speeds and other embedded options.
(2)Simulation analyses calculate the change in net interest income under
parallel shifts in interest rates over the next twelve months, are based upon
a static balance sheet, including debt and related financial derivative
instruments, 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
Merger related charges and litigation settlements.... 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
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
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.
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 .............. $ 9,540,000 $42,043,000 $ 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 ........................ 480,000 10,202,000 (10,703,000) (21,000)
Issuance of 114,718 shares of common stock 115,000 1,322,000 1,437,000
Cash in lieu of fractional shares for
three-for-two stock split .............. (8,000) (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 ............ 10,135,000 53,443,000 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 165,719 shares of common stock 166,000 3,320,000 3,486,000
Cash in lieu of fractional shares for
three-for-two stock split .............. (13,000) (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
represents management's best estimate of losses incurred. In determining
the allowance and the related provision for loan losses,
Management considers four principal elements: (i) specific allocations based
upon probable losses identified during the review of the loan portfolio, (ii)
allocations established for other adversely rated loans, (iii) allocations
based principally on historical loan loss experience and (iv) additional
allowances based on subjective factors, including local and general economic
business factors and trends, portfolio concentrations and changes in the size
and/or the general terms of the loan portfolios. Increases in the allowance
are recorded by a provision for loan losses charged to expense 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. These instruments are accounted for on an accrual basis. Any
net interest differential, including premiums paid, is recognized as an
adjustment to interest expense of the related liability. The Company considers
its interest-rate swaps to be synthetic alterations of the related liability as
long as (1) a specific liability has been designated; (2) there is a high
correlation with the changes in interest expense generated by the liability; and
(3) the notional amount is less than or equal to the principal amount of the
designated liability. If these criteria are not met, the swap is no longer
considered a synthetic alteration and changes in fair value are included in
other income in the financial statements. The criteria for consideration of a
collar, floor or cap as a synthetic alteration are similar to those for a swap
arrangement. If a synthetic alteration is terminated before maturity, the net
proceeds received or paid are deferred and amortized as an adjustment to
interest expense over the shorter of the remaining contract life or the maturity
of the designated liability. If the designated liability is sold or matures, the
synthetic alteration is marked to market and the gain or loss is included with
the gain or loss on the sale/maturity of the designated liability.
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>
Summary information on stock options outstanding at December 31, 1999 follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------ --------------------------------------------------
Weighted-Average Weighted-Average
Number Remaining Weighted- Number Remaining Weighted-
Range of Contractual Life Average of Contractual Life Average
of Exercise Prices Shares (In years) Exercise Price Shares (In years) Exercise Price
------------------- ---------- ---------------- ---------------- ------------ ------------------ ----------------
<S> <C> <C> <C> <C> <C> <C>
$5.21 to $6.85 103,433 3.70 $5.96 103,433 3.70 $5.96
$8.53 to $8.71 51,689 0.33 8.68 51,689 0.33 8.68
$10.34 to $10.51 81,187 2.64 10.42 81,187 2.64 10.42
$14.88 to $15.95 232,339 3.76 15.72 117,041 3.20 15.04
$22.62 to $23.89 187,843 3.18 23.48 187,843 3.18 23.48
---------- ------------
656,491 3.17 15.19 541,193 2.93 14.93
========== ============
</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>
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<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
Merger related charges and litigation settlement...... 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
