UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14A
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )
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[X] Definitive Proxy Statement
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[ ] Soliciting Material Pursuant to Section 240.14a-12
Independent Bank Corporation
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(Name of Registrant as Specified In Its Charter)
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[INDEPENDENT BANK CORPORATION LOGO]
March 18, 2004
Dear Shareholder:
We invite you to attend our 2004 Annual Meeting of Shareholders. This
year's meeting will be held on Friday, April 23, 2004, at 3:00 p.m. at the Ionia
Theater, 205 West Main Street, Ionia, Michigan 48846.
It is important that your shares are represented at the Annual Meeting.
Please carefully read the Notice of Annual Meeting and Proxy Statement. Whether
or not you expect to attend the Annual Meeting, PLEASE SIGN, DATE AND RETURN THE
ENCLOSED PROXY IN THE ENVELOPE PROVIDED OR REGISTER YOUR VOTE BY PHONE OR THE
INTERNET.
Sincerely,
/s/ Charles Van Loan
Charles Van Loan
President and
Chief Executive Officer
INDEPENDENT BANK CORPORATION
230 West Main Street
Ionia, Michigan 48846
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
To Be Held April 23, 2004
The Annual Meeting of Shareholders of Independent Bank Corporation will be
held at the Ionia Theater, 205 West Main Street, Ionia, Michigan 48846, on
Friday, April 23, 2004, at 3:00 p.m. (local time) for the following purposes:
1. To elect two nominees to our Board of Directors to serve three-year
terms expiring in 2007.
2. To transact such other business as may properly come before the meeting
or any adjournment thereof.
Shareholders of record as shown by our transfer books at the close of
business on February 24, 2004, are entitled to notice of and to vote at the
meeting or any adjournment thereof. Whether or not you expect to be present in
person at this meeting, please sign the enclosed proxy and return it promptly in
the enclosed envelope or register your vote by phone or the internet, if you
attend the meeting and wish to vote in person, you may do so even though you
have submitted a proxy.
By order of our Board of Directors,
/s/ Robert N. Shuster
Robert N. Shuster
Secretary
Dated: March 18, 2004
INDEPENDENT BANK CORPORATION
230 West Main Street
Ionia, Michigan 48846
PROXY STATEMENT
MARCH 18, 2004
This Proxy Statement is furnished in connection with the solicitation,
beginning approximately March 18, 2004, by our Board of Directors, of proxies
for use at the Annual Meeting of Shareholders. This meeting will be held on
Friday, April 23, 2004, at 3:00 p.m. at the Ionia Theater, 205 West Main Street,
Ionia, Michigan 48846.
If the form of the Proxy accompanying this Proxy Statement is properly
executed and returned, the shares represented by the Proxy will be voted at the
Annual Meeting of Shareholders in accordance with the directions given in such
Proxy. If no choice is specified, the shares represented by the Proxy will be
voted for the election of directors listed as nominees.
To vote by telephone, shareholders of record (shareholders who have been
issued a certificate representing their shares) may call toll free on a
touch-tone telephone 1-877-PRX-VOTE (1-877-779-8683); enter the control number
located on your proxy card and follow the recorded instructions. To vote by
internet, go to the site http://www.eproxyvote.com/ibcp; enter the control
number located on your proxy card and follow the instructions provided.
If your shares are held through a bank or a broker (referred to as "street
name"), you may also be eligible to vote your shares electronically. Simply
follow the instructions on your voting form, using either the toll-free
telephone number or the internet address that is listed.
A Proxy may be revoked prior to its exercise by delivering a written notice
of revocation to our Secretary, executing a subsequent Proxy or attending the
meeting and voting in person. Attendance at the meeting does not, however,
automatically serve to revoke a Proxy.
VOTING SECURITIES AND RECORD DATE
As of February 24, 2004, the record date for the Annual Meeting, we had
issued and outstanding 19,600,076 shares of Common Stock. Shareholders are
entitled to one vote for each share of our Common Stock registered in their
names at the close of business on the record date. Votes cast at the meeting and
submitted by proxy are counted by the inspectors of the meeting, who are
appointed by us.
As of February 24, 2004, no person was known by us to be the beneficial
owner of more than 5% of our Common Stock, except as follows:
Amount and
Nature of Approximate
Name and Address of Beneficial Percent
Title of Class Beneficial Owner Ownership of Class
-----------------------------------------------------------------------------------------------
Common Stock, Independent Bank Corporation 1,106,913 5.50%
$1 par value Employee Savings and Stock
Ownership Trust ("ESSOT")
230 West Main Street
Ionia, Michigan 48846
1
Our ESSOT holds shares of Common Stock pursuant to the terms of our
Employee Savings and Stock Ownership Plan ("ESSOP"). The Principal Financial
Group administers the ESSOP and serves as directed trustee. Our ESSOP
Administrative Committee has investment power with respect to the shares of
Common Stock held by the ESSOT and has voting power to the extent that the ESSOP
participants do not direct the voting of the shares of Common Stock allocated to
their accounts.
Our Administrative Committee is comprised of three of our officers: Robert
N. Shuster, James J. Twarozynski and Laurinda M. Neve. Except for the shares of
Common Stock allocated to their account as participants in the ESSOP, each
member of our Administrative Committee disclaims beneficial ownership of the
shares held by the ESSOP.
ELECTION OF DIRECTORS
Our Articles of Incorporation provide that our Board be divided into three
classes of nearly equal size, with the classes to hold office for staggered
terms of three years each. Our Bylaws permit our Board of Directors to establish
the size of our Board from three to fifteen members. Our current Board has fixed
the size of our Board at six members. Jeffrey A. Bratsburg and Charles C. Van
Loan are nominees to serve three-year terms expiring in 2007. Mr. Hetzler, Mr.
Haske, Mr. Palmer and Mr. McCarty are incumbent directors previously elected by
our shareholders.
The Proxies cannot be voted for a greater number of persons than the number
of nominees named. In the event that any nominee is unable to serve, which is
not now contemplated, our Board may designate a substitute nominee. The proxy
holders, to the extent they have been granted authority to vote in the election
of directors, may or may not vote for a substitute nominee.
In addition to the nominees for director, each director whose term will
continue after the meeting is named on the following page. Each nominee and
director owned beneficially, directly or indirectly, the number of shares of
Common Stock set forth opposite their respective names. The stock ownership
information and the information relating to each nominee's and director's age,
principal occupation or employment for the past five years has been furnished to
us as of February 24, 2004, by the respective nominees and directors.
A plurality of the votes cast at the Annual Meeting of Shareholders is
required to elect the nominees as directors. Accordingly, at this year's
meeting, the two individuals who receive the largest number of votes cast at the
meeting will be elected as directors. Shares not voted at the meeting, whether
by abstention, broker non-vote or otherwise, will not be treated as votes cast
at the meeting. Our Board of Directors recommends a vote FOR the election of the
persons nominated by our Board.
2
Amount and
Nature of
Beneficial Percent of
Ownership(1) Outstanding
------------ -----------
NOMINEES FOR THREE-YEAR TERMS EXPIRING IN 2007
Jeffrey A. Bratsburg (age 60) 138,590 .69%
Mr. Bratsburg served as President and Chief Executive
Officer of independent Bank West Michigan from 1985 until
his retirement in 1999. He became a Director in 2000.
Charles C. Van Loan (age 56) 265,239(2) 1.32
Mr. Van Loan is the President and Chief Executive Officer of
Independent Bank Corporation. He became a Director in 1992.
DIRECTORS WHOSE TERMS EXPIRE IN 2005
Terry L. Haske (age 55) 56,109(3) .28
Mr. Haske is the President of Ricker & Haske, CPAs, PC.
He became a Director in 1996.
Charles A. Palmer (age 59) 98,424 .49
Mr. Palmer is an attorney and a professor of law at Thomas M. Cooley
Law School. He became a Director in 1991.
DIRECTORS WHOSE TERMS EXPIRE IN 2006
Robert L. Hetzler (age 59) 40,754 .20
Mr. Hetzler is the President of Monitor Sugar Company
(food processor). He became a Director in 2000.
James E. McCarty (age 56) 15,664(4) .08
Mr. McCarty is the President of McCarty Communications
(commercial printing). He became a Director in 2002.
(1) Except as described in the following notes, each nominee owns the shares
directly and has sole voting and investment power or shares voting and
investment power with his spouse under joint ownership. Includes shares of
Common Stock that are issuable under options exercisable within 60 days.
(2) Includes 33,405 shares allocated to Mr. Van Loan's account under the ESSOT,
2,836 shares held by Mr. Van Loan's dependent children and 27,431 shares
held in a spousal trust.
(3) Includes 5,149 shares owned jointly with Mr. Haske's father with respect to
which Mr. Haske shares voting and investment power.
(4) Excludes 3,938 common stock units held in Mr. McCarty's account under our
deferred compensation and stock purchase plan for non-employee directors
that are payable in our Common Stock upon retirement. Includes 3,962 shares
held in a spousal trust and 1,550 shares held by a corporation owned by Mr.
McCarty.
CORPORATE GOVERNANCE AND BOARD MATTERS
CORPORATE GOVERNANCE PRINCIPLES
For many years, our Board of Directors has been committed to sound and
effective corporate governance practices. This past year the Board documented
those practices by adopting our Corporate Governance Principles. These
principles address director qualifications, periodic performance evaluations,
stock ownership guidelines and other corporate governance matters. Under those
principles, a majority of the members of our Board must qualify as independent
under the rules established by the NASDAQ stock market on which our stock
trades. Our principles also require the Board to have an audit committee,
compensation committee and a nominating and corporate governance committee, and
that each member of those committees qualify as independent under the NASDAQ
rules. Our corporate governance principles, as well as the charters of each of
the foregoing committees are available for review on our website at www.ibcp.com
under the "Investor Relations" tab.
3
CODE OF BUSINESS CONDUCT AND ETHICS AND CODE OF ETHICS
FOR SENIOR FINANCIAL OFFICERS
Our Board has also adopted a Code of Business Conduct and Ethics that
applies to all of our employees, officers and directors. In addition, the Board
adopted a Code of Ethics for Senior Financial Officers, which includes our
principle executive officer, principle financial officer and controller. Each of
these codes is posted on our website and can also be obtained free of charge
through our Corporate Secretary at 230 West Main Street, Ionia, Michigan 48846.
Any changes to or waivers of either code for our CEO or senior financial
officers will be disclosed at our website.
DETERMINATION OF INDEPENDENCE OF BOARD MEMBERS
As required by our Corporate Governance Principles, our Board has
determined that each of the following directors qualifies as an "Independent
Director", as such term is defined in Market Place Rules 4200(a)(15) of the
National Association of Securities Dealers (the "NASD"): Jeffrey A. Bratsburg,
Charles A. Palmer, Terry L. Haske, Robert L. Hetzler and James E. McCarty. Our
Board has also determined that each member of the three committees of the Board
meets the independence requirements applicable to those committees as prescribed
by the NASDAQ listing requirements, and, as to the audit committee, under the
applicable rules of the Securities and Exchange Commission. There are no family
relationships between or among our directors, nominees or executive officers.
MEETING ATTENDANCE
Each of our directors is expected to attend all meetings of the Board,
applicable committee meetings, and our annual meeting of shareholders. Each of
our directors attended our 2003 annual shareholder meeting. During 2003, the
Board held 7 meetings; each director attended at least 75% of the aggregate
number of meetings of our Board and Board committees on which they served.
BOARD COMMITTEES
Our audit committee, which met on nine occasions in 2003, consists of
directors Haske, Hetzler and Palmer. Our Board has determined that Mr. Haske
qualifies as the "Audit Committee Financial Expert", as that term is defined in
the rules recently established by the Securities and Exchange Commission. The
primary purpose of this committee is to assist the Board in overseeing (1) the
quality and integrity of our accounting, auditing and reporting practices, (2)
the performance of our internal audit function and independent auditor, and (3)
our disclosure controls and system of internal controls regarding, finance,
accounting, legal compliance, and ethics that management and our Board have
established. A copy of the committee's charter, which was amended and restated
this past year following the committee's annual review and reassessment of its
charter, is attached to this Proxy Statement as Appendix A.
Our compensation committee, consisting of Directors Bratsburg, Hetzler and
Haske, met four times in 2003. This committee reviews and makes recommendations
to the Board on executive compensation matters, including any benefits to be
paid to our executives and officers.
Our nominating and corporate governance committee, consisting of directors
Palmer, Bratsburg and Haske met once in 2003. This committee is responsible for
making recommendations on the qualification and standards to serve on our Board,
identifying board candidates and monitoring our corporate governance standards.
Our Articles of Incorporation contain certain procedural requirements
applicable to shareholder nominations of directors. Shareholders may nominate a
person to serve as a director if they provide written notice to us not later
than sixty and no more than ninety days prior to the first anniversary date of
the preceding year's annual meeting. The notice must include (1) name and
address of the shareholder who intends to make the nomination and of the person
or persons nominated, (2) a representation that the shareholder is a current
record holder and will continue to hold those shares through the date of the
meeting and intends to appear in person or by proxy at the meeting, (3) a
description of all arrangements between the shareholder and each nominee, (4)
the information regarding each nominee as would be required to be included in a
proxy statement filed under Regulations 14A of the Exchange Act had the nominee
been nominated by the Board of Directors, and (5) the consent of each nominee to
serve as director.
Our governance committee does not currently utilize the services of any
third party search firm to assist in the identification or evaluation of board
member candidates. However, the committee may use the services of such a firm in
the future if it deems necessary or appropriate.
The governance committee has not established specific, minimum
qualifications for director nominees. Our Corporate Governance Principles
mandate that directors possess the requisite background and experience to make a
strong, positive contribution to Independent Bank Corporation and our
shareholders. Our governance committee is responsible for reviewing the
qualifications and independence of the members of the Board. This assessment
includes a consideration of the skills, experience and diversity of the
prospective candidates. In light of these general requirements, our governance
committee reviews the suitability of each person nominated to our Board.
4
The committee has not received any recommended nominations from any of our
shareholders in connection with our 2004 annual meeting. The nominees that are
standing for election as directors at the 2004 annual meeting are incumbent
directors nominated by the committee.
SHAREHOLDER COMMUNICATIONS WITH THE BOARD
The Board of Directors has implemented a process by which a shareholder may
send written communications to the Board's attention. Any shareholder desiring
to communicate with the Board or one or more of our directors may send a letter
addressed to the Company's Corporate Secretary at P.O. Box 491, Ionia, Michigan
48846. The Secretary has been directed to promptly forward all communications to
the full Board or the specific director indicated in the letter.
COMPENSATION OF DIRECTORS
Directors who are not employed by us or any of our subsidiaries
("Non-employee Directors") receive an annual retainer of $10,000. Each
Non-employee Director also serves as a director of one of our subsidiary banks.
Non-employee Directors of our subsidiaries receive monthly meeting fees of $850.
Our Non-employee Directors are not compensated for committee meetings.
Pursuant to our Long-Term Incentive Plan, the compensation committee may
grant options to purchase shares of Common Stock to each Non-employee Director.
During 2003, each Non-employee Director received an option to purchase 3,630
shares of Common Stock at $19.22 per share, the fair market value of the Common
Stock on the date of the grant. These options may not be exercised prior to the
expiration of one year from the date of grant, are restricted as to
transferability and expire 10 years after the date of grant.
We maintain a Deferred Compensation and Stock Purchase Plan for
Non-employee Directors (the "Purchase Plan"). The Purchase Plan provides that
Non-employee Directors may defer payment of all or a part of their director fees
("Fees") or receive shares of Common Stock in lieu of cash payment of Fees.
Under the Purchase Plan, each Non-employee Director may elect to participate in
a Current Stock Purchase Account, a Deferred Cash Investment Account or a
Deferred Stock Account.
A Current Stock Purchase Account is credited with shares of Common Stock
having a fair market value equal to the Fees otherwise payable. A Deferred Cash
Investment Account is credited with an amount equal to the Fees deferred and on
each quarterly credit date with an appreciation factor that may not exceed the
prime rate of interest charged by Independent Bank. A Deferred Stock Account is
credited with the amount of Fees deferred and converted into stock units based
on the fair market value of our Common Stock at the time of the deferral.
Amounts in the Deferred Stock Account are credited with cash dividends and other
distributions on our Common Stock. Fees credited to a Deferred Cash investment
Account or a Deferred Stock Account are deferred for income tax purposes. The
Purchase Plan does not provide for distributions of amounts deferred prior to a
participant's termination as a Non-employee Director, and the participant may
generally elect either a lump sum or installment distribution.
REPORT OF OUR AUDIT COMMITTEE
Our audit committee has met with Management and the independent auditors to
review and discuss our audited financial statements as of and for the year ended
December 31, 2003.
Our audit committee obtained from our independent auditors a formal written
statement describing the relationships between us and our auditors that might
bear on the auditors' independence, which is consistent with Independence
Standards Board Standard No. 1, "Independence Discussions with Audit
Committees." Our audit committee has also discussed with our auditors any
relationships that may impact their objectivity and independence and satisfied
itself as to our auditors' independence.
Our audit committee has reviewed with our independent auditors all
communications required by generally accepted auditing standards, including
those described in Statement on Auditing Standards No. 61, as amended,
"Communication with Audit Committees." Our audit committee also discussed, with
and without management present, the results of our independent auditors'
examination of our financial statements.
Based on the reviews and discussions referred to above, the audit committee
has recommended to our Board of Directors that the financial statements referred
to above be included in our Annual Report on Form 10-K for the year ended
December 31, 2003.
ROBERT L. HETZLER
TERRY L. HASKE CHARLES A. PALMER
5
AUDIT MATTERS AND OUR RELATIONSHIP WITH
OUR INDEPENDENT PUBLIC ACCOUNTANTS
Representatives of KPMG, LLP, our independent accounting firm, will be
present at the annual meeting and will be given the opportunity to make a
statement if desired. They will also be available to respond to appropriate
questions. Our audit committee has yet to take action on the selection of our
independent accounting firm for 2004, which is expected to occur in April, 2004.
The following sets forth the fees paid to our independent public
accountants for the last two fiscal years:
Year ended December 31,
2003 2002
-------- --------
Audit fees $203,000 $179,000
Audit related fees(1) 29,000 43,000
Tax fees(2) 84,000 81,000
All other fees (3) 57,000 17,000
-------- --------
Total $373,000 $320,000
======== ========
(1) Consists primarily of fees related to audit required under Housing and
Urban Development loan program and Federal Deposit Insurance Corporation
Improvement Act reporting.
(2) Consists primarily of fees related to the preparation of corporate tax
returns and corporate tax planning.
(3) Amount in 2003 consists primarily of fees related to the filing of an S-3
registration statement relating to the issuance of our trust preferred
securities in 2003 and fees related to benefit plan audits. Amount in 2002
consists primarily of fees related to benefit plan audits.
Our audit committee has established a pre-approval policy for procedures
for audit, audit related and tax services that can be performed by our
independent public accountants. That policy is attached to this Proxy Statement
as Appendix B. Subject to certain limitations, the authority to grant
pre-approvals may be delegated to one or more members of the audit committee.
SHAREHOLDER RETURN PERFORMANCE GRAPH
Set forth below is a line graph comparing the yearly percentage change in
the cumulative total shareholder return on our Common Stock (based on the last
reported sales price of the respective year) with the cumulative total return of
the Nasdaq Stock Market Index (United States stocks, only) and the Nasdaq Bank
Stocks Index for the five-year period ended December 31, 2003. The following
information is based on an investment of $100 on January 1, 1999, in our Common
Stock, the Nasdaq Stock Market Index and the Nasdaq Bank Stocks Index, with
dividends reinvested.
January 1, December 31,
----------------------------------------------------------
1999 1999 2000 2001 2002 2003
-------------------------------------------------------------------------------------------------------
Independent Bank Corporation $ 100.00 $ 77.48 $ 113.20 $ 171.00 $ 199.01 $ 314.87
Nasdaq Stock Market 100.00 185.43 111.83 88.76 61.37 91.75
Nasdaq Bank Stocks 100.00 96.15 109.84 118.92 121.74 156.62
[TOTAL SHAREHOLDER RETURN LINE GRAPH]
6
COMMITTEE REPORT ON EXECUTIVE COMPENSATION
GENERAL
Our ability to create shareholder wealth is predicated on our ability to
attract and retain qualified executives and senior managers. Our Board of
Directors, therefore, believes that our compensation policies and practices
must: 1) provide incentives and rewards for superior performance; 2) align the
interests of our executive officers and senior managers with the interests of
our shareholders, and; 3) provide executive officers and senior managers with
the opportunity to accumulate wealth that is commensurate with increases in the
value of our Common Stock.
COMPENSATION STRATEGY
Consistent with these objectives and based on a compensation review by
nationally recognized compensation consultants, our Board of Directors adopted a
"pay-for-performance" compensation strategy in 1991. The strategy seeks to
maintain an optimum balance among three principal components of total
compensation, as follows:
BASE SALARY-Excluding consideration of other relevant factors, which may
include individual performance, experience, expertise and tenure, our Board
intends to maintain the base salaries of executive officers and senior managers
at approximately the level established by our peers.
Annually, the compensation committee recommends a base salary for our
President and Chief Executive Officer for consideration by the entire Board of
Directors. The compensation committee's recommendation is based upon
compensation levels established by our peers and the compensation committee's
evaluation of the relevant factors that are described above. The base salaries
of the Presidents of each of our Banks are determined in a similar manner by our
President and Chief Executive Officer and our Banks' respective boards of
directors. The base salaries of other executive officers are established by our
President and Chief Executive Officer.
ANNUAL CASH INCENTIVE-To provide performance incentives and to compensate
for the below-peer base salary, the strategy provides for annual cash awards
that are payable if we meet or exceed annual performance objectives established
by our Board of Directors. Assuming "target performance" is achieved under the
Management Incentive Compensation Plan described below, our Board intends that
aggregate annual cash compensation (the total of base salary and annual cash
incentive) will equal approximately peer level.
LONG-TERM INCENTIVES-TO align the interests of our executive officers and
senior managers with our shareholders, our Board's compensation strategy
provides for equity-based compensation plans, including our Employee Savings and
Stock Ownership Plan and our Long-Term Incentive Plan described below. These
compensation plans have been adopted by our Board of Directors, and our
Long-Term Incentive Plan has been approved by our shareholders. Such plans are,
however, administered by the committee.
COMPENSATION PLANS
Pursuant to our MANAGEMENT INCENTIVE COMPENSATION PLAN, our Board of
Directors establishes annual performance levels as follows: 1) threshold
represents the performance level which must be achieved before any incentive
awards are granted; 2) target performance is defined as the desired level of
performance in view of all relevant factors, as discussed below, and; 3) maximum
represents that which reflects outstanding performance.
The principal factors considered by our Board in the determination of these
performance levels include peer performance and investment community
expectations for our return on equity and earnings per common share, as well as
similar expectations for our competitors in the financial services industry.
Corresponding performance levels are established for each of our Banks.
In addition to our objective earnings goals, payments pursuant to this plan
may also be subject to certain pre-determined individual goals. Such individual
goals may be objective or subjective in nature. The individual performance
component is, however, limited to 20% of the total incentive formula for our
executive officers and our Bank Presidents.
For our Chief Executive Officer, cash payments made pursuant to this plan
may range from 20% to 50% of base salary. For other executive officers and our
Bank Presidents, such cash payments may range from 15% to 35% of their base
salary. For the year ended December 31, 2003, our executive officers and our
Bank Presidents received cash awards pursuant to our Management Incentive
Compensation Plan that ranged from 25% to 50% of their respective base salaries.
Our LONG-TERM INCENTIVE PLAN, is intended to provide our executive officers
and senior managers with additional long-term incentives to manage our affairs
in the best interests of our shareholders. On April 17, 2003, our Board of
Directors granted options to purchase 110,994 shares of Common Stock to 41 of
our executive officers and senior managers. These options provide the recipient
the right to purchase shares of Common Stock at $19.22 per share, the market
price of our Common Stock as of the date of the grant. Such options may not be
exercised prior to the expiration of one year from the date of the grant, are
restricted as to transferability and expire 10 years after the date of the
grant.
On January 24, 2004, our Board of Directors granted options to purchase
92,387 shares of Common Stock to our executive officers. Options covering 33,945
shares were designated as incentive stock options, as defined by the Internal
Revenue Code. Each option provides the recipient the right to purchase the
underlying shares of Common Stock at $28.46 per share, the market price of our
Common Stock as of the date of the grant. Such options may not be exercised
prior to December 31, 2004, are restricted as to transferability and expire 10
years after the date of the grant.
7
Our EMPLOYEE SAVINGS AND STOCK OWNERSHIP PLAN, provides substantially all
full-time employees an equity interest in us. Contributions to the ESSOP are
determined annually and are subject to the approval of our Board of Directors.
Contributions for the year ended December 31, 2003, were equal to 6% of the
eligible wages for each of the approximately 1,000 participants in the ESSOP.
CHIEF EXECUTIVE OFFICER COMPENSATION
Charles C. Van Loan has served as our Chief Executive Officer since
December 16, 1992. Prior to that time, Mr. Van Loan served as our President and
Chief Operating Officer and as the President and Chief Executive Officer of
Independent Bank.
Consistent with our existing policies and practices, the Committee reviewed
compensation data from our peers and evaluated Mr. Van Loan's contributions to
our success as well as his experience and expertise. On the basis of its
evaluation, the Committee recommended for consideration by our full Board of
Directors a base salary of $343,200. As a result of our record earnings,
relative to the goals established pursuant to our Management Incentive
Compensation Plan, Mr. Van Loan's cash incentive for 2003 totaled $171,600.
JEFFREY A. BRATSBURG
TERRY L. HASKE ROBERT L. HETZLER
SECURITIES OWNERSHIP OF MANAGEMENT
The following table sets forth the beneficial ownership of our Common Stock
by our Chief Executive Officer and our four highest paid executive officers
("Named Executives") and by all directors and executive officers as a group as
of February 24, 2004.
Amount and
Nature of
Beneficial Percent of
Name Ownership(1) Outstanding
--------------------------------------------------------------------------------
Charles C. Van Loan 265,239(2) 1.32%
Michael M. Magee 92,712 .46
Edward B. Swanson 126,914 .63
Ronald L. Long 60,283 .30
David C. Reglin 81,950 .41
All executive officers and directors 2,140,351(3) 10.63
as a group (consisting of 14 persons)
(1) In addition to shares held directly or under joint ownership with their
spouses, beneficial ownership includes shares that are issuable under
options exercisable within 60 days, and shares that are allocated to their
accounts as participants in the ESSOP.
(2) Includes shares held by Mr. Van Loan's dependent children and in a spousal
trust.
(3) Includes shares held by the ESSOT. Beneficial ownership is disclaimed as to
1,038,627 shares, including 967,236 shares which are held by the ESSOT.
8
SUMMARY COMPENSATION TABLE
The following table sets forth compensation received by our Named
Executives for each of the three years ended December 31, 2003.
Long-Term
Compensation Awards
-------------------
Annual Securities All
Compensation Underlying Other
-----------------------
Name & Principal Position Year Salary(1) Bonus(2) Options (#)(3) Compensation(4)
------------------------------------------------------------------------------------------------------------------
Charles C. Van Loan 2003 $343,200 $171,600 62,209 $ 18,000
President and Chief 2002 330,000 185,000 30,809 18,000
Executive Officer 2001 300,000 150,000 31,367 15,300
Michael M. Magee 2003 $218,400 $ 76,440 12,861 $ 18,000
President and CEO 2002 210,000 83,500 16,765 18,000
Independent Bank 2001 190,000 66,500 16,960 15,300
Edward B. Swanson 2003 $189,280 $ 56,094 9,790 $ 17,040
President and CEO 2002 182,000 57,435 13,036 17,047
Independent Bank South Michigan 2001 170,000 59,500 15,750 15,300
Ronald L. Long 2003 $189,280 $ 66,248 11,512 $ 17,040
President and CEO 2002 182,000 60,031 13,929 15,682
Independent Bank East Michigan 2001 170,000 59,500 15,750 15,300
David C. Reglin 2003 $189,280 $ 76,248 11,512 $ 17,040
President and CEO 2002 170,000 59,500 14,616 15,511
Independent Bank West Michigan 2001 150,000 52,500 17,505 13,500
(1) Includes elective deferrals by employees pursuant to Section 401(k) of the
internal Revenue Code.
(2) Includes amounts earned under the Company's Management Incentive
Compensation Plan.
(3) Includes options granted in 2004 relating to 2003 performance.
(4) Amounts represent our contributions to the ESSOP. Subject to certain age
and service requirements, all of our employees are eligible to participate
in this plan.
OPTION GRANTS IN 2003
The following table provides information on options granted to our Named
Executives during the year ended December 31, 2003.
Individual Grants
Number of Percent of Total Exercise or Grant Date
Securities Underlying Options Granted to Base Price Expiration Present
Options Granted(1) Employees in 2002 (per share)(2) Date Value(3)
--------------------------------------------------------------------------------------------------------------------------
Charles C. Van Loan 2,750 .86% $19.22 April 17, 2013 $ 19,058
22,698 7.12 28.46 January 24, 2014 257,395
36,761 11.53 (4) (4) 370,414
Michael M. Magee 2,750 .86% $19.22 April 17, 2013 $ 19,058
10,111 3.17 28.46 January 24, 2014 114,659
Edward B. Swanson 2,750 .86% $19.22 April 17, 2013 $ 19,058
7,040 2.21 28.46 January 24, 2014 79,834
Ronald L. Long 2,750 .86% $19.22 April 17, 2013 $ 19,058
8,762 2.75 28.46 January 24, 2014 99,361
David C. Reglin 2,750 .86% $19.22 April 17, 2013 $ 19,058
8,762 2.75 28.46 January 24, 2014 99,361
9
(1) Indicates number of shares which may be purchased pursuant to options
granted under our Long-Term Incentive Plan. Options with an expiration date
of April 17, 2013 may not be exercised in full or in part prior to the
expiration of one year from the date of grant. Options with an expiration
date of January 24, 2014 were granted in 2004 and vest on December 31,
2004. Such options relate to 2003 performance.
(2) The exercise price equals the prevailing market price of our Common Stock
on the date of grant. The exercise price may be paid in cash, by the
delivery of previously owned shares, through the withholding of shares
otherwise issuable upon exercise or a combination thereof.
(3) The values reflect application of the Black-Scholes option pricing model.
The assumptions employed on options with an expiration date of April 17,
2013, were expected volatility of 33.15%, risk-free rate of return of
3.94%, dividend yield of 2.65% and time to exercise of ten years. The
assumptions employed on options with an expiration date of January 24,
2014, were expected volatility of 32.68%, risk-free rate of return of
4.14%, dividend yield of 2.25% and time to exercise of ten years.
(4) Represents seven separate grants to Mr. Van Loan for reload options made on
two different dates during 2003. The exercise price of these options range
from $28.37 per share to $29.38 per share with expiration dates ranging
from January 18, 2010 to January 21, 2012.
AGGREGATED STOCK OPTION EXERCISES IN 2003
AND YEAR END OPTION VALUES
The following table provides information on the number and value of options
exercised in the past year, as well as the number and value of unexercised
options held by our Named Executives at December 31, 2003. Options covering
384,344 shares of Common Stock were exercised in 2003.
Shares Number of Securities Underlying Value of Unexercised
Acquired Value Unexercised Options In-the-Money Options(2)
-------------------------- --------------------------
Name on Exercise Realized(1) Exercisable Unexercisable Exercisable Unexercisable
---------------------------------------------------------------------------------------------------------------------------
Charles C. Van Loan 79,727 $1,480,522 30,422 64,836 $ 420,979 $254,126
Michael M. Magee 5,482 37,596 60,150 14,031 1,057,827 127,146
Edward B. Swanson 5,482 31,964 56,688 10,302 998,743 93,429
Ronald L. Long 5,830 99,998 34,562 11,196 534,339 101,505
David C. Reglin 10,965 120,852 42,195 11,882 696,804 107,711
(1) The value realized upon the exercise of options is equal to the difference
between the market value of the shares of Common Stock acquired at the time
of exercise and the aggregate exercise price paid by our Named Executives.
(2) The value of unexercised options is based on the difference between the
closing price of our Common Stock on December 31, 2003 ($28.36) and the
exercise prices of the options.
MANAGEMENT CONTINUITY AGREEMENTS
We have entered into individual Management Continuity Agreements with our
executive officers and certain senior managers, including our Named Executives.
These agreements provide severance benefits if the individual's employment is
terminated within 36 months after a change in control or within six months
before a change in control if we terminate the individual's employment in
contemplation of a change in control and to avoid the agreement. For the
purposes of these agreements, a "change in control" is any occurrence reportable
as such in a proxy statement under applicable rules of the Securities and
Exchange Commission, and would include, without limitation, the acquisition of
beneficial ownership of 20% of our voting securities by any person, certain
extraordinary changes in the composition of our Board of Directors, or a merger
or consolidation in which we are not the surviving entity, or our sale or
liquidation.
Severance benefits are not payable if we terminate the employment for
cause, if employment terminates due to the individual's death or disability, or
if the individual resigns without "good reason." An individual may resign with
"good reason" after a change in control and retain benefits if we reduce the
individual's salary or bonus, assign duties inconsistent with the individual's
prior position, or make other material, adverse changes in the terms or
conditions of the individual's employment. The agreements are for self-renewing
terms of eighteen months to three years unless we take action to terminate
further extensions. The agreements are automatically extended for an eighteen
month to three-year term from the date of a change in control. These agreements
provide a severance benefit of a lump-sum payment equal to eighteen months to
three-years salary and bonus and a continuation of benefits coverage for
eighteen months to three years.
TRANSACTIONS INVOLVING MANAGEMENT
Our Board of Directors and executive officers and their associates were
customers of, and had transactions with, our subsidiaries in the ordinary course
of business during 2003. All loans and commitments included in such transactions
were made in the ordinary course of business on substantially the same terms,
including interest rates and collateral, as those prevailing at the time for
comparable transactions with other persons and do not involve an unusual risk of
collectibility or present other
10
unfavorable features. Such loans totaled $729,000 at December 31, 2003, equal to
0.4% of shareholders' equity.
Mr. McCarty (Director) owns a graphic design and commercial printing
company which does business with us. During 2003 we purchased $133,000 in goods
and services from his company.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Pursuant to Section 16 of the Securities Exchange Act of 1934, our
directors and executive officers, as well as any person holding more than 10% of
our Common Stock, are required to report initial statements of ownership of our
securities and changes in such ownership to the Securities and Exchange
Commission. Based solely upon written representations by each Director and
Executive Officer and our review of those reports furnished to us, all of the
required reports were timely filed by such persons during 2003, except that
Richard E. Butler, a Senior Vice President of the Company, filed one report late
covering the sale of Common Stock.
SHAREHOLDER PROPOSALS
Article III of our Bylaws contain procedural requirements for shareholder
proposals, generally. Copies of our Articles of Incorporation and Bylaws have
been filed with the Securities and Exchange Commission and can be obtained from
its Public Reference Section or from us. Any other shareholder proposal to be
considered by us for inclusion in the 2005 Annual Meeting of Shareholders proxy
materials must be received by us no later than November 19, 2004. If we receive
notice of a shareholder proposal after February 2, 2005, the persons named as
proxies for the 2005 Annual Meeting of Shareholders will have discretionary
voting authority to vote on that proposal at that meeting.
GENERAL
The cost of soliciting proxies will be borne by us. In addition to
solicitation by mail, our officers and employees may solicit proxies by
telephone, telegraph or in person. We have retained the services of The Altman
Group to deliver proxy materials to brokers, nominees, fiduciaries and other
custodians for distribution to beneficial owners, as well as solicit proxies
from these institutions. The cost of such services is expected to total
approximately $4,000, plus reasonable out of pocket expenses.
As of the date of this proxy statement, Management knows of no other
matters to be brought before the meeting. However, if further business is
presented by others, the proxy holders will act in accordance with their best
judgment.
By order of our Board of Directors,
/s/ Robert N. Shuster
Robert N. Shuster
Secretary
Dated: March 18, 2004
11
APPENDIX A
CHARTER OF THE AUDIT COMMITTEE OF THE BOARD OF DIRECTORS
I. PURPOSE
The primary function of the Audit Committee is to assist the Board by
overseeing (1) the quality and integrity of the Company's accounting, auditing
and reporting practices, (2) the performance of the Company's internal audit
function and independent auditor, and (3) the Company's disclosure controls and
system of internal controls regarding finance, accounting, legal compliance, and
ethics that management and the Board of Directors have established.
The Audit Committee shall provide an open avenue of communication among the
independent auditors, financial and senior management, the internal auditor and
the Board of Directors.
II. MEMBERSHIP
A. Independence--The Audit Committee shall be comprised of three or
more members, each of whom (1) must qualify as an independent director
under the listing requirements of NASDAQ and Section 301 of the
Sarbanes-Oxley Act, and (2) shall be free from any relationship to the
Company that, in the opinion of the Board, would interfere with the
exercise of his or her independent judgment as a member of the
Committee. All members of the Committee shall have a working
familiarity with basic financial and accounting practices, and on or
before January 1, 2004 at least one member of the Committee shall be a
"financial expert" in compliance with the criteria established by the
Securities and Exchange Commission.
B. Appointment -- The members shall be nominated by the Nominating and
Corporate Governance Committee and appointed annually to one-year
terms by the Board. The Nominating and Corporate Governance Committee
shall recommend, and the Board shall designate, one member of the
Audit Committee as Chair.
C. Limitations. A member of the Audit Committee shall not simultaneously
serve on the audit committee of more than two other public companies.
III. MEETINGS
Meetings of the Audit Committee shall be subject to the Committee procedure
rules set forth in the Company's Bylaws and its own rules of procedure, which
shall be consistent with those Bylaws and the following:
A. The Audit Committee shall meet at least four (4) times annually and
more frequently as circumstances require. Each regularly scheduled
meeting of the Committee shall conclude with an executive session of
the Committee, absent members of management and on such terms and
conditions as the Committee may elect. In addition, the Committee may
meet periodically with management; the head of the Company's internal
auditing department and the independent auditors in separate executive
sessions to discuss any matters that the Audit Committee or the
internal audit department or independent auditors believe should be
discussed privately.
B. Following each of its meetings, the Audit Committee shall deliver a
report on the meeting to the Board, including a description of all
actions taken by the Audit Committee.
C. The Audit Committee shall keep written minutes of its meetings, which
minutes shall be maintained with the books and records of the Company.
IV. RESPONSIBILITIES, DUTIES AND AUTHORITY
The Audit Committee shall have the following responsibilities, duties and
authority:
A. Document and Report Review
1. Review and update this Charter periodically or as conditions
dictate (at least, annually).
2. Review the Company's annual financial statements and any reports
or other financial information submitted to any governmental body
or to the public, including any report issued by the independent
auditors.
3. Review the summary report of the internal auditor and
management's response to such reports.
4. Recommend to the Board whether the financial statements should be
included in the Annual Report on Form 10-K.
5. Review with financial management and the independent auditors the
quarterly report on Form 10-Q prior to its filing.
6 Review earnings press releases with management prior to
dissemination.
7. Discuss with management financial information and earnings
guidance provided to analysts and rating agencies.
B. Independent Auditors
1. Appoint, approve the compensation of, and provide oversight of
the Company's independent auditor, including the removal of the
Company's independent auditors. The independent auditors shall
report directly to the Committee, and the Committee shall oversee
the resolution of any disagreements between management and the
independent auditors.
12
2. Administer the Company's Policy Regarding the Approval of Audit
and Nonaudit Services Provided by the Independent Auditor.
3. Review the independent auditors' attestation and report on
management's internal control report, and hold timely discussions
with the independent auditors regarding:
(a) All critical accounting policies and practices;
(b) All alternative treatments of financial information within
generally accepted accounting principles that have been
discussed with management, ramifications of the use of such
alternative disclosures and treatments, and the treatment
preferred by the independent auditor;
(c) Other material written communications between the
independent auditor and management including, but not
limited to, management letter and schedule of unadjusted
differences;
(d) An analysis of the independent auditor's judgment as to the
quality of the Company's accounting principles, setting
forth significant reporting issues and judgments made in
connection with the preparation of the financial statements;
and
(e) All significant relationships the independent auditors have
with the Company to determine the independent auditors'
objectivity and independence, undertaking or recommending
appropriate action to ensure and continue that independence.
4. At least annually, obtain and review a report by the independent
auditor describing:
(a) The firm's internal quality control procedures;
(b) Any material issues raised by the most recent internal
quality-control review, peer review or by any inquiry or
investigation by governmental or professional authorities,
within the preceding five years, respecting one or more
independent audits carried out by the firm, and any steps
taken to deal with any such issues;
(c) All relationships between the independent auditor and the
Company; and
(d) All significant relationships the independent auditors have
with the Company to determine the independent auditors'
objectivity and independence, undertaking or recommending
appropriate action to ensure and continue that independence.
C. Financial Reporting Processes
1. Review the integrity of the Company's financial reporting
process, both internal and external, giving consideration to
consultation with management, the independent auditors and the
internal auditor.
2. Consider and approve, as appropriate, major changes to the
Company's auditing and accounting principles and practices as
suggested by the independent auditors, management or the internal
auditor.
3. Review and approve all related party transactions with the
Company's directors, officers and controlling shareholders,
excluding those transactions between the Company's subsidiaries
and such persons that are in compliance with applicable banking
regulations.
4. Establish and maintain procedures for the receipt, retention and
treatment of complaints regarding accounting, or auditing
matters, including procedures necessary to receive and respond to
confidential and anonymous submissions by Company employees
regarding questionable accounting or auditing matters.
D. Internal Audit
1. Review activities, organizational structure and qualifications of
the Company's internal audit department.
2. Periodically review the head of the Company's internal audit
department and any significant difficulties, disagreements with
management or scope restrictions encountered in the course of
that department's work.
E. Ethical and Legal Compliance
1. Review the Company's Code of Business Conduct, approved by the
Board of Directors, to ensure that management has maintained a
system to comply with expected ethical and legal requirements.
2. Review, with the Company's counsel, legal compliance matters
including corporate securities trading policies.
3. Review, with the Company's counsel, any legal matter that could
have a significant impact on the Company's financial statements.
4. Discuss the Company's major financial and accounting risk
exposures and steps taken by management to control or mitigate
those exposures.
F. Other
1. Review with the independent auditors, the internal auditing
department and management the extent to which changes or
improvement in financial or accounting practices, as approved by
the Audit Committee, have been implemented.
2. Prepare the report that the SEC requires to be included in the
Company's annual Proxy Statement.
3. Perform an annual self-assessment relative to the Audit
Committee's purpose, duties and responsibilities set forth in
this Charter.
4. To the extent it deems appropriate, and with or without full
Board approval, obtain advice and assistance from outside legal,
accounting or other advisors as deemed appropriate to perform its
duties and responsibilities.
5. Perform any other activities consistent with this Charter, the
Company's Bylaws and governing law, as the Audit Committee or the
Board of Directors deems necessary or appropriate.
13
APPENDIX B
POLICY REGARDING THE APPROVAL OF AUDIT AND NONAUDIT
SERVICES PROVIDED BY THE INDEPENDENT AUDITOR
I. PURPOSE
Section 10A of the Securities Exchange Act of 1934 and the Charter of the
Company's Audit Committee require that all audit services, as well as all
non-audit services provided by the Company's auditors (the "Audit Firm"), be
pre-approved by the Company's Audit Committee. This policy sets forth the
guidelines and procedures to be followed by the Company prior to the engagement
of (a) any firm to provide audit services, and (b) the Company's Audit Firm to
perform audit and non-audit services.
II. PRE-APPROVAL REQUIREMENT
A. General. Each audit engagement and each service provided by the Audit
Firm, both audit and non-audit (collectively a "Permitted Service"),
must be pre-approved by the Audit Committee or a Designated Member.
The SEC rules allow the pre-approval to be effected through the use of
pre-approval policies and procedures as long as (1) those policies and
procedures are (a) detailed as to the particular services to be
provided, and (b) do not result in the delegation of the Audit
Committee's authority to management, and (2) the Audit Committee is
informed about each service. The appendices to this Policy describe
the audit, audit-related, tax and all other services that have the
pre-approval of the Audit Committee. Such pre-approval (1) may be
given not more than one year before the commencement of the specified
services, (2) may not exceed the budgeted amount pre-approved (unless
subsequently approved), and (3) may not be given unless the
description of the services to be pre-approved is accompanied by
sufficient back-up documentation regarding the specific services to be
provided. Unless the type of service has received such general
pre-approval, it will require specific pre-approval by the Audit
Committee.
B. Delegation. Subject to the conditions in Section II(A), the Audit
Committee may delegate to one or more member(s) of the Audit
Committee (a "Designated Member"), the authority to grant
pre-approvals of Permitted Services to be provided by the Audit Firm
or audit services provided by another audit firm. The decisions of a
Designated Member to pre-approve a Permitted Service shall be reported
to the Audit Committee at each of its regularly scheduled meetings.
III. DISCLOSURES
The Company shall disclose in each proxy statement filed in connection with
annual meetings of shareholders the aggregate fees billed for (1) audit
services, (2) audit-related services, (3) tax services, and (4) all other
services provided by the Audit Firm.
IV. PROHIBITED SERVICES
The Company may not engage the Audit Firm to provide the non-audit services
described below to the Company (the "Prohibited Services").
A. Bookkeeping or other services related to the Company's accounting
records or financial statements.
B. Financial information systems design and implementation, unless
required to support the audit (i.e., using valuation experts to assist
in auditing a valuation obtained by the Company).
C. Appraisal or valuation services or fairness opinions, unless required
to support the audit (i.e., setting actuarial reserves as opposed to
actuarial audit work).
D. Actuarial services.
E. Internal audit outsourcing.
F. Management functions or human resources.
G. Broker-dealer investment adviser, or investment banking services.
H. Legal services or expert services unrelated to the audit.
The list of Prohibited Services shall be automatically expanded to include
those services that are proscribed by rule by the Securities and Exchange
Commission.
V. AUDIT COMMITTEE REVIEW OF SERVICES
At each regularly scheduled Audit Committee meeting, the Audit Committee
shall review the following:
- A report summarizing the Permitted Services, or grouping of
related services, including fees, provided by the Audit Firm
since the last meeting
- A report summarizing the audit services and fees provided to the
Company by any firm
- A listing of newly pre-approved Permitted Services (and estimated
fees) since its last regularly scheduled meeting
- An updated projection for the current fiscal year, presented in a
manner consistent with the proxy disclosure requirements, of the
estimated annual fees to be paid to the Audit Firm
14
VI. EFFECTIVE DATE
This policy, as revised, shall be effective immediately upon approval by
the Audit Committee.
15
APPENDIX C
Independent Bank Corporation is an Ionia, Michigan-based bank holding
company with total assets of $2.4 billion. Our four subsidiary banks principally
serve suburban and rural communities located across Michigan's Lower Peninsula
through 97 offices. We also provide financing for insurance premiums and
extended automobile warranties across the United States, through our wholly
owned subsidiary, Mepco Insurance Premium Financing, Inc.
We emphasize service and convenience as the principal means of competing in
the delivery of financial services. Accordingly, our community banking
philosophy vests discretion and authority in local management. To support our
service and sales efforts, while providing the controls that are consistent with
our decentralized decision-making structure, we have consolidated many
operational and administrative functions and provide these services to our four
subsidiary banks (and their subsidiaries) on a centralized basis.
CONTENTS
Management's Discussion and Analysis ................................. A-l
Selected Consolidated Financial Data ................................. A-16
Independent Auditors' Report ......................................... A-17
Consolidated Financial Statements .................................... A-18
Notes to Consolidated Financial Statements ........................... A-22
Quarterly Data ....................................................... A-42
Shareholder Information .............................................. A-43
Executive Officers and Directors ..................................... A-43
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Any statements in this document that are not historical facts are
forward-looking statements as defined in the Private Securities Litigation
Reform Act of 1995. Words such as "expect," "believe," "intend," "estimate,"
"project," "may" and similar expressions are intended to identify
forward-looking statements. These forward-looking statements are predicated on
management's beliefs and assumptions based on information known to Independent
Bank Corporation's management as of the date of this document and do not purport
to speak as of any other date. Forward-looking statements may include
descriptions of plans and objectives of Independent Bank Corporation's
management for future or past operations, products or services, and forecasts of
the Company's revenue, earnings or other measures of economic performance,
including statements of profitability, business segments and subsidiaries, and
estimates of credit quality trends. Such statements reflect the view of
Independent Bank Corporation's management as of this date with respect to future
events and are not guarantees of future performance; involve assumptions and are
subject to substantial risks and uncertainties, such as the changes in
Independent Bank Corporation's plans, objectives, expectations and intentions.
Should one or more of these risks materialize or should underlying beliefs or
assumptions prove incorrect, the Company's actual results could differ
materially from those discussed. Factors that could cause or contribute to such
differences are changes in interest rates, changes in the accounting treatment
of any particular item, the results of regulatory examinations, changes in
industries where the Company has a concentration of loans, changes in the level
of fee income, changes in general economic conditions and related credit and
market conditions, and the impact of regulatory responses to any of the
foregoing. Forward-looking statements speak only as of the date they are made.
Independent Bank Corporation does not undertake to update forward-looking
statements to reflect facts; circumstances, assumptions or events that occur
after the date the forward-looking statements are made. For any forward-looking
statements made in this document, Independent Bank Corporation claims the
protection of the safe harbor for forward-looking statements contained in the
Private Securities Litigation Reform Act of 1995.
The following section presents additional information to assess the
financial condition and results of operations of Independent Bank Corporation
and its subsidiaries. This section should be read in conjunction with the
consolidated financial statements and the supplemental financial data contained
elsewhere in this appendix.
A-1
RESULTS OF OPERATIONS
SUMMARY. Net income totaled $37.6 million in 2003 compared to $29.5 million
in 2002 and $24.4 million in 2001. The increases in net income are primarily a
result of increases in net interest income, service charges on deposit accounts
and net gains on the sale of real estate mortgage loans, partially offset by
increases in non-interest expense and federal income taxes. 2003 results also
include the operations of Mepco Insurance Premium Financing, Inc. since our
April 15, 2003 date of acquisition.
KEY PERFORMANCE RATIOS Year ended December 31,
2003 2002 2001
----------------------------------------------------------------------------------------
Net income to
Average equity ................................ 24.89% 21.34% 18.52%
Average assets ................................ 1.69 1.52 1.35
Net income per share
Basic ......................................... $ 1.91 $ 1.46 $ 1.17
Diluted ....................................... 1.87 1.44 1.15
NET INTEREST INCOME. Tax equivalent net interest income totaled $100.4
million during 2003, compared to $86.2 million and $75.8 million during 2002 and
2001, respectively. We review yields on certain asset categories and our net
interest margin on a fully taxable equivalent basis. In this presentation, net
interest income is adjusted to reflect tax-exempt interest income on an
equivalent before tax basis. This measure ensures comparability of net interest
income arising from both taxable and tax-exempt sources. The adjustments to
determine tax equivalent net interest income were $5.1 million, $4.4 million and
$3.8 million in 2003, 2002 and 2001, respectively, and were computed using a 35%
tax rate.
The increase in tax equivalent net interest income in 2003 compared to 2002
reflects a $241.5 million increase in average interest-earning assets and a 13
basis point increase in our tax equivalent net interest income as a percent of
average interest-earning assets ("Net Yield"). The increase in average
interest-earning assets is due to the Mepco acquisition, which added $88.9
million in average loan balances during 2003, as well as growth in commercial
loans, real estate mortgage loans and investment securities. Declining interest
rates (through the first half of 2003) and increased levels of lower cost core
deposits resulted in a 58 basis point decline in our interest expense as a
percentage of average interest-bearing liabilities in 2003 compared to 2002. The
decline in the cost of funds was partially offset by a 37 basis point decline in
the tax equivalent yield on average interest-earning assets which was 7.03% in
2003 compared to 7.40% in 2002. This decline is primarily due to both the
amortization and prepayment of higher yielding loans and the addition of new
loans and new investment securities at lower interest rates. Without the Mepco
acquisition, the decline in the tax equivalent yield on average interest-earning
assets would have been greater (64 basis points instead of 37 basis points), as
Mepco added $88.9 million in average loans at a weighted average yield of 12.98%
during 2003.
The 13.6% increase in tax equivalent net interest income in 2002 compared
to 2001 principally reflects a $108.5 million or 6.4% increase in the amount of
average interest earning assets and a 30 basis point increase in Net Yield.
Pursuant to Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities," ("SFAS #133"),
we recorded adjustments, which decreased tax equivalent net interest income by
$0.1 million in 2003. This compares to adjustments, which increased tax
equivalent net interest income by $1.0 million in 2002 and reduced tax
equivalent net interest income by approximately $0.3 million in 2001. These
adjustments relate principally to certain derivative financial instruments that
are not designated as hedges. The changes in the fair value of these derivative
financial instruments are recognized currently as adjustments to interest
expense.
A-2
AVERAGE
BALANCES AND TAX
EQUIVALENT RATES
2003 2002 2001
--------------------------------------------------------------------------------------------
Average Average Average
Balance Interest Rate Balance Interest Rate Balance Interest Rate
--------------------------------------------------------------------------------------------
(dollars in thousands)
ASSETS
Taxable loans(1) ................ $1,612,316 $118,277 7.34% $1,426,286 $108,664 7.62% $1,415,136 $ 117,002 8.27%
Tax-exempt loans(1,2) ........... 11,249 898 7.98 11,639 974 8.37 13,058 1,127 8.63
Taxable securities .............. 239,296 11,687 4.88 211,777 12,211 5.77 137,085 9,334 6.81
Tax-exempt securities(2) ........ 179,668 12,992 7.23 142,320 11,053 7.77 119,282 9,333 7.82
Other investments ............... 12,341 611 4.95 21,342 1,289 6.04 20,348 1,513 7.44
---------- -------- ---------- -------- ---------- ---------
Interest earning assets....... 2,054,870 144,465 7.03 1,813,364 134,191 7.40 1,704,909 138,309 8.11
Cash and due from banks ......... 48,839 -------- 40,533 38,602
Other assets, net ............... 118,309 79,848 66,383
---------- ---------- ----------
Total assets ................. $2,222,018 $1,933,745 $1,809,894
========== ========== ==========
LIABILITIES
Savings and NOW ................. $ 688,697 4,879 0.71 $634,357 7,444 1.17 $ 583,817 11,484 1.97
Time deposits ................... 741,731 22,923 3.09 688,297 27,690 4.02 623,657 33,127 5.31
Long-term debt .................. 371 26 7.01
Other borrowings ................ 407,264 16,311 4.01 287,983 12,874 4.47 304,973 17,823 5.84
---------- -------- ---------- -------- ---------- ---------
Interest bearing
liabilities ............... 1,837,692 44,113 2.40 1,610,637 48,008 2.98 1,512,818 62,460 4.13
Demand deposits ................. 183,032 -------- 156,294 -------- 138,200 ---------
Other liabilities ............... 50,283 28,762 27,162
Shareholders' equity ............ 151,011 138,052 131,714
---------- ---------- ----------
Total liabilities and
shareholders' equity ...... $2,222,018 $1,933,745 $1,809,894
========== ========== ==========
Net interest income .......... $100,352 $ 86,183 $ 75,849
======== ======== =========
Net interest income
as a percent of
earning assets ............ 4.88% 4.75% 4.45%
==== ==== ====
(1) All domestic.
(2) Interest on tax-exempt loans and securities is presented on a fully tax
equivalent basis assuming a marginal tax rate of 35%.
CHANGE IN TAX EQUIVALENT
NET INTEREST INCOME
2003 compared to 2002 2002 compared to 2001
Volume Rate Net Volume Rate Net
------- -------- ------- ------ -------- ---------
(in thousands)
Increase (decrease) in interest income(1)
Taxable loans(2) ................................. $13,763 $ (4,150) $ 9,613 $ 915 $ (9,253) $ (8,338)
Tax-exempt loans(2,3) ............................ (32) (44) (76) (120) (33) (153)
Taxable securities ............................... 1,475 (1,999) (524) 4,478 (1,601) 2,877
Tax-exempt securities(3) ......................... 2,742 (803) 1,939 1,790 (70) 1,720
Other investments ................................ (475) (203) (678) 71 (295) (224)
------- -------- ------- ------ -------- ---------
Total interest income ........................... 17,473 (7,199) 10,274 7,134 (11,252) (4,118)
------- -------- ------- ------ -------- ---------
Increase (decrease) in interest expense(1)
Savings and NOW .................................. 593 (3,158) (2,565) 923 (4,963) (4,040)
Time deposits .................................... 2,025 (6,792) (4,767) 3,184 (8,621) (5,437)
Long-term debt ................................... (26) (26)
Other borrowings ................................. 4,889 (1,452) 3,437 (948) (4,001) (4,949)
------- -------- ------- ------ -------- ---------
Total interest expense .......................... 7,507 (11,402) (3,895) 3,133 (17,585) (14,452)
------- -------- ------- ------ -------- ---------
Net interest income .......................... $ 9,966 $ 4,203 $14,169 $4,001 $ 6,333 $ 10,334
======= ======== ======= ====== ======== =========
(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) All domestic.
(3) Interest on tax-exempt loans and securities is presented on a fully tax
equivalent basis assuming a marginal tax rate of 35%.
A-3
COMPOSITION OF AVERAGE EARNING ASSETS
AND INTEREST BEARING LIABILITIES
Year ended December 31,
2003 2002 2001
----- ----- -----
As a percent of average earning assets
Loans--all domestic ........................................ 79.0% 79.3% 83.8%
Other earning assets ....................................... 21.0 20.7 16.2
----- ----- -----
Average earning assets ................................. 100.0% 100.0% 100.0%
===== ===== =====
Savings and NOW ............................................ 33.5% 35.0% 34.2%
Time deposits .............................................. 19.8 24.5 27.5
Brokered CDs ............................................... 16.3 13.4 9.1
Other borrowings and long-term debt ........................ 19.8 15.9 17.9
----- ----- -----
Average interest bearing liabilities ................... 89.4% 88.8% 88.7%
===== ===== =====
Earning asset ratio .......................................... 92.5% 93.8% 94.2%
Free-funds ratio ............................................. 10.6 11.2 11.3
PROVISION FOR LOAN LOSSES. The provision for loan losses was $4.0 million
during 2003 compared to $3.6 million and $3.7 million during 2002 and 2001,
respectively. Changes in the provision for loan losses reflect our assessment of
the allowance for loan losses. While we use relevant information to recognize
losses on loans, additional provisions for related losses may be necessary based
on changes in economic conditions, customer circumstances and other credit risk
factors. (See "Portfolio Loans and asset quality.")
NON-INTEREST INCOME. Non-interest income totaled $42.6 million during 2003
compared to $30.9 million and $26.9 million during 2002 and 2001, respectively.
Excluding net gains and losses on asset sales, non-interest income grew by 19.1%
to $27.1 million during 2003 and by 13.2% to $22.8 million during 2002.
Increases in service charges on deposit accounts, title insurance fees, income
from bank owned life insurance, mutual fund and annuity commissions and other
non-interest income account for the majority of the increase in total
non-interest income during 2003 and 2002.
NON-INTEREST INCOME
Year ended December 31,
2003 2002 2001
------- ------- -------
(in thousands)
Service charges on deposit accounts ............................... $14,668 $13,049 $ 9,936
Net gains (losses) on assets
Real estate mortgage loans ...................................... 16,269 8,178 6,306
Securities ...................................................... (779) (24) 522
Title insurance fees .............................................. 3,092 2,474 1,874
Bank owned life insurance ......................................... 1,432 403
Manufactured home loan origination fees and commissions ........... 1,769 1,949 2,108
Mutual fund and annuity commissions ............................... 1,227 979 798
Real estate mortgage loan servicing fees, net ..................... (294) (870) 833
Other ............................................................. 5,220 4,773 4,558
------- ------- -------
Total non-interest income .................................. $42,604 $30,911 $26,935
======= ======= =======
Service charges on deposit accounts totaled $14.7 million during 2003,
compared to $13.0 million and $9.9 million during 2002 and 2001, respectively.
The increases in such service charges principally relate to growth in checking
accounts as a result of deposit account promotions, including direct mail
solicitations. We opened approximately 23,000 new checking accounts in 2003
compared to 22,000 in 2002 and 24,000 in 2001. Partially as a result of a
leveling off in our growth rate of new checking accounts and the maturity of our
high performance checking program, we would expect the growth rate of service
charges on deposits to moderate in future periods. (See "Deposits and
borrowings.")
Net gains on the sale of real estate mortgage loans are generally a
function of the volume of loans sold. We realized net gains of $16.3 million on
the sale of such loans during 2003, compared to $8.2 million and $6.3 million
during 2002 and 2001, respectively. The volume of loans sold is dependent upon
our ability to originate real estate mortgage loans as well as the demand for
fixed-rate obligations and other loans that we cannot profitably fund within
established interest-rate risk parameters. (See "Portfolio Loans and asset
quality.") Net gains on real estate mortgage loans are also dependent upon
economic and competitive factors as well as our ability to effectively manage
exposure to changes in interest rates and thus can often be a volatile part of
our overall revenues. In 2003, approximately 70% of the $1.12 billion of loans
originated was the result of refinancing activity. We estimate that refinancing
activities accounted for approximately 69% and 63% of the real estate mortgage
loans originated during 2002 and 2001, respectively. Based on the rise in real
estate mortgage loan interest rates since the second quarter of 2003, our actual
real estate mortgage loan origination volume during the fourth quarter of 2003
and forecasts by the Mortgage Bankers Association we would expect overall real
estate mortgage loan refinance activity in 2004 to decline substantially from
our 2003 levels which would result in significant reductions in real estate
mortgage loan sales and gains on such sales.
A-4
NET GAINS ON THE SALE OF REAL ESTATE
MORTGAGE LOANS
Year ended December 31,
2003 2002 2001
---------- -------- --------
(dollars in thousands)
Real estate mortgage loans originated ............................ $1,123,249 $876,667 $680,702
Real estate mortgage loans sold .................................. 892,482 600,300 410,998
Real estate mortgage loans sold with servicing rights released ... 51,847 165,133 282,240
Net gains on the sale of real estate mortgage loans .............. 16,269 8,178 6,306
Net gains as a percent of real estate mortgage loans sold ........ 1.82% 1.36% 1.53%
SFAS #133 adjustments included in the Loan Sale Margin ........... 0.10 (0.16)
Net gains as a percentage of real estate mortgage loans sold (our "Loan
Sales Margin") are impacted by several factors including competition and the
manner in which the loan is sold (with servicing rights retained or released).
The increase in the Loan Sales Margin in 2003 reflects the high demand for real
estate mortgage loans due to the strong refinance environment that existed,
particularly in the first half of the year. This high demand for real estate
mortgage loans in 2003 allowed us to increase our Loan Sales Margin. Based upon
our present expectations for real estate mortgage loan demand, we would expect
our 2004 Loan Sales Margin to decline substantially from the 2003 level. Our
decision to sell or retain real estate mortgage loan servicing rights is
primarily influenced by an evaluation of the price being paid for real estate
mortgage loan servicing by outside third parties compared to our calculation of
the economic value of retaining such servicing. The sale of real estate mortgage
loan servicing rights may result in declines in real estate mortgage loan
servicing income in future periods. In addition, gains on the sale of real
estate mortgage loans were increased by approximately $1.0 million in 2003 as a
result of recording changes in the fair value of certain derivative instruments
pursuant to SFAS #133 (compared to a decrease in such gains of $1.0 million in
2002). The 2003 SFAS #133 adjustment relating to gains on the sale of real
estate mortgage loans primarily represents the turn around of timing differences
related to the fulfillment of commitments to sell real estate mortgage loans in
the secondary market. Excluding the aforementioned SFAS #133 adjustments, the
Loan Sales Margin would have been 1.72% in 2003 and 1.52% in 2002.
The purchase or sale of securities is dependent upon our assessment of
investment and funding opportunities as well as asset/liability management
needs. We sold securities with an aggregate market value of $20.4 million during
2003 compared to $66.4 million and $18.9 million during 2002 and 2001,
respectively. (See "Securities.") The net loss on securities in 2003 and 2002
includes impairment charges of $0.75 million in each year on a $1.5 million
trust preferred security that was purchased in 1999, and which was issued by an
unaffiliated bank holding company. This bank holding company has been
experiencing ongoing financial difficulties. During 2003 it became a defendant
in class action securities litigation and since the fourth quarter of 2002 has
suspended the payment of interest on this security. As a result of these
circumstances and an ongoing assessment of the market value of this security,
the book value of this asset was written off.
GAINS AND LOSSES ON SECURITIES
Year ended December 31,
Proceeds Gains Losses Net
-------- ----- ------ ------
(in thousands)
2003(1) ....................... $20,446 $ 827 1,606 $(779)
2002(1) ....................... 66,390 809 833 (24)
2001 .......................... 18,925 524 2 522
(1) Losses in 2003 and 2002 include a $0.75 million impairment charge on a
trust-preferred security (as described above).
Title insurance fees increased to $3.1 million in 2003 compared to $2.5
million in 2002 and $1.9 million in 2001. The increase in title insurance fees
is primarily a function of the increased level of real estate mortgage loans
originated. We would anticipate a significant decline in title insurance fees in
2004 as a result of our expectation of lower real estate mortgage loan
origination volumes as previously mentioned.
Real estate mortgage loan servicing, net was an expense of $0.3 million in
2003, compared to an expense of $0.9 million in 2002 and revenue of $0.8 million
in 2001. These yearly comparative increases or decreases are primarily due to
changes in the impairment reserve on capitalized real estate mortgage loan
servicing rights and the level of amortization of this asset. The period end
impairment reserve is based on a third-party valuation of our real estate
mortgage loan servicing portfolio and the amortization is primarily impacted by
prepayment activity.
CAPITALIZED REAL ESTATE MORTGAGE LOAN SERVICING RIGHTS
2003 2002 2001
------- -------- -------
(in thousands)
Balance at January 1, ...................... $ 4,455 $ 4,299 $ 4,582
Originated servicing rights capitalized ... 7,700 3,637 1,353
Amortization .............................. (3,655) (2,386) (1,636)
(Increase)/decrease in impairment reserve . 373 (1,095)
------- -------- -------
Balance at December 31, .................... $ 8,873 $ 4,455 $ 4,299
======= ======== =======
Impairment reserve at December 31, ......... $ 722 $ 1,095
======= ======== =======
A-5
At December 31, 2003 we were servicing approximately $1.14 billion in real
estate mortgage loans for others on which servicing rights have been
capitalized. This servicing portfolio had a weighted average coupon rate of
5.97% and a weighted average service fee of approximately 26 basis points.
Remaining capitalized real estate mortgage loan servicing rights at December 31,
2003 totaled $8.9 million, representing approximately 78 basis points on the
related amount of real estate mortgage loans serviced for others.
In August 2002 we acquired $35.0 million in separate account bank owned
life insurance on which we earned $1.4 million and $0.4 million in 2003 and
2002, respectively, as a result of an increase in cash surrender value. Mutual
fund and annuity commissions have increased over the past two years due
primarily to an improving equities market which has led to increased sales of
investment related products.
Manufactured home loan origination fees and commissions declined in each
year since 2001. This industry has faced a challenging environment as several
buyers of this type of loan have exited the market or materially altered the
guidelines under which they will purchase such loans. In addition, low interest
rates for real estate mortgage loans have made traditional housing more
affordable and reduced the demand for manufactured homes. Finally, recent
regulatory changes have reduced the opportunity to generate revenues on the sale
of insurance related to this type of lending. At the present time we do not
anticipate any improvement in the circumstances adversely impacting manufactured
home lending as outlined above.
NON-INTEREST EXPENSE. Non-interest expense totaled $82.5 million during
2003, compared to $68.3 million and $61.5 million during 2002 and 2001,
respectively. The April 15, 2003 acquisition of Mepco accounted for $6.4
million, or 45.1%, of the $14.2 million increase in non-interest expense between
2003 and 2002.
NON-INTEREST EXPENSE
Year ended December 31,
2003 2002 2001
--------- --------- ---------
(in thousands)
Compensation ............................................ $ 27,954 $ 24,891 $ 22,226
Performance-based compensation and benefits ............. 6,872 5,247 3,392
Other benefits .......................................... 8,732 7,205 5,927
--------- --------- ---------
Compensation and benefits ............................. 43,558 37,343 31,545
Occupancy, net .......................................... 6,519 5,424 4,966
Furniture and fixtures .................................. 5,539 4,731 4,371
Advertising ............................................. 4,011 2,813 2,490
Data Processing ......................................... 3,942 3,209 2,558
Loan and collection ..................................... 3,352 3,028 2,598
Communications .......................................... 2,895 2,484 2,275
Supplies ................................................ 1,920 1,626 1,442
Amortization of intangible assets ....................... 1,721 1,014 1,704
Legal and professional .................................. 1,651 1,238 1,198
Loss on prepayment of borrowings ........................ 983 59 240
Other ................................................... 6,415 5,324 6,132
--------- --------- ---------
Total non-interest expense ......................... $ 82,506 $ 68,293 $ 61,519
========= ========= =========
The increase in compensation and benefits in 2003 and 2002 compared to each
prior year is attributable to merit pay increases and staffing level increases
associated with the growth and expansion of the organization as well as
increases in certain employee benefit costs such as health care insurance. The
inclusion of Mepco in 2003 also added $2.8 million. Based on current conditions,
we expect health care insurance costs to continue to rise at levels
significantly above the general rate of inflation.
We maintain performance-based compensation plans. In addition to
commissions and cash incentive awards, such plans include employee stock
ownership and employee stock option plans. Stock options granted during 2003 and
in prior years did not require the recognition of any expense in our
consolidated statements of operations during those periods. Presently, the
Financial Accounting Standards Board is reviewing the accounting for stock
options and in the future we may be required to recognize the expense of issuing
stock options in our consolidated statements of operations. We believe that
these equity-based plans help align the interests of our officers and employees
with those of our shareholders.
Occupancy, furniture and fixtures, advertising, communications and supplies
expenses all generally increased over the periods presented as a result of the
growth of the organization and expansion of our number of offices. In early 2003
we opened two new loan production offices. In the second half of 2002 we opened
four new full-service banking offices and added loan production offices related
to our purchase of a mortgage brokerage company in March 2002. Further, our
acquisition of Mepco added $1.1 million of expenses in these categories in 2003.
The increase in loan and collection expense in 2003 and 2002 over 2001
reflects costs associated with holding or disposal of other real estate and
collection costs associated with increases in the level of non-performing loans.
The increase in data processing costs in 2003 compared to 2002 and 2001
reflects a new five-year contract that we entered into for core data processing
services effective in March 2002, the growth of our organization and additional
third-party vendor costs for several special projects such as disaster recovery
and upgrades to our network. In addition, our acquisition of Mepco added $0.2
million of expense in this category in 2003.
A-6
The increase in amortization of intangible assets in 2003 compared to
2002 is a result of the Mepco acquisition. We adopted Statement of Financial
Accounting Standards No. 142, "Goodwill and Other Intangible Assets," ("SFAS
#142") on January 1, 2002 and as a result, intangible asset amortization
declined by approximately $0.7 million in 2002 compared to 2001 as the
amortization of goodwill ceased and this asset is instead periodically tested
for impairment.
From time to time we may prepay borrowings in order to reduce our cost
of funds. The prepayment of certain borrowings may result in a loss being
incurred due to prepayment penalty or yield maintenance provisions. In
determining whether to prepay a borrowing, we principally evaluate the reduction
in future borrowing costs compared to the loss we expect to incur on the
prepayment as well as our overall asset liability management needs. During 2003
we prepaid $5.0 million in FHLB advances with a weighted average cost of 7.45%
and a weighted average remaining maturity of 6.5 years and incurred a loss of
$1.0 million and replaced these FHLB advances with $5.0 million in new
borrowings with a weighted average cost of 3.65% and weighted average maturity
of five years.
Other non-interest expense increased to $6.4 million in 2003 compared
to $5.3 million in 2002. This increase is primarily attributed to the
acquisition of Mepco. The decrease in non-interest expense in 2002 from 2001 is
primarily attributable to 2001 including a $0.9 million loss on de-designating
certain cash flow hedges. We terminated the cash flow hedging relationships
relating to $26 million of notional value fixed pay interest rate swaps in
December 2001. As a result, in the fourth quarter of 2001, pursuant to SFAS
#133, we reclassified a $0.9 million charge from accumulated other comprehensive
income to earnings. This charge was included in other expenses.
Our federal income tax expense has increased generally commensurate
with our increase in pre-tax earnings. Our actual federal income tax expense is
lower than the amount computed by applying our statutory federal income tax rate
to our pre-tax earnings primarily due to tax-exempt interest income. Our
effective tax rate was 26.7%, 27.9% and 27.5% in 2003, 2002 and 2001,
respectively. The decrease in 2003 from prior years is principally attributed to
an increase in tax-exempt interest income and income from bank owned life
insurance.
FINANCIAL CONDITION
SUMMARY. Our total assets grew to $2.4 billion at December 31, 2003
from $2.1 billion at December 31, 2002. The growth in total assets primarily
reflects increases in securities available for sale and loans. Loans, excluding
loans held for sale ("Portfolio Loans") increased $286.0 million in 2003 due
primarily to the Mepco acquisition as well as growth in commercial and real
estate mortgage loans. Total deposits increased $167.2 million in 2003 primarily
as a result of increases in checking and savings deposits and in brokered
certificates of deposit ("Brokered CDs").
SECURITIES. We maintain diversified securities portfolios, which
include obligations of the U.S. Treasury and government-sponsored agencies as
well as securities issued by states and political subdivisions, corporate
securities, mortgage-backed securities and asset-backed securities. We also
invest in capital securities, which include preferred stocks and trust preferred
securities. We regularly evaluate asset/liability management needs and attempt
to maintain a portfolio structure that provides sufficient liquidity and cash
flow. We believe that the unrealized losses on securities available for sale are
temporary in nature and due primarily to changes in interest rates and not a
result of credit related issues, except for a $1.5 million impairment charge
that we recorded (one-half in 2003 and one-half in 2002) on a trust preferred
security issued by a bank holding company as discussed in "Results of
Operations" above. In this instance, we believe that the decline in value is
directly due to the issuer's financial difficulties and is other than temporary
in nature. We also believe that we have the ability to hold securities with
unrealized losses to maturity or until such time as the unrealized losses
reverse. (See "Non-interest income" and "Asset/liability management.")
SECURITIES
Amortized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
(in thousands)
Securities available for sale
December 31, 2003 ................... $440,060 $15,681 $1,745 $453,996
December 31, 2002 ................... 358,149 14,890 1,793 371,246
Securities available for sale increased by $82.8 million during 2003 to
$454.0 million at December 31, 2003. This increase was due primarily to
purchases of municipal, corporate, mortgage-backed and asset-backed securities
during the year. Generally we cannot earn the same interest-rate spread on
securities as we can on Portfolio Loans. As a result, purchases of securities
will tend to erode some of our profitability measures such as our Net Yield and
our return on assets.
At December 31, 2003 and 2002, we had $33.1 million and $42.1 million
of asset-backed securities included in securities available for sale. All of
these asset-backed securities are rated as investment grade by a major rating
agency. Approximately 86% of our asset-backed securities at December 31, 2003
are backed by mobile home loans (compared to 81% at December 31, 2002). We do
not foresee, at the present time, any risk of loss (related to credit issues) on
our asset-backed securities.
A-7
PORTFOLIO LOANS AND ASSET QUALITY. We believe that our decentralized
loan origination structure provides important advantages in serving the credit
needs of our principal lending markets. In addition to the communities served by
our bank branch networks, principal lending markets include nearby communities
and metropolitan areas. Subject to established underwriting criteria, we also
participate in commercial lending transactions with certain non-affiliated banks
and may also purchase real estate mortgage loans from third-party originators.
LOAN PORTFOLIO COMPOSITION
December 31,
2003 2002
---------- ----------
(in thousands)
Real estate(1)
Residential first mortgages.................................. $ 546,647 $ 506,652
Residential home equity and other junior mortgages........... 150,346 126,742
Construction and land development............................ 194,340 185,583
Other(2)..................................................... 389,617 325,176
Finance receivables............................................. 147,671
Consumer........................................................ 139,261 137,631
Commercial...................................................... 88,558 86,413
Agricultural.................................................... 10,953 13,245
---------- ----------
Total loans................................................ $1,667,393 $1,381,442
========== ==========
(1) Includes both residential and non-residential commercial loans secured by
real estate.
(2) Includes loans secured by multi-family residential and non-farm,
non-residential property.
Our recent acquisition of Mepco added the financing of insurance
premiums and extended automobile warranties to our lending activities. These are
new lines of business for us and expose us to new risks. Mepco conducts its
lending activities across the United States although its insurance premium
financing business is presently concentrated in California and Illinois. Mepco
generally does not evaluate the creditworthiness of the individual borrower but
instead primarily relies on the loan collateral (the unearned insurance premium
or automobile warranty contract) in the event of default. As a result, we have
established and monitor insurance carrier concentration limits in order to
manage our collateral exposure. The insurance carrier concentration limits are
primarily based on the insurance company's AM Best rating and statutory surplus
level. Mepco also has established procedures for loan servicing and collections,
including the timely cancellation of the insurance policy or automobile warranty
contract in order to protect our collateral position in the event of default.
Mepco also has established procedures to attempt to prevent and detect fraud
since the loan origination activities and initial borrower contact is entirely
done through unrelated third parties (primarily insurance agents and automobile
warranty administrators or automobile dealerships). There can be no assurance
that the aforementioned risk management policies and procedures will prevent us
from the possibility of incurring significant credit or fraud related losses in
this business segment.
Although the management and board of directors of each of our banks
retain authority and responsibility for credit decisions, we have adopted
uniform underwriting standards. Further, our loan committee structure as well as
the centralization of commercial loan credit services and the loan review
process, provides requisite controls and promotes compliance with such
established underwriting standards. Such centralized functions also facilitate
compliance with consumer protection laws and regulations.
We generally retain loans that may be profitably funded within
established risk parameters. (See "Asset/liability management.") As a result, we
may hold adjustable-rate and balloon real estate mortgage loans as Portfolio
Loans, while 15- and 30-year, fixed-rate obligations are generally sold to
mitigate exposure to changes in interest rates. (See "Non-interest income.")
Although total real estate mortgage loan origination volume increased
substantially in 2003 compared to 2002, our balance of real estate mortgage
loans increased at a more moderate pace. This reflects an increase in
prepayments in the portfolio (caused primarily by refinancing activity resulting
from lower interest rates) as well as the majority of new loan origination
volume being 15- and 30-year fixed rate obligations, which generally are sold as
explained above. If borrowers continue to prefer longer-term fixed rate real
estate mortgage loans, we believe it may be difficult to grow our real estate
mortgage loan portfolio in the foreseeable future.
The $66.8 million increase in commercial loans during 2003, principally
reflects our emphasis on lending opportunities within this category of loans and
an increase in commercial lending staff. Loans secured by real estate comprise
the majority of new commercial loans.
The $147.7 million of finance receivables at December 31, 2003 are
comprised principally of loans to businesses to finance insurance premiums and
loans to individuals to finance extended automobile warranties. The finance
receivables are a result of our acquisition of Mepco.
Future growth of overall Portfolio Loans is dependent upon a number of
competitive and economic factors. Declines in Portfolio Loans or competition
leading to lower relative pricing on new Portfolio Loans could adversely impact
our future operating results. We continue to view loan growth consistent with
prevailing quality standards as a major short- and long-term challenge.
A-8
NON-PERFORMING ASSETS
December 31,
2003 2002 2001
------- ------- -------
(dollars in thousands)
Non-accrual loans .................................................. $ 9,122 $ 5,738 $ 5,990
Loans 90 days or more past due and still accruing interest ......... 3,284 3,961 2,771
Restructured loans ................................................. 335 270 285
------- ------- -------
Total non-performing loans ........................................ 12,741 9,969 9,046
Other real estate .................................................. 3,256 3,908 1,610
------- ------- -------
Total non-performing assets ................................... $15,997 $13,877 $10,656
======= ======= =======
As a percent of Portfolio Loans
Non-performing loans .............................................. .76% .72% .65%
Allowance for loan losses ......................................... 1.06 1.21 1.17
Non-performing assets to total assets .............................. .68 .67 .56
Allowance for loan losses as a percent of non-performing loans...... 139 168 179
Non-performing loans totaled $12.7 million, or 0.76% of total Portfolio
Loans at December 31, 2003, a $2.8 million increase from December 31, 2002. This
increase is primarily attributable to $1.9 million of finance receivables added
as the result of the Mepco acquisition and a $1.5 million increase in
non-performing commercial loans. The increase in non-performing commercial loans
is primarily due to the addition of two credits totaling $3.6 million partially
offset by the reduction of certain non-performing commercial credits from
December 31, 2002. One of the aforementioned commercial credits had a balance of
$2.3 million at December 31, 2003. This remaining balance is fully guaranteed
under a federal program through the United States Department of Agriculture. We
recorded a $0.6 million charge-off on this credit in the fourth quarter of 2003
primarily representing the non-guaranteed portion of the loan. We have made an
initial claim of $1.5 million under the federal guarantee program and expect to
receive these funds by April 2004. The remaining balance of approximately $0.8
million is expected to be received upon the final liquidation of the collateral,
which may not occur during 2004. The other commercial loan relationship referred
to above had a balance of approximately $1.3 million at December 31, 2003 and is
secured by multi-family properties. This relationship is in the process of
collection and at the present time the Company does not expect to incur any
significant loss associated with the resolution of this credit.
The increase in non-performing loans in 2002 compared to 2001 is
primarily the result of a $0.3 million increase in non-performing commercial
loans and a $0.7 million increase in non-performing real estate mortgage loans.
We will place a loan that is 90 days or more past due on non-accrual,
unless we believe the loan is both well secured and in the process of
collection. Accordingly, we have determined that the collection of the accrued
and unpaid interest on any loans that are 90 days or more past due and still
accruing interest is probable.
Other real estate and repossessed assets totaled $3.3 million at
December 31, 2003 a decline of $0.7 million from December 31, 2002. The decline
in other real estate and repossessed assets is due primarily to the sale of a
$1.2 million hotel property in June 2003 partially offset by an increase in the
level of residential homes acquired through foreclosure.
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
December 31,
2003 2002 2001
------- ------- -------
(in thousands)
Specific allocations ........................................... $ 1,362 $ 1,313 $ 500
Other adversely rated loans .................................... 6,487 6,067 7,284
Historical loss allocations .................................... 3,571 2,813 2,837
Additional allocations based on subjective factors.............. 6,308 6,512 5,546
------- ------- -------
Total ..................................................... $17,728 $16,705 $16,167
======= ======= =======
In determining the allowance and the related provision for loan losses,
we consider 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, mix and/or
the general terms of the loan portfolios.
The first element reflects our estimate of probable losses based upon
our 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 our loan 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 that
is based upon a historical analysis of losses incurred. The lower the rating
assigned to a loan or category, the greater the allocation percentage that is
applied.
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The third element is determined by assigning allocations based
principally upon the ten-year average of loss experience for each type of loan.
Average losses may be further adjusted based on the current delinquency rate.
Loss analyses are conducted at least annually.
The fourth element is based on factors that cannot be associated with a
specific credit or loan category and reflects our 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. We
consider 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, mix and the general terms of
the loan portfolios. (See "Provision for loan losses.")
Mepco's allowance for loan losses is determined in a similar manner as
discussed above and takes into account delinquency levels, net charge-offs,
unsecured exposure and other subjective factors deemed relevant to their lending
activities.
ALLOWANCE FOR LOAN LOSSES
Year ended December 31,
2003 2002 2001
-------- -------- --------
(dollars in thousands)
Balance at beginning of year.............. $ 16,705 $ 16,167 $ 13,982
Allowance on loans from business acquired 517
Provision charged to operating expense... 4,032 3,562 3,737
Recoveries credited to allowance......... 1,087 733 644
Loans charged against allowance.......... (4,613) (3,757) (2,196)
-------- -------- --------
Balance at end of year.................... $ 17,728 $ 16,705 $ 16,167
======== ======== ========
Net loans charged against the allowance
to average Portfolio Loans............... .23% .22% .11%
Loans charged against the allowance for loan losses, net of recoveries,
were equal to 0.23% of average Portfolio Loans during 2003, compared to 0.22%
and 0.11% during 2002 and 2001, respectively. The increase in net loans charged
against the allowance during 2003 and 2002 compared to 2001 relates primarily to
higher levels of charge-offs in the commercial and consumer loan portfolios. In
addition 2003 net charge-offs included $0.2 million of finance receivables.
DEPOSITS AND BORROWINGS. Our competitive position within many of the
markets served by our branch networks limits our ability to materially increase
deposits without adversely impacting the weighted-average cost of core deposits.
Accordingly, we principally compete on the basis of convenience and personal
service, while employing pricing tactics that are intended to enhance the value
of core deposits.
To attract new core deposits, we have implemented a high-performance
checking program that utilizes a combination of direct mail solicitations,
in-branch merchandising, gifts for customers opening new checking accounts or
referring business to our banks and branch staff sales training. This program
has generated increases in customer relationships as well as deposit service
charges. We believe that the new relationships that result from these marketing
and sales efforts provide valuable opportunities to cross sell related financial
products and services.
ALTERNATE SOURCES OF FUNDS
December 31,
2003 2002
------------------------------ ------------------------------
Average Average
Amount Maturity Rate Amount Maturity Rate
-------- --------- ---- -------- --------- ----
(dollars in thousands)
Brokered CDs(1) $416,566 2.3 years 2.43% $278,012 1.9 years 3.03%
Fixed-rate FHLB advances(1, 2) 84,638 5.0 years 3.99 62,861 7.9 years 5.83
Variable-rate FHLB advances(1) 104,150 0.4 years 1.30 131,200 0.3 years 1.50
Securities sold under agreements to
repurchase(1) 140,969 0.3 years 1.22 98,712 0.1 years 1.74
Federal funds purchased 53,885 1 day 1.16 23,840 1 day 1.38
-------- --------- ---- -------- --------- ----
Total $800,208 1.8 years 2.15% $594,625 1.8 years 2.71%
======== ========= ==== ======== ========= ====
(1) Certain of these items have had their average maturity and rate altered
through the use of derivative instruments, including pay-fixed and
pay-variable interest-rate swaps.
(2) Advances totaling $10 million, at December 31, 2003 and 2002, have
provisions that allow the FHLB to convert fixed-rate advances to adjustable
rates prior to stated maturity.
We have implemented strategies that incorporate federal funds
purchased, other borrowings and Brokered CDs to fund a portion of the increases
in securities available for sale and Portfolio Loans. The use of such alternate
sources of funds supplements our core deposits and is an integral part of our
asset/liability management efforts.
Other borrowed funds, principally advances from the Federal Home Loan
Bank (the "FHLB") and securities sold under agreements to repurchase
("Repurchase Agreements"), totaled $331.8 million at December 31, 2003, compared
to $310.4 million
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a year earlier. The $21.4 million increase in other borrowed funds principally
reflects an increase in Repurchase Agreements of $42.3 million, partially offset
by a $5.3 million decline in FHLB advances and a $12.6 million decline in our
bank holding company credit facility. The increase in Brokered CDs was primarily
utilized to fund finance receivables resulting from our Mepco acquisition. In
determining our borrowing sources, we primarily evaluate the interest cost,
payment terms, facility structure and collateral requirements.
We employ derivative financial instruments to manage our exposure to
changes in interest rates. At December 31, 2003, we employed interest-rate swaps
with an aggregate notional amount of $454.7 million.
LIQUIDITY AND CAPITAL RESOURCES. Our liquidity management involves the
measurement and monitoring of a variety of sources and uses of funds. Our
Consolidated Statements of Cash Flows categorize these sources and uses into
operating, investing and financing activities. We primarily focus on developing
access to a variety of borrowing sources to supplement our deposit gathering
activities and provide funds for growing our investment and loan portfolios. At
December 31, 2003 we had $429.9 million of time deposits that mature in 2004.
Historically, a majority of these maturing time deposits are renewed by our
customers. Additionally, $893.3 million of our deposits at December 31, 2003
were in account types from which the customer could withdraw the funds on
demand. Changes in the balances of deposits that can be withdrawn upon demand
are usually predictable and the total balances of these accounts have generally
grown over time as a result of our marketing and promotional activities. There
can be no assurance that historical patterns of renewing time deposits or
overall growth in deposits will continue in the future.
Effective management of capital resources is critical to our mission to
create value for our shareholders. The cost of capital is an important factor in
creating shareholder value and, accordingly, our capital structure includes
unsecured debt and cumulative trust preferred securities.
We believe that a diversified portfolio of quality loans will provide
superior risk-adjusted returns. Accordingly, we have implemented balance sheet
management strategies that combine efforts to originate Portfolio Loans with
disciplined funding strategies. Acquisitions are also an integral component of
our capital management strategies.
CAPITALIZATION
December 31,
2003 2002
----------------------
(in thousands)
Unsecured debt ................................................................... $ 12,600
----------------------
Guaranteed preferred beneficial interests in Company's subordinated debentures ... $ 50,600 17,250
----------------------
Shareholders' equity
Common stock ................................................................... 19,569 17,822
Capital surplus ................................................................ 119,353 75,076
Retained earnings .............................................................. 16,953 41,785
Accumulated other comprehensive income ......................................... 6,341 3,364
----------------------
Total shareholders' equity ................................................... 162,216 138,047
----------------------
Total capitalization ......................................................... $212,816 $167,897
======================
On March 19, 2003 we completed the sale of $50.6 million of trust preferred
securities issued by IBC Capital Finance II, a Delaware statutory trust (Nasdaq:
IBCPO) that we formed for the offering. Each trust preferred security has a par
value of $25 and a distribution rate of 8.25% per year with cumulative quarterly
cash distributions. On April 21, 2003 we redeemed all of the $17.25 million
9.25% trust preferred securities issued by IBC Capital Finance in 1996 (Nasdaq:
IBCPP). At December 31, 2003 all of our outstanding trust preferred securities
(which are accounted for as debt under generally accepted accounting principles)
qualified as Tier 1 capital for regulatory purposes. In July 2003, the Federal
Reserve issued a supervisory letter instructing bank holding companies to
continue to include trust preferred securities in Tier 1 capital until notice is
given to the contrary. The Federal Reserve intends to review the regulatory
implications of any accounting treatment changes and, if warranted, provide
further appropriate guidance. There can be no assurance that the Federal Reserve
will continue to allow us to include trust preferred securities in Tier 1
capital.
We have supplemented our balance-sheet management activities with purchases
of our common stock. We repurchased 0.6 million shares of our common stock at an
average price of $21.97 in 2003 compared to 1.2 million shares of our common
stock at an average price of $18.82 per share in 2002 and compared to 0.9
million shares at an average price of $14.88 per share in 2001. The level of
share repurchases in a given year generally reflects changes in our need for
capital associated with our balance sheet growth. We have approximately 0.8
million shares remaining to be repurchased on plans expiring through December
31, 2004.
Shareholders' equity totaled $162.2 million at December 31, 2003. The
increase from $138.0 million at December 31, 2002 reflects the retention of
earnings (net of cash dividends paid), the issuance of common stock for the
Mepco acquisition and pursuant to various equity-based incentive compensation
plans and an increase in accumulated other comprehensive income. The decrease in
retained earnings from December 31, 2002 reflects the payment of a 10% stock
dividend in October of 2003. Shareholders' equity was equal to 6.88% of total
assets at December 31, 2003, compared to 6.71% a year earlier.
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CAPITAL RATIOS
December 31,
2003 2002
----------------
Equity capital ................................................ 6.88% 6.71%
Average shareholders' equity to average assets ................ 6.80 7.14
Tier 1 capital to average assets .............................. 7.91 6.85
Tier 1 risk-based capital ..................................... 10.55 9.36
Total risk-based capital ...................................... 11.57 10.49
ASSET/LIABILITY MANAGEMENT. Interest-rate risk is created by differences in
the cash flow characteristics of our 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.
Our asset/liability management efforts identify and evaluate opportunities
to structure the balance sheet in a manner that is consistent with our mission
to maintain profitable financial leverage within established risk parameters. We
evaluate various opportunities and alternative balance-sheet strategies
carefully and consider the likely impact on our risk profile as well as the
anticipated contribution to earnings. The marginal cost of funds is a principal
consideration in the implementation of our balance-sheet management strategies,
but such evaluations further consider interest-rate and liquidity risk as well
as other pertinent factors. We have established parameters for interest-rate
risk. We regularly monitor our interest-rate risk and report quarterly to our
respective banks' boards of directors.
We employ simulation analyses to monitor each Bank's interest-rate risk
profiles and evaluate potential changes in our 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 our balance sheets. The simulations do not anticipate any actions
that we 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.
CHANGES IN MARKET VALUE OF PORTFOLIO EQUITY
AND NET INTEREST INCOME
December 31, 2003
Market Value of Percent Net Interest Percent
Change in Interest Rates Portfolio Equity(1) Change Income(2) Change
--------------------------------------------- ------------------------------------------------------
(dollars in thousands)
200 basis point rise ........................ $158,100 (3.36)% $105,800 (.19)%
100 basis point rise ........................ 163,800 .12 105,000 (.94)
Base-rate scenario .......................... 163,600 106,000
100 basis point decline ..................... 155,300 (5.07) 105,700 (.28)
200 basis point decline ..................... 146,000 (10.76) 103,400 (2.45)
(1) Simulation analyses calculate the change in the net present value of our
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, based upon a
static balance sheet, which includes debt and related financial derivative
instruments, and do not consider loan fees.
ACQUISITIONS
On April 15, 2003, we completed the acquisition of Mepco Insurance Premium
Financing, Inc. with the purpose of adding a high margin business with good
growth prospects and to take advantage of our relatively lower cost of funds and
greater access to capital. Mepco is a 40-year old Chicago-based company that
specializes in financing insurance premiums for businesses and extended
automobile warranties for consumers. As a result of the closing of this
transaction we issued 272,439 shares of common stock and paid out $5.0 million
in cash on April 15, 2003 as the initial consideration. Under the terms of the
agreement and plan of merger additional contingent consideration may be paid in
the future pursuant to a five-year earn out. Included in our 2003 results are
Mepco's operations subsequent to April 15, 2003. During 2003, Mepco recorded
approximately $11.5 million in interest income and fees on loans, $1.1 million
in interest expense (which was eliminated in consolidation because it was
related to an inter-company borrowing), a $0.4 million provision for credit
losses, $0.3 million in other non-interest income, $6.4 million in non-interest
expense, $3.9 million in income before income taxes and $2.4 million in net
income. At December 31, 2003 Mepco had total assets of $164.7 million, including
finance receivables of $147.7 million. We recorded the assets acquired and the
liabilities assumed at fair value which resulted in goodwill of $9.4 million, a
customer relationship intangible of $2.6 million, a covenant not to compete of
$0.2 million and a write-down of fixed assets (software in the process of
development) of $2.3 million. The customer relationship intangible is being
amortized on an accelerated basis over ten years and the covenant not to compete
on a straight-line basis over five years. Included in 2003 was $0.6 million for
amortization of the customer relationship intangible and the covenant not to
compete.
In March 2002, we acquired substantially all of the assets of Saginaw Bay
Mortgage, a mortgage-broker primarily operating
A-12
in Bay, Gladwin, Midland and Saginaw counties in Michigan. As a result of this
acquisition, we recorded $0.4 million in goodwill. In October 2002, we acquired
a bank branch in Rogers City, Michigan. At the time of acquisition, this branch
had approximately $13.0 million in deposits and we recorded a core deposit
premium of approximately $0.7 million (which is being amortized on an
accelerated basis over ten years). The operations of this purchased branch were
immediately merged into our already existing branch in this market.
On February 4, 2004 we executed a definitive agreement to acquire
Midwest Guaranty Bancorp, Inc. and its wholly-owned subsidiaries ("Midwest"),
including Midwest Guaranty Bank. Midwest is a $235 million bank holding company
that operates six full-service branches in southeastern Michigan. It is
anticipated that the transaction will be completed by June 30, 2004, pending
regulatory approvals, the approval of the shareholders of Midwest and completion
of other customary closing conditions.
Under the terms of the agreement, shareholders of Midwest will receive
$43.456 per share, 60% of the consideration will be paid in our common stock
and 40% of the consideration will be paid in cash. Based on the number of shares
of Midwest common stock outstanding (947,754) and stock options outstanding
(74,500 with an average exercise price of $19.10 per share) and subject to
certain contingent Independent Bank Corporation share price adjustments, the
aggregate transaction value is $43 million. The contingency that could impact
the aggregate transaction value is limited to circumstances under which the
average market value of our stock, at the time of consummation of the
transaction, drops below a predetermined level and that drop exceeds the general
decline in the market value of NASDAQ bank stocks. Under those circumstances,
the Board of Directors of Midwest could elect to terminate the transaction.
The agreement provides for the merger of Midwest into Independent Bank
Corporation, and the subsequent merger of Midwest Guaranty Bank into Independent
Bank East Michigan, a wholly-owned subsidiary of ours. The combined bank will
operate under the name Independent Bank East Michigan.
CRITICAL ACCOUNTING POLICIES
Our accounting and reporting policies are in accordance with accounting
principles generally accepted within the United States of America and conform to
general practices within the banking industry. Accounting and reporting policies
for the allowance for loan losses, real estate mortgage loan servicing rights,
derivative financial instruments, income taxes and goodwill are deemed critical
since they involve the use of estimates and require significant management
judgments. Application of assumptions different than those that we have used
could result in material changes in our financial position or results of
operations.
Our methodology for determining the allowance and related provision for
loan losses is described above in "Portfolio Loans and asset quality." In
particular, this area of accounting requires a significant amount of judgment
because a multitude of factors can influence the ultimate collection of a loan
or other type of credit. It is extremely difficult to precisely measure the
amount of losses that are probable in our loan portfolio. We use a rigorous
process to attempt to accurately quantify the necessary allowance and related
provision for loan losses, but there can be no assurance that our modeling
process will successfully identify all of the losses that are probable in our
loan portfolio. As a result, we could record future provisions for loan losses
that may be significantly different than the levels that we have recorded in the
past three-year period.
At December 31, 2003 we had approximately $8.9 million of real estate
mortgage loan servicing rights capitalized on our balance sheet. There are
several critical assumptions involved in establishing the value of this asset
including estimated future prepayment speeds on the underlying real estate
mortgage loans, the interest rate used to discount the net cash flows from the
real estate mortgage loan servicing, the estimated amount of ancillary income
that will be received in the future (such as late fees) and the estimated cost
to service the real estate mortgage loans. We utilize an outside third party
(with expertise in the valuation of real estate mortgage loan servicing rights)
to assist us in our valuation process. We believe the assumptions that we
utilize in our valuation are reasonable based upon accepted industry practices
for valuing mortgage servicing rights and represent neither the most
conservative or aggressive assumptions.
We use a variety of derivative instruments to manage our interest-rate
risk. These derivative instruments include interest- rate swaps, collars, floors
and caps and mandatory forward commitments to sell real estate mortgage loans.
Under SFAS #133 the accounting for increases or decreases in the value of
derivatives depends upon the use of the derivatives and whether the derivatives
qualify for hedge accounting. In particular, we use pay-fixed interest-rate
swaps to convert the variable-rate cash flows on short-term or variable-rate
debt obligations to fixed rates. At December 31, 2003 we had approximately
$343.5 million in fixed pay interest-rate swaps being accounted for as cash flow
hedges, thus permitting us to report the related unrealized gains or losses in
the fair market value of these derivatives in other comprehensive income and
subsequently reclassify such gains or losses into earnings as yield adjustments
in the same period in which the related interest on the hedged item (primarily
short-term or variable-rate debt obligations) affect earnings. Because of the
general decline in interest rates over the past few years, the fair market value
of our fixed pay interest-rate swaps being accounted for as cash flow hedges is
approximately negative $4.2 million at December 31, 2003. If we could not
continue to account for these fixed pay interest-rate swaps as cash flow hedges,
because for example, we were unable to continue to renew some or all of the
related short-term or variable-rate debt obligations that are being hedged, we
could have to recognize some or all of the $4.2 million negative fair market
value as an immediate charge against earnings. We expect to continue to be able
to qualify for and account for these fixed pay interest-rate swaps as cash flow
hedges.
Our accounting for income taxes involves the valuation of deferred tax
assets and liabilities primarily associated with differences in the timing of
the recognition of revenues and expenses for financial reporting and tax
purposes. At December 31, 2003 we had
A-13
recorded a net deferred tax asset of $9.0 million, which included a net
operating loss carryforward of $7.2 million. We have recorded no valuation
allowance on our net deferred tax asset because we believe that the tax benefits
associated with this asset will more likely than not, be realized. However,
changes in tax laws, changes in tax rates and our future level of earnings can
adversely impact the ultimate realization of our net deferred tax asset.
At December 31, 2003 we had recorded $16.7 million of goodwill. Under
SFAS #142, amortization of goodwill ceased, and instead this asset must be
periodically tested for impairment. Our goodwill primarily arose from our 2003
acquisition of Mepco and the past acquisitions of other banks and a mobile home
loan origination company. We test our goodwill for impairment utilizing the
methodology and guidelines established in SFAS #142. This methodology involves
assumptions regarding the valuation of the business segments that contain the
acquired entities. We believe that the assumptions we utilize are reasonable and
even utilizing more conservative assumptions on valuation would not presently
result in any impairment in the amount of goodwill that we have recorded.
However, we may incur impairment charges related to our goodwill in the future
due to changes in business prospects or other matters that could affect our
valuation assumptions.
RECENT ACCOUNTING PRONOUNCEMENTS
In April 2002, the FASB issued Statement of Financial Accounting
Standards No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment
of FASB Statement No. 13, and Technical Corrections," ("SFAS #145") which
rescinds FASB Statement No. 4, "Reporting Gains and Losses from Extinguishment
of Debt," and an amendment of that Statement, FASB Statement No. 64,
"Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements." SFAS #145
also rescinds FASB Statement No. 44, "Accounting for Intangible Assets of Motor
Carriers" and amends FASB Statement No. 13, "Accounting for Leases." SFAS #145
amends other existing authoritative pronouncements to make various technical
corrections, clarify meanings, or describe their applicability under changed
conditions. SFAS #145 is effective for fiscal years beginning after May 15,
2002, with early adoption of the provisions related to the rescission of
Statement #4 encouraged. The adoption of SFAS #145 did not have a material
impact on our financial condition or results of operations.
In July 2002, the FASB issued Statement of Financial Accounting
Standards No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities," ("SFAS #146") which addresses financial accounting and reporting
for costs associated with exit or disposal activities (including restructuring)
and nullifies Emerging Issues Task Force Issue No. 94- 3, "Liability Recognition
for Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)." SFAS #146 requires that
a liability for a cost associated with an exit or disposal activity be
recognized and measured initially at fair value only when the liability is
incurred. Under Issue 94- 3 the liability was recognized at the date of an
entity's commitment to an exit plan. SFAS #146 is effective for exit or disposal
activities (including restructuring) that are initiated after December 31, 2002,
with early adoption encouraged. Adoption of SFAS #146 did not have a material
impact on our financial condition or results of operations.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others," ("FIN #45") which addresses the
disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations under guarantees. The initial recognition and
measurement provisions of FIN #45 are applicable on a prospective basis to
guarantees issued or modified after December 31, 2002. The disclosure
requirements of FIN #45 are effective for interim and annual periods ending
after December 15, 2002. Adoption of this Interpretation did not have a material
impact on our financial condition or results of operations.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation
of Variable Interest Entities," ("FIN #46") which addresses consolidation by
business enterprises of variable interest entities. This Interpretation applies
immediately to variable interest entities created after January 31, 2003 and to
variable interest entities in which an enterprise obtains an interest after that
date. For enterprises with variable interest entities created before February 1,
2003, this Interpretation applies no later than the beginning of the first
interim or annual reporting period ending after December 15, 2003. However,
certain disclosure requirements were effective for all financial statements
issued after January 31, 2003. The adoption of this Interpretation did not have
a material impact on our financial condition or results of operations.
In December 2003, the FASB issued Interpretation No. 46 (revised
December 2003), "Consolidation of Variable Interest Entities," ("FIN 46R"),
which addresses how a business enterprise should evaluate whether it has a
controlling financial interest in an entity through means other than voting
rights and accordingly should consolidate the entity. FIN 46R replaces FIN 46
discussed in the previous paragraph. Under the general transition provisions of
FIN 46R all public entities are required to fully implement FIN 46R no later
than the end of the first reporting period ending after March 15, 2004. The
implementation of FIN 46R is not expected to have material impact on our
financial condition or results of operations.
In April 2003, the FASB issued Statement of Financial Accounting
Standards No. 149, "Amendment of Statement 133 on Derivative Instruments and
Hedging Activities," ("SFAS #149") which amends SFAS #133 to clarify the
definition of a derivative and expand the nature of exemptions from SFAS #133.
SFAS #149 also clarifies the application of hedge accounting when using certain
instruments and the application of SFAS #133 to embedded derivative instruments.
SFAS #149 also modifies the cash flow presentation of derivative instruments
that contain financing elements. This Statement is effective for contracts
entered into or modified after June 30, 2003, with early adoption encouraged.
Adoption of this Statement did not have a significant impact on our financial
condition or results of operations.
In May 2003, the FASB issued Statement of Financial Accounting
Standards No. 150, "Accounting for Certain Financial
A-14
Instruments with Characteristics of both Liabilities and Equity," ("SFAS #150")
which requires issuers of financial instruments to classify as liabilities
certain freestanding financial instruments that embody obligations for the
issuer. SFAS #150 was effective for all freestanding financial instruments
entered into or modified after May 31, 2003 and was otherwise effective at the
beginning of the first interim period beginning after June 15, 2003. On October
29, 2003, the FASB voted to defer for an indefinite period the application of
the guidance in SFAS #150, to non-controlling interests that are classified as
equity in the financial statements of a subsidiary but would be classified as a
liability on the parent's financial statements. The adoption of the sections of
this Statement that have not been deferred did not have a significant impact on
our financial condition or results of operations. The section noted above that
has been deferred indefinitely is not expected to have a significant impact on
our financial condition or results of operations.
A-15
SELECTED CONSOLIDATED FINANCIAL DATA
Year Ended December 31,
2003 2002 2001 2000 1999
----------- ----------- ----------- ----------- -----------
(dollars in thousands, except per share amounts)
SUMMARY OF OPERATIONS
Interest income ......................... $ 139,366 $ 129,815 $ 134,502 $ 132,841 $ 120,534
Interest expense ........................ 44,113 48,008 62,460 67,865 58,730
----------- ----------- ----------- ----------- -----------
Net interest income ................... 95,253 81,807 72,042 64,976 61,804
Provision for loan losses ............... 4,032 3,562 3,737 3,287 2,661
Net gains on the sale of real estate
mortgage loans ........................ 16,269 8,178 6,306 2,209 4,247
Other non-interest income ............... 26,335 22,733 20,629 16,752 13,848
Merger-related securities losses,
charges and litigation settlement ..... 8,000
Other non-interest expenses ............. 82,506 68,293 61,519 53,375 57,276
----------- ----------- ----------- ----------- -----------
Income before federal income tax
expense ............................. 51,319 40,863 33,721 27,275 11,962
Federal income tax expense ............ 13,727 11,396 9,288 7,266 3,293
----------- ----------- ----------- ----------- -----------
Net income before cumulative effect
of change in accounting principle ... 37,592 29,467 24,433 20,009 8,669
Cumulative effect of change in
accounting principle, net of related
tax effect(1) ......................... (35)
----------- ----------- ----------- ----------- -----------
Net income ........................ $ 37,592 $ 29,467 $ 24,398 $ 20,009 $ 8,669
=========== =========== =========== =========== ===========
PER COMMON SHARE DATA(2)
Net income before cumulative effect
of change in accounting principle
Basic ................................. $ 1.91 $ 1.46 $ 1.17 $ .94 $ .40
Diluted ............................... 1.87 1.44 1.15 .93 .39
Net income
Basic ................................. $ 1.91 $ 1.46 $ 1.17 $ .94 $ .40
Diluted ............................... 1.87 1.44 1.15 .93 .39
Cash dividends declared ................. .59 .44 .37 .32 .24
Book value .............................. 8.29 7.05 6.42 6.07 5.30
SELECTED BALANCES
Assets .................................. $ 2,358,557 $ 2,057,562 $ 1,888,457 $ 1,783,791 $ 1,725,205
Loans ................................... 1,667,393 1,381,442 1,384,684 1,379,664 1,290,641
Allowance for loan losses ............... 17,728 16,705 16,167 13,982 12,985
Deposits ................................ 1,702,806 1,535,603 1,387,367 1,389,900 1,310,602
Shareholders' equity .................... 162,216 138,047 131,903 128,336 113,746
Long-term debt .......................... 1,000
SELECTED RATIOS
Tax equivalent net interest income
to average earning assets ............. 4.88% 4.75% 4.45% 4.21% 4.15%
Net income to
Average equity ........................ 24.89 21.34 18.52 16.59 7.26
Average assets ........................ 1.69 1.52 1.35 1.15 .52
Average shareholders' equity to
average assets ........................ 6.80 7.14 7.28 6.92 7.16
Tier 1 capital to average assets ........ 7.90 6.85 7.46 7.31 6.56
Non-performing loans to Portfolio Loans.. .76 .72 .65 .51 .41
(1) Effect of the implementation of SFAS #133. (See note #15 to the
consolidated financial statements.)
(2) Per share data has been adjusted for a 10% stock dividend in 2003, 5% stock
dividends in 2002, 2001, 2000 and 1999 and three-for-two stock splits in
2002 and 1998.
A-16
INDEPENDENT AUDITORS' 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,
2003 and 2002, 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, 2003. 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 auditing standards generally
accepted in the United States of America. 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, 2003 and 2002, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2003, in conformity with accounting
principles generally accepted in the United States of America.
As discussed in notes 1 and 15 to the consolidated financial
statements, Independent Bank Corporation changed its method of accounting for
derivative financial instruments and hedging activities in 2001.
(KPMG LLP)
KPMG LLP
Detroit, Michigan
February 27, 2004
A-17
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
December 31,
2003 2002
----------- -----------
(in thousands, except share amounts)
ASSETS
Cash and due from banks ................................................. $ 61,741 $ 60,731
Securities available for sale ........................................... 453,996 371,246
Federal Home Loan Bank stock, at cost ................................... 13,895 9,704
Loans held for sale ..................................................... 32,642 129,577
Loans
Commercial ............................................................ 603,558 536,715
Real estate mortgage .................................................. 681,602 601,799
Installment ........................................................... 234,562 242,928
Finance receivables ................................................... 147,671
----------- -----------
Total Loans ......................................................... 1,667,393 1,381,442
Allowance for loan losses ............................................. (17,728) (16,705)
----------- -----------
Net Loans ........................................................... 1,649,665 1,364,737
Property and equipment, net ............................................. 43,979 40,735
Bank owned life insurance ............................................... 36,850 35,415
Goodwill ................................................................ 16,696 7,299
Other intangibles ....................................................... 7,523 6,420
Accrued income and other assets ......................................... 41,570 31,698
----------- -----------
Total Assets ..................................................... $ 2,358,557 $ 2,057,562
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Non-interest bearing .................................................. $ 192,733 $ 179,871
Savings and NOW ....................................................... 700,541 657,530
Time .................................................................. 809,532 698,202
----------- -----------
Total Deposits ...................................................... 1,702,806 1,535,603
Federal funds purchased ................................................. 53,885 23,840
Other borrowings ........................................................ 331,819 310,413
Guaranteed preferred beneficial interests in
Company's subordinated debentures ...................................... 50,600 17,250
Financed premiums payable ............................................... 26,340
Accrued expenses and other liabilities .................................. 30,891 32,409
----------- -----------
Total Liabilities ................................................... 2,196,341 1,919,515
----------- -----------
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-30,000,000 shares authorized; issued
and outstanding: 19,568,867 shares at December 31, 2003 and
17,822,090 shares at December 31, 2002 .............................. 19,569 17,822
Capital surplus ....................................................... 119,353 75,076
Retained earnings ..................................................... 16,953 41,785
Accumulated other comprehensive income ................................ 6,341 3,364
----------- -----------
Total Shareholders' Equity .......................................... 162,216 138,047
----------- -----------
Total Liabilities and Shareholders' Equity ....................... $ 2,358,557 $ 2,057,562
=========== ===========
See accompanying notes to consolidated financial statements
A-18
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended December 31,
2003 2002 2001
--------- --------- ---------
(in thousands, except per share amounts)
INTEREST INCOME
Interest and fees on loans ......................................... $ 118,861 $ 109,297 $ 117,735
Securities available for sale
Taxable ......................................................... 11,687 12,211 9,334
Tax-exempt ...................................................... 8,207 7,018 5,920
Other investments .................................................. 611 1,289 1,513
--------- --------- ---------
Total Interest Income ........................................... 139,366 129,815 134,502
--------- --------- ---------
INTEREST EXPENSE
Deposits ........................................................... 27,802 35,134 44,611
Other borrowings ................................................... 16,311 12,874 17,849
--------- --------- ---------
Total Interest Expense .......................................... 44,113 48,008 62,460
--------- --------- ---------
Net Interest Income ............................................. 95,253 81,807 72,042
Provision for loan losses ........................................... 4,032 3,562 3,737
--------- --------- ---------
Net Interest Income After Provision for Loan Losses ............. 91,221 78,245 68,305
--------- --------- ---------
NON-INTEREST INCOME
Service charges on deposit accounts ................................ 14,668 13,049 9,936
Net gains (losses) on assets
Real estate mortgage loans ...................................... 16,269 8,178 6,306
Securities ...................................................... (779) (24) 522
Title insurance fees ............................................... 3,092 2,474 1,874
Manufactured home loan origination fees and commissions ............ 1,769 1,949 2,108
Other income ....................................................... 7,585 5,285 6,189
--------- --------- ---------
Total Non-interest Income ....................................... 42,604 30,911 26,935
--------- --------- ---------
NON-INTEREST EXPENSE
Compensation and employee benefits ................................. 43,558 37,343 31,545
Occupancy, net ..................................................... 6,519 5,424 4,966
Furniture and fixtures ............................................. 5,539 4,731 4,371
Other expenses ..................................................... 26,890 20,795 20,637
--------- --------- ---------
Total Non-interest Expense ...................................... 82,506 68,293 61,519
--------- --------- ---------
Income Before Federal Income Tax ................................ 51,319 40,863 33,721
Federal income tax expense .......................................... 13,727 11,396 9,288
--------- --------- ---------
Net income before cumulative effect of change in accounting
principle ..................................................... 37,592 29,467 24,433
Cumulative effect of change in accounting principle, net of
related tax effect ................................................. (35)
--------- --------- ---------
Net Income .................................................... $ 37,592 $ 29,467 $ 24,398
========= ========= =========
Net income per share before cumulative effect of change in accounting
principle
Basic .............................................................. $ 1.91 $ 1.46 $ 1.17
========= ========= =========
Diluted ............................................................ $ 1.87 $ 1.44 $ 1.15
========= ========= =========
Net income per share
Basic .............................................................. $ 1.91 $ 1.46 $ 1.17
========= ========= =========
Diluted ............................................................ $ 1.87 $ 1.44 $ 1.15
========= ========= =========
Cash dividends declared per common share ............................ $ .59 $ .44 $ .37
========= ========= =========
See accompanying notes to consolidated financial statements
A-19
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Accumulated
Other
Compre- Total
Common Capital Retained hensive Shareholders'
Stock Surplus Earnings Income (Loss) Equity
--------- --------- --------- ------------- -------------
(in thousands)
Balances at January 1, 2001 ................. $ 17,415 $ 71,450 $ 37,544 $ 1,927 $ 128,336
Net income for 2001 ......................... 24,398 24,398
Cash dividends declared, $.37 per share ..... (7,636) (7,636)
5% stock dividend ........................... 851 14,081 (14,951) (19)
Issuance of 335,748 shares of common stock .. 336 3,412 3,748
Repurchase and retirement of 804,626 shares
of common stock ........................... (805) (12,363) (13,168)
Net change in accumulated other
comprehensive income (loss), net of
$2.0 million of related tax effect ........ (3,756) (3,756)
--------- --------- --------- --------- ---------
Balances at December 31, 2001 ............... 17,797 76,580 39,355 (1,829) 131,903
Net income for 2002 ......................... 29,467 29,467
Cash dividends declared, $.44 per share ..... (8,756) (8,756)
5% stock dividend ........................... 853 17,407 (18,281) (21)
Issuance of 291,891 shares of common stock .. 292 3,168 3,460
Repurchase and retirement of 1,120,070
shares of common stock .................... (1,120) (22,071) (23,191)
Cash in lieu of fractional shares for
three-for-two stock split ................. (8) (8)
Net change in accumulated other
comprehensive income (loss), net of
$2.8 million of related tax effect ........ 5,193 5,193
--------- --------- --------- --------- ---------
Balances at December 31, 2002 ............... 17,822 75,076 41,785 3,364 138,047
Net income for 2003 ......................... 37,592 37,592
Cash dividends declared, $.59 per share ..... (11,642) (11,642)
10% stock dividend .......................... 1,776 48,969 (50,782) (37)
Issuance of 491,818 shares of common stock .. 492 7,365 7,857
Repurchase and retirement of 520,607
shares of common stock .................... (521) (12,057) (12,578)
Net change in accumulated other
comprehensive income (loss), net of
$1.6 million of related tax effect ........ 2,977 2,977
--------- --------- --------- --------- ---------
Balances at December 31, 2003 .. $ 19,569 $ 119,353 $ 16,953 $ 6,341 $ 162,216
========= ========= ========= ========= =========
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
2003 2002 2001
-------- -------- --------
(in thousands)
Net income ..................................................... $ 37,592 $ 29,467 $ 24,398
Other comprehensive income
Net change in unrealized gain (loss) on securities
available for sale, net of related tax effect ................ 545 6,087 499
Cumulative effect of change in accounting principle, net
of related tax effect ....................................... (720)
Net change in unrealized loss on derivative instruments,
net of related tax effect ................................... 2,432 (894) (3,535)
-------- -------- --------
Comprehensive Income ............................. $ 40,569 $ 34,660 $ 20,642
======== ======== ========
See accompanying notes to consolidated financial statements
A-20
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
2003 2002 2001
--------- --------- ---------
(in thousands)
Net Income ..................................................................... $ 37,592 $ 29,467 $ 24,398
--------- --------- ---------
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH
FROM (USED IN) OPERATING ACTIVITIES
Proceeds from sales of loans held for sale ................................... 908,751 608,478 417,304
Disbursements for loans held for sale ........................................ (795,547) (652,661) (467,401)
Provision for loan losses .................................................... 4,032 3,562 3,737
Deferred federal income tax expense (credit) ................................. 4,428 974 (1,086)
Deferred loan fees ........................................................... (620) 443 324
Depreciation, amortization of intangible assets and premiums and
accretion of discounts on securities and loans .......................... 7,770 6,511 6,559
Net gains on sales of real estate mortgage loans ............................. (16,269) (8,178) (6,306)
Net (gains) losses on securities ............................................. 779 24 (522)
(Increase) decrease in accrued income and other assets ....................... (12,077) (3,438) 843
Increase in accrued expenses and other liabilities ........................... 1,021 225 1,234
--------- --------- ---------
Total Adjustments .......................................................... 102,268 (44,060) (45,314)
--------- --------- ---------
Net Cash Provided by (Used in) Operating Activities ........................ 139,860 (14,593) (20,916)
--------- --------- ---------
CASH FLOW USED IN INVESTING ACTIVITIES
Proceeds from the sale of securities available for sale ...................... 20,446 66,390 18,925
Proceeds from the maturity of securities available, for sale ................. 22,740 4,315 21,987
Principal received on securities available for sale .......................... 96,037 49,676 25,644
Purchases of securities available for sale ................................... (226,898) (181,228) (120,037)
Portfolio loans originated, net of principal payments ........................ (197,782) (24,730) 10,342
Portfolio loans purchased .................................................... (36,480)
Principal received on portfolio loans purchased .............................. 8,598 24,509 19,242
Acquisition of business, less cash received .................................. (3,062)
Purchase of bank owned life insurance ........................................ (35,000)
Capital expenditures ......................................................... (7,272) (9,480) (5,640)
--------- --------- ---------
Net Cash Used in Investing Activities ...................................... (287,193) (105,548) (66,017)
--------- --------- ---------
CASH FLOW FROM FINANCING ACTIVITIES
Net increase (decrease) in total deposits .................................... 167,203 148,236 (2,533)
Net increase (decrease) in other borrowings and federal funds
purchased ............................................................... (23,168) 39,165 61,532
Proceeds from Federal Home Loan Bank advances ................................ 645,650 485,090 995,750
Payments of Federal Home Loan Bank advances .................................. (650,924) (513,112) (956,754)
Retirement of long-term debt ................................................. (1,000)
Dividends paid ............................................................... (11,040) (8,406) (7,236)
Proceeds from issuance of guaranteed preferred beneficial interest in
Company's subordinated debentures ....................................... 48,712
Redemption of guaranteed preferred beneficial interest in Company's
subordinated debentures ................................................. (17,250)
Repurchase of common stock ................................................... (12,578) (23,191) (13,168)
Proceeds from issuance of common stock ....................................... 1,738 2,565 2,718
--------- --------- ---------
Net Cash From Financing Activities ......................................... 148,343 130,347 79,309
--------- --------- ---------
Net Increase (Decrease) in Cash and Cash Equivalents ....................... 1,010 10,206 (7,624)
Cash and Cash Equivalents at Beginning of Year ................................. 60,731 50,525 58,149
--------- --------- ---------
Cash and Cash Equivalents at End of Year ................................ $ 61,741 $ 60,731 $ 50,525
========= ========= =========
Cash paid during the year for
Interest ..................................................................... $ 37,516 $ 48,052 $ 64,255
Income taxes ................................................................. 10,738 11,693 9,746
Transfer of loans to other real estate ......................................... 4,106 5,399 2,318
Transfer of securities held to maturity to available for sale .................. 20,098
Real estate loans securitized .................................................. 50,100
See accompanying notes to consolidated financial statements
A-21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - CRITICAL ACCOUNTING POLICIES
The accounting and reporting policies and practices of Independent Bank
Corporation and subsidiaries conform with accounting principles generally
accepted in the United States of America and prevailing practices within the
banking industry. Our critical accounting policies include accounting for the
allowance for loan losses, the valuation of derivative financial instruments,
the valuation of originated mortgage servicing rights, the valuation of deferred
tax assets and the valuation of goodwill. We are required to make material
estimates and assumptions that are particularly susceptible to changes in the
near term as we prepare the consolidated financial statements and report amounts
for each of these items. Actual results may vary from these estimates.
Our Banks transact business in the single industry of commercial
banking. Our Banks' activities cover traditional phases of commercial banking,
including checking and savings accounts, commercial lending, direct and indirect
consumer financing, mortgage lending as well as insurance premium and extended
automobile warranty financing. The principal markets are the rural and suburban
communities across lower Michigan that are served by our Banks' branches and
loan production offices. The economies of these communities are relatively
stable and reasonably diversified. Our financing for insurance premiums and
extended automobile warranties is provided across the United States through our
wholly owned subsidiary, Mepco Insurance Premium Financing, Inc. Subject to
established underwriting criteria, our 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, 2003, 77% of our
Banks' loan portfolios were secured by real estate.
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. We report net
cash flows for customer loan and deposit transactions.
COMPREHENSIVE INCOME - Statement of Financial Accounting Standards, No.
130, "Reporting Comprehensive Income," established standards for reporting
comprehensive income, which consists of unrealized gains and losses on
securities available for sale and derivative instruments. The net change in
unrealized gain or loss on securities available for sale in 2003 and 2002
reflects net losses reclassified into earnings of $0.8 million and $24,000,
respectively, and reflects a net gain reclassified into earnings of $0.5 million
in 2001. The net change in unrealized loss on derivative instruments in 2001
reflects expense reclassified into earnings totaling $0.9 million. The
reclassification of these amounts from comprehensive income resulted in a
federal income tax benefit of $0.3 million, $8,000 and $0.1 million in 2003,
2002 and 2001, 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. We 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 - We classify our 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. We do not have
any trading securities. Securities held to maturity represent those securities
for which our 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. We did not have any securities
held to maturity at December 31, 2003 and 2002. 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 in comprehensive income. We determine whether a decline in
fair value below the amortized cost basis is other than temporary. If the
decline in value is judged to be other than temporary, the cost basis of the
security is written down to fair value as a new cost basis and the amount of the
write-down is recognized as a charge to non-interest income. 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 anticipated 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 anticipated 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-22
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 our best estimate of losses incurred. In determining the allowance
and the related provision for loan losses, we consider 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.
Although we periodically allocate 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 recoveries may occur after a loan is
charged against the allowance.
While we use relevant information to recognize losses on loans,
additional provisions for related losses may be necessary based on changes in
economic conditions, customer circumstances and other credit risk factors.
We measure our 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. We do 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 at the time of foreclosure is
recorded at the lower of cost of acquisition or fair value, less estimated costs
to sell, which becomes the property's new basis. Any write-downs at date of
acquisition are charged to the allowance for loan losses. Expense incurred in
maintaining assets and subsequent write-downs to reflect declines in value are
recorded as other expense.
During 2003 and 2002 we foreclosed on certain loans secured by real
estate and transferred approximately $4.1 million and $5.4 million,
respectively to other real estate. At the time of foreclosure amounts were
charged-off against the allowance for loan losses to bring the carrying amount
of these properties to their estimated fair market values, less estimated costs
to sell. During 2003 and 2002, we sold other real estate with book balances of
approximately $4.8 million and $2.9 million, respectively. Gains or losses on
the sale of other real estate are recorded in other expense on the income
statement.
Other real estate and repossessed assets totaling $3.3 million and $3.9
million at December 31, 2003 and 2002, respectively, are included in accrued
income and other assets.
INTANGIBLE ASSETS - We adopted Statement of Financial Accounting
Standards No. 141, "Business Combinations," ("SFAS #141") and Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets,"
("SFAS #142"). These two Statements have a profound effect on how organizations
account for business combinations and for the purchased goodwill and intangible
assets that arise from those combinations or are acquired otherwise. SFAS #141
was effective for all business combinations initiated after June 30, 2001, and
for all purchase method business combinations completed after June 30, 2001, and
requires that such combinations be accounted for using the purchase method of
accounting. SFAS #142 was effective for fiscal years beginning after December
15, 2001 and requires that the amortization of goodwill cease and that goodwill
instead only be reviewed for impairment. Prior to 2002, we recognized
approximately $0.7 million, net of tax, of goodwill amortization annually. This
amortization ceased upon adoption of SFAS #142 on January 1, 2002. Based on our
review of goodwill recorded on the Statement of Condition, no impairment existed
as of December 31, 2003. Prior to the year ended December 31, 2001 goodwill was
being amortized on a straight-line basis over the period of expected benefit,
generally 12 to 20 years.
Other intangible assets, including core deposit and customer
relationship intangibles, are amortized using both straight-line and accelerated
methods over 10 to 15 years.
INCOME TAXES - We employ 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 our 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.
We 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 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 - We adopted Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities," ("SFAS #133") on January 1, 2001. SFAS #133, which was subsequently
amended by SFAS #138, requires companies to record derivatives on the balance
sheet as assets and liabilities measured at their fair value. The accounting for
increases and decreases in the value of derivatives depends upon the use of
derivatives and whether the derivatives qualify for hedge accounting.
Upon adoption of SFAS #133, we recorded the fair value of cash-flow
hedging instruments ("Cash Flow Hedges") in accrued expenses and other
liabilities. On an ongoing basis, our Banks adjust their balance sheets to
reflect the then current fair value of the Cash Flow Hedges. The related gains
or losses are reported in other comprehensive income and are subsequently
reclassified into earnings, as a yield adjustment in the same period in which
the related interest on the hedged items (primarily variable-rate debt
A-23
obligations) affect earnings. It is anticipated that approximately $2.8 million,
net of tax, of unrealized losses on Cash Flow Hedges at December 31, 2003, will
be reclassified to earnings over the next twelve months. To the extent that the
Cash Flow Hedges are not effective, the ineffective portion of the Cash Flow
Hedges are immediately recognized as interest expense. The maximum term of any
Cash Flow Hedge at December 31, 2003 is 5.6 years.
Also upon adoption of SFAS #133, we recorded fair-value hedging
instruments ("Fair Value Hedges") at fair value in accrued expenses and other
liabilities. The hedged items (primarily fixed-rate debt obligations) were also
recorded at fair value through the statement of operations, which offsets the
adjustment to the Fair Value Hedges. On an ongoing basis, our Banks adjust their
balance sheets to reflect the then current fair value of both the Fair Value
Hedges and the respective hedged items. To the extent that the change in value
of the Fair Value Hedges do not offset the change in the value of the hedged
items, the ineffective portion is immediately recognized as interest expense.
Certain derivative financial instruments are not designated as hedges.
The fair value of these derivative financial instruments have been recorded on
our balance sheet and are adjusted on an ongoing basis to reflect their then
current fair value. The changes in the fair value of derivative financial
instruments not designated as hedges, are recognized currently as interest
expense.
When hedge accounting is discontinued because it is determined that a
derivative financial instrument no longer qualifies as a fair-value hedge, we
continue to carry the derivative financial instrument on the balance sheet at
its fair value, and no longer adjust the hedged item for changes in fair value.
The adjustment of the carrying amount of the previously hedged item is accounted
for in the same manner as other components of similar instruments. When hedge
accounting is discontinued because it is probable that a forecasted transaction
will not occur, we continue to carry the derivative financial instrument on the
balance sheet at its fair value, and gains and losses that were included in
accumulated other comprehensive income are recognized immediately in other
non-interest expense. In all other situations in which hedge accounting is
discontinued, we continue to carry the derivative financial instrument at its
fair value on the balance sheet and recognize any changes in its fair value in
interest expense.
STOCK BASED COMPENSATION - We apply APB Opinion No. 25 in accounting
for our stock based compensation plans and, accordingly, no compensation cost
has been recognized for our stock options. We have elected to provide pro forma
disclosures for our net income and earnings per share as if we had adopted the
fair value accounting method for stock-based compensation. Our stock based
compensation plans are described more fully in Note #14.
COMMON STOCK - At December 31, 2003, 0.6 million shares of common stock
were reserved for issuance under the dividend reinvestment plan and 1.6 million
shares of common stock were reserved for issuance under stock option plans.
RECLASSIFICATION - Certain amounts in the 2002 and 2001 consolidated
financial statements have been reclassified to conform with the 2003
presentation.
NOTE 2 - ACQUISITION
On April 15, 2003, we completed the acquisition of Mepco Insurance
Premium Financing, Inc. with the purpose of adding a high margin business with
good growth prospects and to take advantage of our relatively lower cost of
funds and greater access to capital. Mepco is a 40-year old Chicago-based
company that specializes in financing insurance premiums for businesses and
extended automobile warranties for consumers. As a result of the closing of this
transaction we issued 272,439 shares of common stock, with a value of $5.0
million, and paid out $5.0 million in cash on April 15, 2003 as the initial
consideration. Under the terms of the agreement and plan of merger additional
contingent consideration may be paid in the future pursuant to a five-year earn
out. Included in our 2003 results are Mepco's operations subsequent to April 15,
2003.
A-24
A condensed balance sheet of Mepco at the date of acquisition follows:
(in thousands)
Cash .......................... $ 2,217
Finance receivables, net ...... 99,156
Property and equipment ........ 1,233
Intangible assets ............. 2,824
Goodwill ...................... 9,396
Other assets .................. 3,005
--------
Total assets acquired ....... 117,831
--------
Short-term borrowings ......... 79,893
Financed premiums payable ..... 24,628
Other liabilities ............. 3,028
--------
Total liabilities assumed.... 107,549
--------
Net assets acquired ......... $ 10,282
========
We recorded purchase accounting adjustments related to the Mepco
acquisition including recording goodwill of $9.4 million (non-deductible for
federal income tax purposes), establishing a customer relationship intangible of
$2.6 million, a covenant not to compete of $0.2 million and writing down fixed
assets (software in the process of development) by $2.3 million. The customer
relationship intangible is being amortized on an accelerated basis over ten
years and the covenant not to compete on a straight-line basis over five years.
Included in 2003 was $0.6 million for amortization of the customer relationship
intangible and the covenant not to compete.
The unaudited pro-forma information presented in the following table
has been prepared based on our historical results combined with Mepco. The
information has been combined to present the results of operations as if the
acquisition had occurred at the beginning of the periods presented. The proforma
results are not necessarily indicative of the results which would have actually
been attained if the acquisition had been consummated in the past or what may be
attained in the future:
Year Ended December 31,
2003 2002
-------- --------
(in thousands)
Total revenue ......... $185,100 $172,700
======== ========
Net income ............ $ 37,750 $ 30,300
======== ========
Earnings per share..... $ 1.87 $ 1.46
======== ========
NOTE 3 - RESTRICTIONS ON CASH AND DUE FROM BANKS
Our Banks' legal reserve requirements were satisfied by average vault
cash and non-interest earning balances with the Federal Reserve Bank of $18.8
million and $15.7 million during 2003 and 2002, respectively. Our Banks do not
maintain compensating balances with correspondent banks.
A-25
NOTE 4 - SECURITIES
Securities available for sale consist of the following at December 31:
Amortized Unrealized Fair
Cost Gains Losses Value
-------- -------- -------- --------
(in thousands)
2003
U.S. Treasury ...................................... $ 300 $ 1 $ 301
Mortgage-backed .................................... 137,839 1,396 $ 249 138,986
Other asset-backed ................................. 32,721 648 239 33,130
Obligations of states and political subdivisions ... 188,076 10,570 855 197,791
Trust preferred .................................... 29,041 2,186 149 31,078
Preferred stock .................................... 30,374 142 253 30,263
Corporate .......................................... 21,171 738 21,909
Other .............................................. 538 538
-------- -------- -------- --------
Total ............................................ $440,060 $ 15,681 $ 1,745 $453,996
======== ======== ======== ========
2002
U.S. Treasury ...................................... $ 300 $ 6 $ 306
Mortgage-backed .................................... 81,941 2,983 $ 1 84,923
Other asset-backed ................................. 42,114 855 831 42,138
Obligations of states and political subdivisions.... 155,076 8,090 249 162,917
Trust preferred .................................... 32,013 1,743 545 33,211
Preferred stock .................................... 25,386 911 26,297
Corporate .......................................... 20,682 302 167 20,817
Other .............................................. 637 637
-------- -------- -------- --------
Total ............................................ $358,149 $ 14,890 $ 1,793 $371,246
======== ======== ======== ========
Our investments' gross unrealized losses and fair values aggregated by
investment type and length of time that individual securities have been a
continuous unrealized loss position, at December 31, 2003 follows:
Less Than Twelve Months Twelve Months or More Total
------------------------ ----------------------- -----------------------
Unrealized Unrealized Unrealized
Fair Value Losses Fair Value Losses Fair Value Losses
---------- ---------- ---------- ---------- ---------- ----------
(in thousands)
Mortgage-backed ..................................... $47,894 $ 249 $47,894 $ 249
Other asset-backed .................................. $ 5,859 $ 239 5,859 239
Obligations of states and political subdivisions .... 17,950 805 1,948 50 19,898 855
Trust preferred securities .......................... 7,143 149 7,143 149
Preferred stock ..................................... 5,244 253 5,244 253
------- ------- ------- ------- ------- -------
Total ............................................. $78,231 $ 1,456 $ 7,807 $ 289 $86,038 $ 1,745
======= ======= ======= ======= ======= =======
We believe that the unrealized losses on securities available for sale
are temporary in nature and due primarily to changes in interest rates and not a
result of credit related issues. We also believe that we have the ability to
hold securities with unrealized losses to maturity or until such time as the
unrealized losses reverse.
A-26
The amortized cost and fair value of securities available for sale at
December 31, 2003, 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.
Amortized Fair
Cost Value
---- -----
(in thousands)
Maturing within one year .......................... $ 10,943 $ 11,162
Maturing after one year but within five years ..... 37,848 40,241
Maturing after five years but within ten years .... 46,822 50,375
Maturing after ten years .......................... 142,975 149,301
-------- --------
238,588 251,079
Mortgage-backed ................................... 137,839 138,986
Other asset-backed ................................ 32,721 33,130
Preferred stock ................................... 30,374 30,263
Other ............................................. 538 538
-------- --------
Total ........................................... $440,060 $453,996
======== ========
A summary of proceeds from the sale of securities and gains and losses
follows:
Realized
Proceeds Gains Losses
-------- ----- ------
(in thousands)
2003 (1) ............................. $20,446 $827 $1,606
2002 (1) ............................. 66,390 809 833
2001 ................................. 18,925 524 2
(1) Losses in 2003 and 2002 include a $0.8 million other than temporary
impairment charge on a trust-preferred security.
Securities with a book value of $186.3 million and $136.8 million at
December 31, 2003 and 2002, respectively, were pledged to secure borrowings,
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, 2003 or 2002.
NOTE 5 - LOANS
An analysis of the allowance for loan losses for the years ended
December 31 follows:
2003 2002 2001
---- ---- ----
(in thousands)
Balance at beginning of year............................. $16,705 $16,167 $13,982
Allowance on loans from business acquired ............. 517
Provision charged to operating expense................. 4,032 3,562 3,737
Recoveries credited to allowance....................... 1,087 733 644
Loans charged against allowance........................ (4,613) (3,757) (2,196)
------- ------- -------
Balance at end of year................................... $17,728 $16,705 $16,167
======= ======= =======
Loans are presented net of deferred loan fees of $1.8 million at
December 31, 2003, and $2.4 million at December 31, 2002.
Loans on non-accrual status, 90 days or more past due and still
accruing interest, or restructured amounted to $12.7 million, $10.0 million and
$9.0 million at December 31, 2003, 2002 and 2001, respectively. If these loans
had continued to accrue interest in accordance with their original terms,
approximately $0.7 million, $0.9 million, and $0.6 million of interest income
would have been realized in 2003, 2002 and 2001, respectively. Interest income
realized on these loans was approximately $0.3 million, $0.3 million and $0.2
million in 2003, 2002 and 2001, respectively.
Impaired loans totaled approximately $13.5 million, $5.4 million and
$5.1 million at December 31, 2003, 2002 and 2001, respectively. Our Banks'
average investment in impaired loans was approximately $10.1 million, $6.8
million and $4.1 million in 2003, 2002 and 2001, respectively. Cash receipts on
impaired loans on non-accrual status are generally applied to the principal
balance. Interest income recognized on impaired loans was approximately $0.4
million, $0.2 million and $0.1 million in 2003, 2002 and 2001, respectively.
Certain impaired loans with a balance of approximately $9.6 million, $3.1
million and $1.4 million had specific allocations of the allowance for loan
losses totaling approximately $1.4 million, $1.3 million and $0.5 million at
December 31, 2003, 2002 and 2001, respectively.
At December 31, 2003, 2002 and 2001, our Banks serviced loans totaling
$1.179 billion, $0.882 billion and $0.846 billion, respectively, for the benefit
of third parties.
A-27
An analysis of capitalized mortgage servicing rights for the years
ended December 31 follows:
2003 2002 2001
---- ---- ----
(in thousands)
Balance at beginning of year............................................. $ 4,455 $ 4,299 $ 4,582
Originated servicing rights capitalized................................ 7,700 3,637 1,353
Amortization .......................................................... (3,655) (2,386) (1,636)
Change in impairment reserve........................................... 373 (1,095)
---------- -------- --------
Balance at end of year................................................... $ 8,873 $ 4,455 $ 4,299
========== ======== ========
Impairment reserve....................................................... $ 722 $ 1,095
========== ======== ========
Loans sold and serviced that have had servicing rights capitalized ...... $1,140,600 $793,700 $670,800
========== ======== ========
Capitalized mortgage servicing rights are included on the consolidated
statement of financial position in accrued income and other assets.
NOTE 6 - PROPERTY AND EQUIPMENT
A summary of property and equipment at December 31 follows:
2003 2002
---- ----
(in thousands)
Land........................................... $ 9,202 $ 8,973
Buildings...................................... 39,954 37,361
Equipment...................................... 39,881 34,359
-------- --------
89,037 80,693
Accumulated depreciation and amortization...... (45,058) (39,958)
-------- --------
Property and equipment, net................. $ 43,979 $ 40,735
======== ========
NOTE 7 - INTANGIBLE ASSETS
Intangible assets, net of amortization, at December 31 follows:
2003 2002
---- ----
Gross Gross
Carrying Accumulated Carrying Accumulated
Amount Amortization Amount Amortization
------ ------------ ------ ------------
(in thousands)
Amortized intangible assets
Core deposit intangibles ................................ $13,386 $8,067 $13,386 $6,966
Customer relationship ................................... 2,604 589
Other ................................................... 220 31
------- ------ ------- ------
Total ................................................. $16,210 $8,687 $13,386 $6,966
======= ====== ======= ======
Unamortized intangible assets - Goodwill................... $16,696 $ 7,299
======= =======
The $9.4 million increase in the gross carrying amount of goodwill and
the addition of the customer relationship intangible and other intangible are
the result of the acquisition of Mepco Insurance Premium Financing, Inc. The
customer relationship intangible is being amortized on an accelerated basis over
ten years while the covenant not to compete is being amortized straight-line
over five years.
A summary of estimated intangible amortization, primarily amortization
of core deposit and customer relationship intangibles, at December 31, 2003,
follows:
(in thousands)
2004........................................ $1,794
2005........................................ 1,556
2006........................................ 1,392
2007........................................ 1,278
2008........................................ 1,032
2009 and thereafter......................... 471
------
Total................................... $7,523
======
A-28
Changes in the carrying amount of goodwill and amortizing intangibles
by reporting segment for the year ended December 31, 2003, follows:
IB IBWM IBSM IBEM Mepco Other(1) Total
-- ---- ---- ---- ----- -------- -----
(in thousands)
Goodwill
Balance at beginning of year .................... $6,754 $ 32 $ 180 $ 333 $ 7,299
Acquired during year .......................... $ 9,397 9,397
------ ------- ------- ------- -------- --------- --------
Balance at end of year........................... $6,754 $ 32 $ 180 $ 9,397 $ 333 $ 16,696
====== ======= ======= ======= ======== ========= ========
Core Deposit Intangible, net ......................
Balance at beginning of year .................... $ 714 $ 124 $ 736 $ 4,757 $ 89 $ 6,420
Amortization................................... (130) (29) (142) (784) (16) (1,101)
------ ------- ------- ------- -------- --------- --------
Balance at end of year........................... $ 584 $ 95 $ 594 $ 3,973 $ 73 $ 5,319
====== ======= ======= ======= ======== ========= ========
Customer Relationship Intangible, net..............
Balance at beginning of year ....................
Acquired during year .......................... $ 2,604 $ 2,604
Amortization................................... (589) (589)
------ ------- ------- ------- -------- --------- --------
Balance at end of year........................... $ 2,015 $ 2,015
====== ======= ======= ======= ======== ========= ========
Other Intangibles, net ............................
Balance at beginning of year ....................
Acquired during year .......................... $ 220 $ 220
Amortization................................... (31) (31)
------ ------- ------- ------- -------- --------- --------
Balance at end of year........................... $ 189 $ 189
====== ======= ======= ======= ======== ========= ========
(1) Includes items relating to our parent company and certain insignificant
operations.
A reconciliation of reported net income to net income adjusted to
reflect the adoption of SFAS #142 for the years ended December 31 follows:
2003 2002 2001
---- ---- ----
(in thousands, except per share amounts)
Net income:
Reported net income ............................. $37,592 $29,467 $24,398
Add back - goodwill amortization ................ 712
------- ------- -------
Adjusted net income ........................... $37,592 $29,467 $25,110
======= ======= =======
Basic earnings per share:
Reported net income ............................. $ 1.91 $ 1.46 $ 1.17
Add back - goodwill amortization ................ .03
------- ------- -------
Adjusted net income ........................... $ 1.91 $ 1.46 $ 1.20
======= ======= =======
Diluted earnings per share: .......................
Reported net income ............................. $ 1.87 $ 1.44 $ 1.15
Add back - goodwill amortization ................ .04
------- ------- -------
Adjusted net income ........................... $ 1.87 $ 1.44 $ 1.19
======= ======= =======
NOTE 8 - DEPOSITS
A summary of interest expense on deposits for the years ended December
31 follows:
2003 2002 2001
---- ---- ----
(in thousands)
Savings and NOW ................................... $ 4,879 $ 7,444 $ 11,484
Time deposits under $100,000....................... 9,841 14,219 20,705
Time deposits of $100,000 or more ................. 13,082 13,471 12,422
------- ------- --------
Total ..................................... $27,802 $35,134 $ 44,611
======= ======= ========
Aggregate time deposits in denominations of $100,000 or more amounted
to $496.2 million, $347.5 million, and $239.0 million at December 31, 2003, 2002
and 2001, respectively.
A-29
A summary of the maturity of time deposits at December 31, 2003,
follows:
(in thousands)
2004................................ $429,944
2005................................ 127,938
2006................................ 71,829
2007................................ 68,102
2008................................ 39,665
2009 and thereafter................. 72,054
--------
Total......................... $809,532
========
NOTE 9 - OTHER BORROWINGS
A summary of other borrowings at December 31 follows:
2003 2002
---- ----
(in thousands)
Advances from Federal Home Loan Bank ........... $188,788 $194,061
Repurchase agreements.......................... 140,969 98,712
Notes payable................................... 12,600
U.S. Treasury demand notes...................... 1,858 4,840
Other........................................... 204 200
-------- --------
Total................................... $331,819 $310,413
======== ========
Advances from the Federal Home Loan Bank ("FHLB") are secured by our
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. As of December 31,
2003, our Banks had unused borrowing capacity with the FHLB (subject to the
FHLB's credit requirements and policies) of $143.0 million. Interest expense on
advances amounted to $5.4 million, $5.2 million and $11.7 million for the years
ended December 31, 2003, 2002 and 2001, respectively. During 2003, 2002 and 2001
we prepaid $5.0 million, $4.0 million and $20.0 million, respectively, of FHLB
advances and incurred losses during those same periods of $1.0 million, $0.1
million and $0.2 million, respectively. These losses were recorded in other
expenses.
As members of the FHLB, our Banks must own FHLB stock equal to the
greater of 1.0% of the unpaid principal balance of residential mortgage loans or
5.0% of its outstanding advances. At December 31, 2003, our 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, 2003, advances totaling $10.0 million, with a stated maturity of 2008 are
convertible in 2004 and beyond.
The maturity and weighted average interest rates of FHLB advances at
December 31 follow:
2003 2002
Amount Rate Amount Rate
------ ---- ------ ----
(dollars in thousands)
Fixed-rate advances
2003 .................................. $ 10,515 4.39%
2004 .................................. $ 34,000 1.44% 4,000 3.17
2005 .................................. 3,100 4.10 2,100 5.05
2006 .................................. 1,500 2.32
2007 .................................. 5,000 2.83 1,000 4.64
2008 .................................. 11,000 5.43 10,000 5.51
2009 and thereafter ................... 30,038 6.61 35,246 6.73
-------- ---- ---------- ----
Total fixed-rate advances ........... 84,638 3.99 62,861 5.83
-------- ---- ---------- ----
Variable-rate advances
2003 .................................. 131,200 1.50
2004 .................................. 104,150 1.30
-------- ---- ---------- ----
Total variable-rate advances ........ 104,150 1.30 131,200 1.50
-------- ---- ---------- ----
Total advances .................... $188,788 2.51% $ 194,061 2.90%
======== ==== ========== ====
Repurchase agreements are secured by U.S. Treasury, mortgage-backed,
asset-backed and corporate securities with a book value of approximately $161.0
million and $106.0 million at December 31, 2003 and 2002, respectively which are
being held by the counterparty to the repurchase agreement.
Repurchase agreements averaged $122.4 million, $93.1 million and $13.7
million during 2003, 2002 and 2001, respectively. The maximum amounts
outstanding at any month end during 2003, 2002 and 2001 were $141.0 million,
$109.2 million and $55.0 million, respectively. Interest expense on repurchase
agreements totaled $1.7 million, for the years ended 2003 and 2002 and $0.3
million for the year ended 2001.
A-30
We have established an unsecured credit facility comprised of a $20.0
million revolving credit agreement. At December 31, 2003, there was no balance
outstanding on the revolving credit facility. During 2003 and 2002 the revolving
credit facility accrued interest at federal funds, plus 1.00%. We are also
charged 28 basis points on the unused balance of the revolving credit facility.
Under the revolving credit agreement, we are subject to certain restrictive
covenants. As of December 31, 2003, we were in compliance with all covenants.
NOTE 10 - GUARANTEED PREFERRED BENEFICIAL INTERESTS
IN COMPANY'S SUBORDINATED DEBENTURES
During 2003, our consolidated trust subsidiary, IBC Capital Finance II,
completed its public offering of 2,024,000 shares of cumulative trust preferred
securities ("Preferred Securities") with a liquidation preference of $25 per
security. The Preferred Securities represent an interest in our 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 8.25% 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 March 31, 2033, at our option after
March 31, 2008, 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.
We have the option to defer distributions on the subordinated debentures from
time to time for a period not to exceed 20 consecutive quarters.
A portion of the proceeds from the offering referenced above were used
to redeem our 9.25% Preferred Securities originally issued in 1996. The 690,000
shares of Preferred Securities outstanding were redeemed at the liquidation
preference on April 21, 2003. At December 31, 2002, our consolidated trust
subsidiary, IBC Capital Finance, had issued and outstanding, 690,000 shares of
Preferred Securities with a liquidation preference of $25 per security. These
Preferred Securities represented an interest in our Company's subordinated
debentures, which had terms that were similar to the Preferred Securities.
Distributions on these securities were payable quarterly at the annual rate of
9.25% of the liquidation preference and are included in interest expense in the
consolidated financial statements.
Interest expense on our Preferred Securities is recorded in interest
expense on other borrowings.
NOTE 11 - COMMITMENTS AND CONTINGENT LIABILITIES
We and our 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 to be material to our
financial condition or results of operations.
In the normal course of business, our 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 and standby letters of
credit. 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. We do 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:
2003 2002
---- ----
(in thousands)
Financial instruments whose risk is represented by contract amounts
Commitments to extend credit ................................................. $146,265 $141,197
Standby letters of credit..................................................... 27,850 26,731
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. The majority of
the letters of credit are to corporations and mature during 2004.
A-31
NOTE 12 - EARNINGS PER SHARE
A reconciliation of basic and diluted earnings per share for the years
ended December 31 follows:
2003 2002 2001
---- ---- ----
(in thousands, except per share amounts)
Net income before cumulative effect of change in accounting principle......... $37,592 $29,467 $24,433
======= ======= =======
Net income ................................................................... $37,592 $29,467 $24,398
======= ======= =======
Shares outstanding(1) ........................................................ 19,635 20,131 20,842
Effect of stock options..................................................... 424 385 333
------- ------- -------
Shares outstanding for calculation of diluted earnings per share(1) ...... 20,059 20,516 21,175
======= ======= =======
Net income per share before cumulative effect of change in accounting
principle ..................................................................
Basic....................................................................... $ 1.91 $ 1.46 $ 1.17
======= ======= =======
Diluted .................................................................... $ 1.87 $ 1.44 $ 1.15
======= ======= =======
Net income per share
Basic....................................................................... $ 1.91 $ 1.46 $ 1.17
======= ======= =======
Diluted .................................................................... $ 1.87 $ 1.44 $ 1.15
======= ======= =======
(1) Shares outstanding have been adjusted for a 10% stock dividend in 2003,
5% stock dividends in 2002 and 2001 and a three-for-two stock split in
2002.
NOTE 13 - FEDERAL INCOME TAX
The composition of federal income tax expense (benefit) for the years
ended December 31 follows:
2003 2002 2001
---- ---- ----
(in thousands)
Current ................................... $ 9,299 $ 10,422 $ 10,374
Deferred .................................. 4,428 974 (1,086)
------- -------- --------
Federal income tax expense ................ $13,727 $ 11,396 $ 9,288
======= ======== ========
A reconciliation of federal income tax expense to the amount computed
by applying the statutory federal income tax rate of 35% in each year presented
to income before federal income tax for the years ended December 31 follows:
2003 2002 2001
---- ---- ----
(in thousands)
Statutory rate applied to income before federal income tax.......... $17,962 $14,302 $ 11,802
Tax-exempt interest income.......................................... (3,358) (2,848) (2,387)
Bank owned life insurance .......................................... (501) (141)
Dividends paid to Employee Savings and Stock Ownership Plan......... (188)
Amortization of goodwill ........................................... 256
Other, net.......................................................... (188) 83 (383)
------- ------- --------
Federal income tax expense ...................................... $13,727 $11,396 $ 9,288
======= ======= ========
The deferred federal income tax expense of $4.4 million and $1.0
million in 2003 and 2002, respectively and the deferred federal income tax
benefit of $1.1 million in 2001, resulted from the tax effect of temporary
differences. Federal income tax expense in 2001 includes a benefit of $0.4
million resulting from an adjustment of net deferred tax assets associated with
an increase in our tax rate from 34% to 35%.
A-32
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:
2003 2002
---- ----
(in thousands)
Deferred tax assets
Net operating loss carryforward............................... $ 7,194 $ 8,202
Allowance for loan losses..................................... 6,264 5,847
Unrealized loss on derivative financial instruments .......... 1,614 3,190
Deferred compensation......................................... 634 431
Fixed assets.................................................. 545 339
Loans held for sale........................................... 171 670
Deferred loan fees............................................ 170
Deferred insurance premiums................................... 520 287
Purchase discounts, net....................................... 319
Other......................................................... 385 347
------- --------
Gross deferred tax assets................................... 17,497 19,632
Deferred tax liabilities
Unrealized gain on securities available for sale ............. 4,875 4,584
Mortgage servicing rights..................................... 3,105 1,559
Purchase premiums, net........................................ 491
Deferred loan fees............................................ 216
------- --------
Gross deferred tax liabilities.............................. 8,471 6,359
------- --------
Net deferred tax assets................................... $ 9,026 $ 13,273
======= ========
At December 31, 2003, the Company had a net operating loss ("NOL")
carryforward of approximately $20.6 million which, if not used against taxable
income, will expire as follows:
(in thousands)
2008....................................... $ 8,918
2009....................................... 81
2010....................................... 6,779
2011....................................... 929
2012....................................... 411
2018....................................... 3,437
-------
Total.............................. $20,555
=======
The use of the $20.6 million NOL carryforward, which was acquired
through the acquisition of Mutual Savings Bank, f.s.b., is limited to $2.9
million per year as the result of a change in control as defined in the Internal
Revenue Code.
We believe that the tax benefits associated with the deferred tax
assets will more likely than not be realized, and therefore no valuation
allowance is considered necessary.
NOTE 14 - EMPLOYEE BENEFIT PLANS
We maintain stock option plans for our non-employee directors as well
as certain of our officers and those of our Banks. 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.
A-33
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:
2003 2002 2001
---- ---- ----
Expected dividend yield ........................ 2.53% 2.48% 3.17%
Risk-free interest rate ........................ 4.04 5.11 5.22
Expected life (in years) ....................... 9.4 9.9 10.0
Expected volatility............................. 33.20% 35.91% 41.62%
Per share weighted-average fair value .......... $ 7.57 $ 6.87 $ 4.50
The following table summarizes the impact on our net income had
compensation cost included the fair value of options at the grant date:
2003 2002 2001
---- ---- ----
(in thousands, except per share amounts)
Net income - as reported ................................................. $ 37,592 $29,467 $24,398
Stock based compensation expense determined under fair value based
method, net of related tax effect....................................... (1,355) (1,572) (1,007)
-------- ------- -------
Pro-forma net income.................................................. $ 36,237 $27,895 $23,391
======== ======= =======
Income per share
Basic
As reported........................................................... $ 1.91 $ 1.46 $ 1.17
Pro-forma............................................................. 1.85 1.39 1.12
Diluted
As reported........................................................... $ 1.87 $ 1.44 $ 1.15
Pro-forma............................................................. 1.81 1.36 1.10
A summary of outstanding stock option grants and transactions follows:
Number Average
of Exercise
Shares Price
------ -----
Outstanding at January 1,2001................. 1,327,852 $ 8.21
Granted..................................... 382,498 11.09
Exercised................................... (478,080) 7.51
Forfeited................................... (14,082) 10.25
--------- ----
Outstanding at December 31,2001............... 1,218,188 9.38
Granted..................................... 376,624 16.77
Exercised................................... (384,981) 8.96
--------- ----
Outstanding at December 31,2002............... 1,209,831 11.82
Granted..................................... 306,136 21.06
Exercised................................... (384,344) 11.75
Forfeited................................... (10,992) 18.13
--------- ----
Outstanding at December 31,2003............... 1,120,631 $14.30
========= ======
A summary of stock options outstanding at December 31, 2003 follows:
Options Outstanding Options Exercisable
------------------- -------------------
Weighted-Average Weighted-Average
Number ----------------------- Number -----------------------
of Remaining Exercise of Remaining Exercise
Range of Exercise Prices Shares Life (years) Price Shares Life (years) Price
------------------------ ------ ------------ ----- ------ ------------ -----
$3.52 to $8.35 ........... 292,040 4.20 $ 7.26 292,040 4.20 $ 7.26
$8.36 to $13.12 .......... 215,212 7.23 10.98 215,212 7.23 10.98
$13.13 to $17.03 ......... 293,056 8.16 16.53 293,056 8.16 16.53
$17.04 to $19.22 ......... 145,033 9.02 19.07 17,766 7.02 18.03
$19.23 to $30.40.......... 175,290 8.28 22.43 1,924 6.30 19.39
--------- ---- ------ ------- ---- ------
1,120,631 7.08 $14.30 819,998 5.46 $11.81
========= ==== ====== ======= ==== ======
We maintain 401(k) and employee stock ownership plans covering
substantially all of our full-time employees. We match employee contributions to
the 401(k) up to a maximum of 3% of participating employees' eligible wages.
Contributions to the employee stock ownership plan are determined annually and
require approval of our Board of Directors. During 2003, 2002 and 2001, $2.8
million, $2.4 million and $1.8 million respectively, was expensed for these
retirement plans.
Our officers participate in various performance-based compensation
plans. Amounts expensed for all incentive plans totaled
A-34
$3.2 million, $2.6 million, and $2.2 million, in 2003, 2002 and 2001,
respectively.
We also provide certain health care and life insurance programs to
substantially all full-time employees. Amounts expensed for these programs
totaled $3.5 million, $2.8 million and $2.1 million, in 2003, 2002 and 2001,
respectively. These insurance programs are also available to retired employees
at their expense.
NOTE 15 - DERIVATIVE FINANCIAL INSTRUMENTS
Our derivative financial instruments according to the type of hedge in
which they are designated under SFAS #133 at December 31 follow:
2003
Average
Notional Maturity Fair
Amount (years) Value
------ ------- -----
(dollars in thousands)
Fair Value Hedge - pay variable interest-rate swap agreements....... $ 81,159 4.5 $ 141
======== === =======
Cash Flow Hedge - pay-fixed interest-rate swap agreements........... $343,500 1.5 $(4,180)
======== === =======
No hedge designation
Pay-fixed interest-rate swap agreements ........................... $ 30,000 1.0 $ (83)
Rate-lock real estate mortgage loan commitments.................... 15,400 .1 194
Mandatory commitments to sell real estate mortgage loans .......... 46,200 .1 (140)
-------- -- -------
Total............................................................. $ 91,600 .4 $ (29)
======== == =======
2002
Average
Notional Maturity Fair
Amount (years) Value
------ ------- -----
(dollars in thousands)
Fair Value Hedge - pay variable interest-rate swap agreements........ $ 25,000 7.3 $ 28
======== === ========
Cash Flow Hedge
Pay-fixed interest-rate swap agreements ........................... $236,000 1.5 $ (7,494)
Interest-rate collar agreements.................................... 10,000 0.9 (404)
-------- --- --------
Total............................................................ $246,000 1.5 $ (7,898)
======== === ========
No hedge designation
Rate-lock real estate mortgage loan commitments.................... $ 59,000 .1 $ 504
Mandatory commitments to sell real estate mortgage loans .......... 182,000 .1 (1,492)
-------- -- --------
Total............................................................ $241,000 .1 $ (988)
======== == ========
Our Banks have established management objectives and strategies that
include interest-rate risk parameters for maximum fluctuations in net interest
income and market value of portfolio equity. We monitor our Banks' interest rate
risk position via simulation modeling reports. The goal of our Banks'
asset/liability management efforts is to maintain profitable financial leverage
within established risk parameters.
Our Banks use variable-rate and short-term fixed-rate (less than 12
months) debt obligations to fund a portion of their balance sheets, which expose
our Banks to variability in interest rates. To meet their objectives, our Banks
may periodically enter into derivative financial instruments to mitigate
exposure to fluctuations in cash flows resulting from changes in interest rates.
Cash Flow Hedges currently include certain pay-fixed interest-rate swaps.
Pay-fixed interest-rate swaps convert the variable-rate cash flows on
debt obligations to fixed-rates. Under interest-rate collars, our Banks will
receive cash if interest rates rise above a predetermined level while our Banks
will make cash payments if interest rates fall below a predetermined level. As a
result, our Banks effectively have variable-rate debt with an established
maximum and minimum rate.
Our Banks also use long-term, fixed-rate brokered CDs to fund a portion
of their balance sheets. These instruments expose our Banks to variability in
fair value due to changes in interest rates. To meet their objectives, our Banks
may enter into derivative financial instruments to mitigate exposure to
fluctuations in fair values of such fixed-rate debt instruments. Fair Value
Hedges currently include pay-variable interest-rate swaps.
Certain financial derivative instruments have not been designated as
hedges. The fair value of these derivative financial instruments have been
recorded on our balance sheet and are adjusted on an ongoing basis to reflect
their then current fair value. The changes in fair value of derivative financial
instruments not designated as hedges, are recognized as interest expense.
In the ordinary course of business, our Banks enter into rate-lock real
estate mortgage loan commitments with customers
A-35
("Rate Lock Commitments"). These commitments expose our Banks to interest rate
risk. Our Banks also enter into mandatory commitments to sell real estate
mortgage loans ("Mandatory Commitments") to hedge price fluctuations of mortgage
loans held for sale and Rate Lock Commitments. Mandatory Commitments help
protect our Banks' loan sale profit margin from fluctuations in interest rates.
The changes in the fair value of Rate Lock Commitments and Mandatory Commitments
are recognized currently as part of gains on the sale of real estate mortgage
loans. Interest expense and net gains on the sale of real estate mortgage loans,
as well as net income may be more volatile as a result of derivative
instruments, which are not designated as hedges.
The impact of SFAS #133 on net income and other comprehensive income is
as follows:
Other
Comprehensive
Net Income Income Total
---------- ------ -----
(in thousands)
Change in fair value during the year ended December 31, 2003 ..............
Interest rate swap agreements not designated as hedges ................. $ (83) $ (83)
Rate-lock real estate mortgage loan commitments......................... (310) (310)
Mandatory commitments to sell real estate mortgage loans ............... 1,352 1,352
Ineffectiveness of cash flow hedges..................................... (33) (33)
Cash flow hedges ....................................................... (24) $ (3,178) (3,202)
Reclassification adjustment ............................................ 6,920 6,920
------- -------- -------
Total................................................................. 902 3,742 4,644
Federal income tax ..................................................... 316 1,310 1,626
------- -------- -------
Total, net of federal income tax.................................... $ 586 $ 2,432 $ 3,018
======= ======== =======
Change in fair value during the year ended December 31, 2002 ..............
Interest rate swap agreements not designated as hedges ................. $ 848 $ 848
Rate-lock real estate mortgage loan commitments......................... 2,129 2,129
Mandatory commitments to sell real estate mortgage loans ............... (4,045) (4,045)
Fair value hedges....................................................... 22 22
Ineffectiveness of cash flow hedges..................................... 72 72
Cash flow hedges ....................................................... 43 $ (8,182) (8,139)
Reclassification adjustment ............................................ 6,807 6,807
------- -------- -------
Total................................................................. (931) (1,375) (2,306)
Federal income tax ..................................................... (326) (481) (807)
------- -------- -------
Total, net of federal income tax.................................... $ (605) $ (894) $(1,499)
======= ======== =======
Cumulative effect of change in accounting principle at January 1, 2001
Fair value adjustments of option contracts not designated as hedges .... $ (215) $ (215)
Interest rate swap agreements not designated as hedges ................. 310 310
Fair value hedges....................................................... (39) (39)
Cash flow hedges ....................................................... (110) $ (1,107) (1,217)
------- -------- -------
Total................................................................. (54) (1,107) (1,161)
Federal income tax ..................................................... (19) (387) (406)
------- -------- -------
Total, net of federal income tax.................................... $ (35) $ (720) $ (755)
======= ======== =======
Change in fair value during the year ended December 31, 2001
Option contracts not designated as hedges .............................. $ 26 $ 26
Interest rate swap agreements not designated as hedges ................. (310) (310)
Rate-lock real estate mortgage loan commitments......................... (1,625) (1,625)
Mandatory commitments to sell real estate mortgage loans ............... 2,553 2,553
Fair value hedges....................................................... 16 16
Ineffectiveness of cash flow hedges..................................... (53) (53)
Cash flow hedges ....................................................... 26 $ (9,010) (8,984)
Reclassification adjustment ............................................ 3,571 3,571
------- -------- -------
Total................................................................. 633 (5,439) (4,806)
Federal income tax ..................................................... 222 (1,904) (1,682)
------- -------- -------
Total, net of federal income tax.................................... $ 411 $ (3,535) $(3,124)
======= ======== =======
A-36
NOTE 16 - RELATED PARTY TRANSACTIONS
Certain of our directors and executive officers, including companies in
which they are officers or have significant ownership, were loan and deposit
customers of the Banks during 2003 and 2002.
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:
2003 2002
---- ----
(in thousands)
Balance at beginning of year...................... $ 26,000 $ 25,628
New loans and advances.......................... 23,611 18,668
Repayments...................................... (22,852) (18,296)
-------- --------
Balance at end of year............................ $ 26,759 $ 26,000
======== ========
NOTE 17 - OTHER NON-INTEREST EXPENSES
Other non-interest expenses for the years ended December 31 follow:
2003 2002 2001
---- ---- ----
(in thousands)
Advertising............................................ $ 4,011 $ 2,813 $ 2,490
Data processing........................................ 3,942 3,209 2,558
Loan and collection.................................... 3,352 3,028 2,598
Communications......................................... 2,895 2,484 2,275
Supplies............................................... 1,920 1,626 1,442
Amortization of intangible assets ..................... 1,721 1,014 1,704
Legal and professional................................. 1,651 1,238 1,198
Other.................................................. 7,398 5,383 6,372
------- ------- -------
Total non-interest expense ......................... $26,890 $20,795 $20,637
======= ======= =======
NOTE 18 - LEASES
We have non-cancelable operating leases for office facilities that
provide for renewal options.
A summary of future minimum lease payments under non-cancelable
operating leases at December 31, 2003, follows:
(in thousands)
2004.............................. $ 728
2005.............................. 598
2006.............................. 530
2007.............................. 509
2008.............................. 112
2009 and thereafter...............
------
Total........................... $2,477
======
Rental expense on operating leases totaled $0.8 million in 2003 and
$0.4 in 2002 and 2001, respectively.
NOTE 19 - REGULATORY MATTERS
Capital guidelines adopted by Federal and State regulatory agencies and
restrictions imposed by law limit the amount of cash dividends our Banks can pay
to us. At December 31, 2003, using the most restrictive of these conditions for
each Bank, the aggregate cash dividends that our Banks can pay us without prior
approval was $48.7 million. It is not our intent to have dividends paid in
amounts which would reduce the capital of our Banks to levels below those which
we consider prudent and in accordance with guidelines of regulatory authorities.
We are also subject to various regulatory capital requirements.
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. Failure to meet minimum capital
requirements can initiate certain mandatory, and possibly discretionary, actions
by regulators that could have a material effect on our consolidated financial
statements. Under capital adequacy guidelines, we must meet specific capital
requirements that involve quantitative measures as well as qualitative judgments
by the regulators. The most recent notification from the FDIC categorized each
of our Banks as well capitalized.
A-37
Our actual capital amounts and ratios at December 31, 2003 follow:
Minimum Ratio Minimum Ratio
Actual for Adequately for Well-Capitalized
Amount Ratio Capitalized Institutions Institutions
------------------ ------------------------ ---------------------
(dollars in thousands)
Total capital to risk-weighted assets
Consolidated ...................................... $ 199,823 11.57% 8.00% 10.00%
Independent Bank .................................. 93,029 10.76 8.00 10.00
Independent Bank West Michigan .................... 38,566 10.83 8.00 10.00
Independent Bank South Michigan ................... 27,351 10.78 8.00 10.00
Independent Bank East Michigan .................... 26,529 10.81 8.00 10.00
Tier 1 capital to risk-weighted assets
Consolidated ...................................... $ 182,145 10.55% 4.00% 6.00%
Independent Bank .................................. 84,592 9.78 4.00 6.00
Independent Bank West Michigan .................... 34,152 9.59 4.00 6.00
Independent Bank South Michigan ................... 24,859 9.80 4.00 6.00
Independent Bank East Michigan .................... 24,080 9.81 4.00 6.00
Tier 1 capital to average assets
Consolidated ...................................... $ 182,145 7.91% 4.00% 5.00%
Independent Bank .................................. 84,592 7.46 4.00 5.00
Independent Bank West Michigan .................... 34,152 7.42 4.00 5.00
Independent Bank South Michigan ................... 24,859 7.06 4.00 5.00
Independent Bank East Michigan .................... 24,080 6.85 4.00 5.00
NOTE 20 - FAIR VALUES OF FINANCIAL INSTRUMENTS
Most of our assets and liabilities are considered financial instruments.
Many of these financial instruments lack an available trading market and it is
our general practice and intent to hold the majority of our 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 and accrued interest.
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.
We have purchased a "stable value wrap" for our bank owned life insurance
that permits a surrender of this investment at the greater of its fair market or
book value.
Financial instrument liabilities 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.
Capitalized mortgage servicing rights have been valued based upon a
valuation performed by an independent third party.
Derivative financial instruments have principally been valued based on
discounted value of contractual cash flows using a discount rate approximating
current market rates.
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-38
The estimated fair values and recorded book balances at December 31 follow:
2003 2002
Estimated Recorded Estimated Recorded
Fair Book Fair Book
Value Balance Value Balance
---------- ---------- ---------- ----------
(in thousands)
Assets
Cash and due from banks ...................................... $ 61,700 $ 61,700 $ 60,700 $ 60,700
Securities available for sale ................................ 454,000 454,000 371,200 371,200
Net loans and loans held for sale ............................ 1,689,800 1,682,300 1,511,900 1,494,300
Bank owned life insurance .................................... 36,900 36,900 35,400 35,400
Accrued interest receivable .................................. 11,100 11,100 9,000 9,000
Capitalized mortgage servicing rights ........................ 10,100 8,900 4,700 4,500
Liabilities
Deposits with no stated maturity ............................. $ 893,300 $ 893,300 $ 837,400 $ 837,400
Deposits with stated maturity ................................ 816,100 809,500 706,200 698,200
Other borrowings ............................................. 449,500 436,300 361,200 351,500
Accrued interest payable ..................................... 4,100 4,100 4,600 4,600
Derivative financial instruments ............................. 4,100 4,100 8,900 8,900
The fair values for commitments to extend credit and standby letters of
credit are estimated to approximate their aggregate book balance.
Fair value estimates are made at a specific point in time, based on
relevant market information and information about the financial instrument.
These estimates do not reflect any premium or discount that could result from
offering for sale the entire holdings of a particular financial instrument.
Fair value estimates are based on existing on- and off-balance sheet
financial instruments without attempting to estimate the value of anticipated
future business, the value of future earnings attributable to off-balance sheet
activities and the value of assets and liabilities that are not considered
financial instruments.
Fair value estimates for deposit accounts do not include the value of the
substantial core deposit intangible asset resulting from the low-cost funding
provided by the deposit liabilities compared to the cost of borrowing funds in
the market.
NOTE 21 - OPERATING SEGMENTS
Our reportable segments are based upon legal entities. We have five
reportable segments: Independent Bank ("IB"), Independent Bank West Michigan
("IBWM"), Independent Bank South Michigan ("IBSM"), Independent Bank East
Michigan ("IBEM") and Mepco Insurance Premium Financing, Inc. ("Mepco"). The
accounting policies of the segments are the same as those described in Note 1 to
the Consolidated Financial Statements. We evaluate performance based principally
on net income of the respective reportable segments.
A-39
A summary of selected financial information for our reportable segments
follows:
IB IBWM IBSM IBEM Mepco Other(1) Elimination Total
---------- ---------- ---------- ---------- ---------- ---------- ----------- ----------
(in thousands)
2003
Total assets ................... $1,007,934 $ 464,782 $ 359,920 $ 352,800 $ 164,707 $ 223,293 $ 214,879 $2,358,557
Interest income ................ 60,821 28,508 18,473 20,073 11,534 35 78 139,366
Net interest income ............ 40,762 21,081 12,454 14,339 10,474 (3,857) 95,253
Provision for loan losses ...... 2,060 1,056 (118) 630 404 4,032
Income (loss) before
income tax .................. 23,317 15,249 7,857 6,196 3,942 (4,311) 931 51,319
Net income (loss) .............. 17,212 10,681 5,816 5,076 2,412 (2,674) 931 37,592
2002
Total assets ................... $ 965,167 $ 427,465 $ 321,980 $ 341,931 $ 176,010 $ 174,991 $2,057,562
Interest income ................ 61,450 27,678 19,622 21,112 29 76 129,815
Net interest income ............ 37,698 19,682 12,511 13,754 (1,838) 81,807
Provision for loan losses ...... 1,657 890 390 625 3,562
Income (loss) before
income tax .................. 19,970 11,716 6,697 5,615 (2,432) 703 40,863
Net income (loss) .............. 14,628 8,125 4,849 4,539 (1,971) 703 29,467
2001
Total assets ................... $ 878,664 $ 387,607 $ 295,683 $ 327,628 $ 166,340 $ 167,465 $1,888,457
Interest income ................ 64,969 28,949 17,981 22,730 31 158 134,502
Net interest income ............ 33,099 17,659 10,086 13,281 (2,083) 72,042
Provision for loan losses ...... 1,547 850 510 830 3,737
Income (loss) before
income tax .................. 16,581 10,050 5,210 5,561 (3,194) 487 33,721
Net income (loss) .............. 11,894 6,804 3,829 4,356 (1,998) 487 24,398
(1) Includes amounts relating to our parent company and certain insignificant
operations.
NOTE 22 - INDEPENDENT BANK CORPORATION (PARENT COMPANY ONLY) FINANCIAL
INFORMATION
Presented below are condensed financial statements for our parent company.
CONDENSED STATEMENTS OF FINANCIAL CONDITION
December 31,
2003 2002
---------- ----------
(in thousands)
ASSETS
Cash and due from banks .................. $ 10,894 $ 5,128
Investment in subsidiaries ............... 200,070 158,676
Other assets ............................. 9,900 9,606
---------- ----------
Total Assets .......................... $ 220,864 $ 173,410
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Notes payable ............................ $ 12,600
Subordinated debentures .................. $ 52,165 17,783
Other liabilities ........................ 6,483 4,980
Shareholders' equity ..................... 162,216 138,047
---------- ----------
Total Liabilities and Shareholders' Equity $ 220,864 $ 173,410
========== ==========
A-40
CONDENSED STATEMENTS OF OPERATIONS
Year Ended December 31,
2003 2002 2001
---------- ---------- ----------
(in thousands)
OPERATING INCOME
Dividends from subsidiaries ............................................ $ 26,775 $ 26,450 $ 23,100
Management fees from subsidiaries and other income ..................... 19,252 17,708 14,944
---------- ---------- ----------
Total Operating Income .............................................. 46,027 44,158 38,044
---------- ---------- ----------
OPERATING EXPENSES
Interest expense ....................................................... 3,892 1,867 2,114
Administrative and other expenses ...................................... 21,084 19,340 16,764
---------- ---------- ----------
Total Operating Expenses ............................................ 24,976 21,207 18,878
---------- ---------- ----------
Income Before Federal Income Tax and Undistributed Net Income
of Subsidiaries .................................................. 21,051 22,951 19,166
Federal income tax credit ................................................. 2,119 825 1,449
---------- ---------- ----------
Income Before Equity in Undistributed Net Income of Subsidiaries .... 23,170 23,776 20,615
Equity in undistributed net income of subsidiaries ........................ 14,422 5,691 3,783
---------- ---------- ----------
Net Income ....................................................... $ 37,592 $ 29,467 $ 24,398
========== ========== ==========
CONDENSED STATEMENTS OF CASH FLOWS
Year Ended December 31,
2003 2002 2001
---------- ---------- ----------
` (in thousands)
Net Income ................................................................ $ 37,592 $ 29,467 $ 24,398
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 ..................... 1,191 1,087 1,005
Gain on sale of securities ............................................. (146)
Increase in other assets ............................................... (2,125) (886) (529)
Increase in other liabilities .......................................... 1,925 1,388 819
Equity in undistributed net income of subsidiaries ..................... (14,422) (5,691) (3,783)
---------- ---------- ----------
Total Adjustments ................................................... (13,431) (4,248) (2,488)
---------- ---------- ----------
Net Cash from Operating Activities .................................. 24,161 25,219 21,910
---------- ---------- ----------
CASH FLOW FROM INVESTING ACTIVITIES
Purchase of securities available for sale .............................. (100)
Proceeds from the sale of securities available for sale ................ 206
Investment in subsidiaries ............................................. (15,610) (1,824)
Capital expenditures ................................................... (799) (1,833) (328)
---------- ---------- ----------
Net Cash Used in Investing Activities ............................... (16,409) (3,451) (428)
---------- ---------- ----------
CASH FLOW FROM FINANCING ACTIVITIES
Proceeds from short-term borrowings .................................... 2,100
Retirement of long-term debt ........................................... (1,000)
Repayment of other borrowings .......................................... (12,600)
Proceeds from issuance of subordinated debentures ...................... 50,277
Redemption of subordinated debentures .................................. (17,783)
Dividends paid ......................................................... (11,040) (8,406) (7,236)
Repurchase of common stock ............................................. (12,578) (23,191) (13,168)
Proceeds from issuance of common stock ................................. 1,738 2,565 2,718
---------- ---------- ----------
Net Cash Used in Financing Activities ............................... (1,986) (26,932) (18,686)
---------- ---------- ----------
Net Increase (Decrease) in Cash and Cash Equivalents ................ 5,766 (5,164) 2,796
Cash and Cash Equivalents at Beginning of Year ............................ 5,128 10,292 7,496
---------- ---------- ----------
Cash and Cash Equivalents at End of Year ......................... $ 10,894 $ 5,128 $ 10,292
========== ========== ==========
A-41
QUARTERLY FINANCIAL DATA (UNAUDITED)
A summary of selected quarterly results of operations for the years ended
December 31 follows:
Three Months Ended
March June September December
31, 30, 30, 31,
---------- ---------- ---------- ----------
(in thousands, except per share amounts)
2003
Interest income ........................................................ $ 31,620 $ 35,458 $ 35,971 $ 36,317
Net interest income .................................................... 20,807 23,467 25,259 25,720
Provision for loan losses .............................................. 1,000 785 606 1,641
Income before income tax expense ....................................... 12,167 12,521 14,210 12,421
Net income ............................................................. 8,817 9,131 10,320 9,324
Income per share
Basic .................................................................. $ .45 $ .46 $ .53 $ .48
Diluted ................................................................ .44 .45 .51 .47
2002
Interest income ........................................................ $ 31,721 $ 32,255 $ 32,955 $ 32,884
Net interest income .................................................... 19,467 20,243 21,004 21,093
Provision for loan losses .............................................. 927 1,166 752 717
Income before income tax expense ....................................... 9,923 10,158 9,856 10,926
Net income ............................................................. 7,109 7,288 7,113 7,957
Income per share
Basic .................................................................. $ .35 $ .36 $ .35 $ .40
Diluted ................................................................ .34 .35 .35 .40
QUARTERLY SUMMARY
Reported Sale Prices of Common Shares
2003 2002 Cash Dividends
------------------------------ ----------------------------- Declared
High Low Close High Low Close 2003 2002
-------- -------- -------- -------- -------- -------- -------- --------
First quarter ........... $ 19.55 $ 17.41 $ 18.27 $ 17.32 $ 14.85 $ 16.60 $ .13 $ .10
Second quarter .......... 25.00 17.96 23.36 19.63 16.03 18.22 .15 .10
Third quarter ........... 27.95 22.96 26.62 19.63 15.65 19.11 .16 .10
Fourth quarter .......... 31.00 26.61 28.36 20.61 18.21 18.34 .16 .13
We have approximately 2,100 holders of record of our common stock. Our
common stock trades on the Nasdaq National Market System 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 Corporation Act, our
ability to pay dividends is limited by our ability to obtain funds from our
Banks and by regulatory capital guidelines applicable to us. (See Note #19 to
the Consolidated Financial Statements.)
A-42
SHAREHOLDER INFORMATION
HOW TO ORDER FORM 10-K
Shareholders may obtain, without charge, a copy of Form 10-K, the 2003
Annual Report to the Securities and Exchange Commission, through our website at
www.ibcp.com or by writing to the Chief Financial Officer, Independent Bank
Corporation, P. O. Box 491, Ionia, Michigan 48846 or by e-mail at info@ibcp.com.
PRESS RELEASES
Our press releases, including earnings and dividend announcements as well
as other financial information, are available on our website at www.ibcp.com.
NOTICE OF ANNUAL MEETING
Our Annual Meeting of Shareholders will be held at 3:00 p.m. on April 23,
2004, in the Ionia Theater located at 205 West Main Street, Ionia, Michigan,
48846.
TRANSFER AGENT AND REGISTRAR
EquiServe Trust Company, N.A., P.O. Box 43010, Providence, RI 02940-3010,
800/426-5523, www.equiserve.com, serves as transfer agent and registrar of our
common stock.
DIVIDEND REINVESTMENT
We maintain an Automatic Dividend Reinvestment and Stock Purchase Plan
which provides an opportunity for shareholders of record to reinvest cash
dividends into our common stock. Optional cash purchases up to $10,000 per
quarter are also permitted. A prospectus is available by writing to our Chief
Financial Officer.
EXECUTIVE OFFICERS AND DIRECTORS
EXECUTIVE OFFICERS
Charles C. Van Loan, President and Chief Executive Officer, Independent
Bank Corporation
Ronald L. Long, President and Chief Executive Officer, Independent Bank
East Michigan
Michael M. Magee, Jr., President and Chief Executive Officer, Independent
Bank
David C. Reglin, President and Chief Executive Officer, Independent Bank
West Michigan
Edward B. Swanson, President and Chief Executive Officer, Independent Bank
South Michigan
Robert N. Shuster, Executive Vice President and Chief Financial Officer,
Independent Bank Corporation
Richard E. Butler, Senior Vice President, Independent Bank Corporation
Peter R. Graves, Senior Vice President, Independent Bank Corporation
James J. Twarozynski, Senior Vice President and Controller, Independent
Bank Corporation
DIRECTORS
Jeffrey A. Bratsburg, Retired, former President and Chief Executive
Officer, Independent Bank West Michigan
Terry L. Haske, President, Ricker & Haske, C.P. A.s, P.C., Marlette
Robert L. Hetzler, President, Monitor Sugar Company, Food Processor, Bay
City
James E. McCarty, President, McCarty Communications, Graphic Design and
Commercial Printing, Saranac
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(1)
(1) Retired at December 31, 2003.
A-43
INDEPENDENT BANK CORPORATION
P.O. Box 491, 230 West Main Street
Ionia, Michigan 48846
616-527-9450 3567-PS-04
INDEPENDENT BANK CORPORATION
Dear Shareholder,
Please take note of the important information enclosed with this Proxy. Your
vote counts, and you are strongly encouraged to exercise your right to vote your
shares.
Mark the boxes on this proxy card to indicate how your shares will be voted.
Then sign the card, detach it and return your proxy vote in the enclosed postage
paid envelope. If you wish to register your vote by touch-tone telephone or the
Internet see the reverse side for instructions.
Your vote must be received prior to the Annual Meeting of Shareholders to be
held April 23, 2004.
Thank you in advance for your prompt consideration of these matters.
Sincerely,
The Board of Directors
INDEPENDENT BANK CORPORATION
DETACH HERE ZIBC42
INDEPENDENT BANK CORPORATION
230 WEST MAIN STREET, IONIA, MICHIGAN
PROXY SOLICITED BY THE BOARD OF DIRECTORS FOR THE
ANNUAL MEETING OF SHAREHOLDERS TO BE HELD APRIL 23, 2004
The undersigned hereby appoints Charles C. Van Loan and Robert N. Shuster and
each of them, Proxies, with power of substitution, to vote all shares of common
stock of Independent Bank Corporation, which the undersigned is entitled to vote
at the Annual Meeting of Shareholders to be held at the Ionia Theater, located
at 205 West Main Street, Ionia, Michigan 48846 on Friday, April 23, 2004 at 3:00
p.m. (local time), and at all adjournments thereof, as directed on the reverse
side.
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED HEREIN
BY THE UNDERSIGNED SHAREHOLDER(S). IF NO DIRECTION IS MADE, THIS PROXY WILL BE
VOTED "FOR" THE NOMINEES AS DIRECTORS.
_______________________________________________________________________________
PLEASE VOTE, DATE AND SIGN ON REVERSE AND RETURN PROMPTLY IN THE ENCLOSED
ENVELOPE.
_______________________________________________________________________________
Please sign this Proxy exactly as your name(s) appear(s) hereon. Joint owners
should each sign personally. Trustees and other fiduciaries should indicate the
capacity in which they sign, and where more than one name appears, a majority
must sign. If a corporation, this signature should be that of an authorized
officer who should state his or her title.
HAS YOUR ADDRESS CHANGED? DO YOU HAVE ANY COMMENTS?
__________________________________ _______________________________
__________________________________ _______________________________
__________________________________ _______________________________
INDEPENDENT BANK
CORPORATION
C/O EQUISERVE TRUST COMPANY, N.A.
P.O. BOX 8694
EDISON, NJ 08818-8694
[ ]
[ ]
YOUR VOTE IS IMPORTANT. PLEASE VOTE IMMEDIATELY.
VOTE-BY-INTERNET
LOG ON TO THE INTERNET AND GO TO [Computer] OR VOTE-BY-TELEPHONE [Telephone]
HTTP://WWW.EPROXYVOTE.COM/IBCP [ logo ] CALL TOLL-FREE [ logo ]
1-877-PRX-VOTE (1-877-779-8683)
IF YOU VOTE OVER THE INTERNET OR BY TELEPHONE, PLEASE DO NOT MAIL YOUR CARD.
DETACH HERE IF YOU ARE RETURNING YOUR PROXY CARD BY MAIL ZIBC41
| 3567
|
PLEASE MARK |
X VOTES AS IN _________
THIS EXAMPLE.
-----------------------------------
INDEPENDENT BANK CORPORATION
-----------------------------------
1. Election of two Directors for terms expiring in 2007. 2. To transact such other business that may properly come
Nominees: (01) Jeffrey A. Bratsburg and before the meeting or at any adjournments thereof.
(02) Charles C. Van Loan
FOR [ ] [ ] WITHHELD
ALL [ ] [ ] FROM ALL
NOMINEES [ ] [ ] NOMINEES
[ ]
[ ]
--------------------------------------
For all nominees except as noted above
Mark box at right if an address change or comment [ ]
has been noted on the reverse side of this card. [ ]
PLEASE BE SURE TO SIGN AND DATE THIS PROXY.
Signature: Date: Signature: Date:
------------------------------- -------------- -------------------------------- -------------