ITEM 1. BUSINESS
Independent Bank Corporation (the "Registrant") was incorporated under the laws of the State of Michigan on September 17, 1973, for the purpose of becoming a bank holding company. The Registrant is registered under the Bank Holding Company Act of 1956, as amended, and owns the outstanding stock of four banks (the "Banks") which are all organized under the laws of the State of Michigan.
Aside from the stock of the Banks, the Registrant has no other substantial assets. The Registrant conducts no business except for the provision of certain management and operational services to the Banks, the collection of fees and dividends from the Banks and the payment of dividends to the Registrant's shareholders. Certain employee retirement plans (including employee stock ownership and deferred compensation plans) as well as health and other insurance programs have been established by the Registrant. The proportional costs of these plans are borne by each of the Banks and their respective subsidiaries.
The Registrant and the Banks have no material patents, trademarks, licenses or franchises except the corporate franchises of the Banks which permit them to engage in commercial banking pursuant to Michigan law.
The following table shows each of the Banks and their total deposits and loans as of December 31, 2001:
Independent Bank (formerly Independent Bank MSB) merged with Independent Bank (formerly First Security Bank) in 2001. Independent Bank (formerly First Security Bank) affiliated with the Registrant on June 1, 1974. Independent Bank MSB affiliated with the Registrant on September 15, 1999.
Independent Bank West Michigan is the result of a merger in 1985 of the First State Bank of Newaygo (acquired December 16, 1974), the Western State Bank, Howard City (acquired February 7, 1977), and the Bank of Rockford (organized by the Registrant as a new bank on August 18, 1975).
Independent Bank South Michigan is the result of a merger in 1985 of the Peoples Bank of Leslie (acquired February 16, 1981) and the Olivet State Bank (acquired on October 16, 1979).
ITEM 1. BUSINESS (Continued)
Independent Bank East Michigan is the result of the consolidation of the former American Home Bank (acquired October 8, 1993), Pioneer Bank (acquired October 15, 1993) and The Kingston State Bank (acquired March 7, 1994). On December 13, 1996 Independent Bank East Michigan purchased eight branch offices from First of America Bank--Michigan N.A.
On November 7, 1996, the Registrant formed IBC Capital Finance, a Delaware statutory business trust ("IBC Capital"). IBC Capital's business and affairs are conducted by its property trustee, a Delaware trustee, and three individual administrative trustees who are employees or officers of or affiliated with the Registrant. IBC Capital exists for the sole purposes of selling and issuing its preferred and common securities, using the proceeds from the sale of those securities to acquire subordinated debentures issued by the Registrant and certain related services. As a result, the sole assets of IBC Capital are the subordinated debentures of the Registrant.
The Banks transact business in the single industry of commercial banking. Most of the Banks' offices provide full-service lobby and drive-in services in the communities which they serve. Automatic teller machines are also provided at most locations.
The Banks' activities cover all phases of commercial banking, including checking and savings accounts, commercial and agricultural lending, direct and indirect consumer financing, mortgage lending and safe deposit box services. The Banks' mortgage lending activities are primarily conducted through separate mortgage bank subsidiaries formed during 1998. The Banks also offer title insurance services through a separate subsidiary. The Banks do not offer trust services. The principal markets are the rural and suburban communities across lower Michigan that are served by the Banks' branch networks. The local economies of the communities served by the Banks are relatively stable and reasonably diversified. The Banks serve their markets through their four main offices and a total of 78 branch and 10 loan production offices.
The Banks compete with other commercial banks, savings and loan associations, credit unions, mortgage banking companies, securities brokerage companies, insurance companies, and money market mutual funds. Many of these competitors have substantially greater resources than the Registrant and the Banks and offer certain services that the Registrant and Banks do not currently provide. Such competitors may also have greater lending limits than the Banks. Competition may increase as a result of the Gramm-Leach-Bliley Act of 1999 (the "GLB Act"), and the easing of restrictions on interstate banking effected under the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the "Riegle-Neal Act"). In addition, non-bank competitors are generally not subject to the extensive regulations applicable to the Registrant and the Banks.
Price (the interest charged on loans and/or paid on deposits) remains a principal means of competition within the financial services industry. The Banks also compete on the basis of service and convenience, utilizing the strengths and benefits of the Registrant's decentralized structure to providing financial services.
The principal sources of revenue, on a consolidated basis, are interest and fees on loans, other interest income and non-interest income. The sources of income for the three most recent years are as follows:
As of December 31, 2001, the Registrant and the Banks had 805 full-time employees and 299 part-time employees.
ITEM 1. BUSINESS (Continued)
Supervision and Regulation
The following is a summary of certain statutes and regulations affecting the Registrant and the Banks. This summary is qualified in its entirety by reference to the particular statutes and regulations. A change in applicable laws or regulations may have a material effect on the Registrant, the Banks and the businesses of the Registrant and the Banks.
General
Financial institutions and their holding companies are extensively regulated under Federal and state law. Consequently, the growth and earnings performance of the Registrant and the Banks can be affected not only by management decisions and general and local economic conditions, but also by the statutes administered by, and the regulations and policies of, various governmental regulatory authorities. Those authorities include, but are not limited to, the Board of Governors of the Federal Reserve System (the "Federal Reserve"), the Federal Deposit Insurance Corporation (the "FDIC"), the Michigan Division of Financial Institutions (the "MDFI"), the Internal Revenue Service, and state taxing authorities. The effect of such statutes, regulations and policies and any changes thereto can be significant and cannot be predicted.
Federal and state laws and regulations generally applicable to financial institutions and their holding companies regulate, among other things, the scope of business, investments, reserves against deposits, capital levels, lending activities and practices, the nature and amount of collateral for loans, the establishment of branches, mergers, consolidations and dividends. The system of supervision and regulation applicable to the Registrant and the Banks establishes a comprehensive framework for their operations and is intended primarily for the protection of the FDIC's deposit insurance funds, the depositors of the Banks, and the public, rather than shareholders of the Registrant.
Federal law and regulations establish supervisory standards applicable to the lending activities of the Banks, including internal controls, credit underwriting, loan documentation and loan-to-value ratios for loans secured by real property.
The Registrant
General. The Registrant is a bank holding company and, as such, is registered with, and subject to regulation by, the Federal Reserve under the Bank Holding Company Act, as amended (the "BHCA"). Under the BHCA, the Registrant is subject to periodic examination by the Federal Reserve, and is required to file periodic reports of its operations and such additional information as the Federal Reserve may require.
In accordance with Federal Reserve policy, a bank holding company is expected to act as a source of financial strength to its subsidiary banks and to commit resources to support the subsidiary banks in circumstances where the bank holding company might not do so absent such policy.
In addition, if the MDFI deems a bank's capital to be impaired, the MDFI may require a bank to restore its capital by special assessment upon a bank holding company, as the bank's sole shareholder. If the bank holding company were to fail to pay such assessment, the directors of that bank would be required, under Michigan law, to sell the shares of that bank stock owned by the bank holding company to the highest bidder at either public or private auction and use the proceeds of the sale to restore the bank's capital.
Any capital loans by a bank holding company to a subsidiary bank are subordinate in right of payment to deposits and to certain other indebtedness of such subsidiary bank. In the event of a bank holding company's bankruptcy, any commitment by the bank holding company to a federal bank regulatory agency to maintain the capital of a subsidiary bank will be assumed by the bankruptcy trustee and entitled to a priority of payment.
Investments and Activities. In general, any direct or indirect acquisition by a bank holding company of any voting shares of any bank which would result in the bank holding company's direct or indirect ownership or control of more than 5% of any class of voting shares of such bank, and any merger or consolidation of the bank holding company with another bank holding company, will require the prior written approval of the Federal Reserve under
ITEM 1. BUSINESS (Continued)
the BHCA. In acting on such applications, the Federal Reserve must consider various statutory factors including the effect of the proposed transaction on competition in relevant geographic and product markets, and each party's financial condition, managerial resources, and record of performance under the Community Reinvestment Act.
In addition and subject to certain exceptions, the Change in the Bank Control Act ("Control Act") and regulations promulgated thereunder by the Federal Reserve, require any person acting directly or indirectly, or through or in concert with one or more persons, to give the Federal Reserve 60 days' written notice before acquiring control of a bank holding company. Transactions which are presumed to constitute the acquisition of control include the acquisition of any voting securities of a bank holding company having securities registered under Section 12 of the Securities Exchange Act of 1934, as amended, if, after the transaction, the acquiring person (or persons acting in concert) owns, controls or holds with power to vote 25% or more of any class of voting securities of the institution. The acquisition may not be consummated subsequent to such notice if the Federal Reserve issues a notice within 60 days, or within certain extensions of such period, disapproving the acquisition.
The merger or consolidation of an existing bank subsidiary of a bank holding company with another bank, or the acquisition by such a subsidiary of the assets of another bank, or the assumption of the deposit and other liabilities by such a subsidiary requires the prior written approval of the responsible Federal depository institution regulatory agency under the Bank Merger Act, based upon a consideration of statutory factors similar to those outlined above with respect to the BHCA. In addition, in certain cases an application to, and the prior approval of, the Federal Reserve under the BHCA and/or MDFI under Michigan banking laws, may be required.
With certain limited exceptions, the BHCA prohibits any bank holding company from engaging, either directly or indirectly through a subsidiary, in any activity other than managing or controlling banks unless the proposed non-banking activity is one that the Federal Reserve has determined to be so closely related to banking as to be a proper incident thereto. Under current Federal Reserve regulations, such permissible non-banking activities include such things as mortgage banking, equipment leasing, securities brokerage, and consumer and commercial finance company operations. Well-capitalized and well-managed bank holding companies may, however, engage de novo in certain types of non-banking activities without prior notice to, or approval of, the Federal Reserve, provided that written notice of the new activity is given to the Federal Reserve within 10 business days after the activity is commenced. If a bank holding company wishes to engage in a non-banking activity by acquiring a going concern, prior notice and/or prior approval will be required, depending upon the activities in which the company to be acquired is engaged, the size of the company to be acquired and the financial and managerial condition of the acquiring bank company.
Eligible bank holding companies that elect to operate as financial holding companies may engage in, or own shares in companies engaged in, a wider range of nonbanking activities, including securities and insurance activities and any other activity that the Federal Reserve Board, in consultation with the Secretary of the Treasury, determines by regulation or order is financial in nature, incidental to any such financial activity or complementary to any such financial activity and does not pose a substantial risk to the safety or soundness of depository institutions or the financial system generally. The Bank Holding Company Act generally does not place territorial restrictions on the domestic activities of non-bank subsidiaries of bank or financial holding companies. While the Registrant believes it is eligible to elect to operate as a financial holding company, as of the date of this filing, it has not applied for approval to operate as a financial holding company.
Capital Requirements. The Federal Reserve uses capital adequacy guidelines in its examination and regulation of bank holding companies. If capital falls below minimum guidelines, a bank holding company may, among other things, be denied approval to acquire or establish additional banks or non-bank businesses.
The Federal Reserve's capital guidelines establish the following minimum regulatory capital requirements for bank holding companies: (i) a leverage capital requirement expressed as a percentage of total assets, and (ii) a risk-based requirement expressed as a percentage of total risk-weighted assets. The leverage capital requirement consists of a minimum ratio of Tier 1 capital (which consists principally of shareholders' equity) to total assets of 3% for the most highly rated companies with minimum requirements of 4% to 5% for all others. The risk-based requirement consists of a minimum ratio of total capital to total risk-weighted assets of 8%, of which at least one-half must be Tier 1 capital.
ITEM 1. BUSINESS (Continued)
The risk-based and leverage standards presently used by the Federal Reserve are minimum requirements, and higher capital levels will be required if warranted by the particular circumstances or risk profiles of individual banking organizations. The Federal Reserve has not advised the Registrant of any specific minimum Tier 1 Capital leverage ratio applicable to it.
The Federal bank regulatory agencies are required biennially to review risk-based capital standards to ensure that they adequately address interest rate risk, concentration of credit risk and risks from non-traditional activities.
Dividends. The Registrant is a corporation separate and distinct from the Banks. Most of the Registrant's revenues will be received by it in the form of dividends, if any, paid by the Banks. Thus, the Registrant's ability to pay dividends to its shareholders will indirectly be limited by statutory restrictions on the ability of its Banks to pay dividends. Further, in a policy statement, the Federal Reserve has expressed its view that a bank holding company experiencing earnings weaknesses should not pay cash dividends exceeding its net income or which can only be funded in ways that weakened the bank holding company's financial health, such as by borrowing. Additionally, the Federal Reserve possesses enforcement powers over bank holding companies and their non-bank subsidiaries to prevent or remedy actions that represent unsafe or unsound practices or violations of applicable statutes and regulations. Among these powers is the ability to proscribe the payment of dividends by banks and bank holding companies. Similar enforcement powers over subsidiary banks are possessed by the FDIC. The "prompt corrective action" provisions of federal law and regulation authorizes the Federal Reserve to restrict the payment of dividends by the Registrant for an insured bank which fails to meet specified capital levels.
In addition to the restrictions on dividends imposed by the Federal Reserve, the Michigan Business Corporation Act provides that dividends may be legally declared or paid only if after the distribution, a corporation can pay its debts as they come due in the usual course of business and its total assets equal or exceed the sum of its liabilities plus the amount that would be needed to satisfy the preferential rights upon dissolution of any holders of preferred stock whose preferential rights are superior to those receiving the distribution. The Registrant does not have any holders of its preferred stock.
The Banks
General. The Banks are Michigan banking corporations and their deposit accounts are insured by the Bank Insurance Fund ("BIF") of the FDIC. As BIF-insured Michigan chartered banks, the Banks are subject to the examination, supervision, reporting and enforcement requirements of the MDFI, as the chartering authority for Michigan banks, and the FDIC, as administrator of the BIF. These agencies and the federal and state laws applicable to the Banks and their operations, extensively regulate various aspects of the banking business including, among other things, permissible types and amounts of loans, investments and other activities, capital adequacy, branching, interest rates on loans and on deposits, the maintenance of non-interest bearing reserves on deposit accounts, and the safety and soundness of banking practices.
Deposit Insurance. As FDIC-insured institutions, banks are required to pay deposit insurance premium assessments to the FDIC. The FDIC has adopted a risk-based assessment system under which all insured depository institutions are placed into one of nine categories and assessed insurance premiums, based upon their level of capital and supervisory evaluation. Institutions classified as well-capitalized and considered healthy pay the lowest premium while institutions that are less than adequately capitalized and considered of substantial supervisory concern pay the highest premium. Risk classification of all insured institutions is made by the FDIC for each semi-annual assessment period.
FDICIA requires the FDIC to establish assessment rates at levels which will maintain the Deposit Insurance Fund at a mandated reserve ratio of not less than 1.25% of estimated insured deposits. Accordingly, the FDIC established the schedule of BIF insurance assessments, ranging from 0% of deposits for institutions in the lowest risk category to .27% of deposits for institutions in the highest risk category. However, there is speculation that the reserve may fall below the mandated ratio resulting in increased assessments in the second half of 2002.
FICO Assessments. The Banks, as members of BIF, are subject to assessments to cover the payments on outstanding obligations of the financing corporation ("FICO"). FICO was created to finance the recapitalization of
ITEM 1. BUSINESS (Continued)
the Federal Savings and Loan Insurance Corporation, the predecessor to the FDIC's Savings Association Insurance Fund (the "SAIF"), which insures the deposits of thrift institutions. From now until the maturity of the outstanding FICO obligations in 2019, BIF members and SAIF members will share the cost of the interest on the FICO bonds on a pro rata basis. It is estimated that FICO assessments during this period will be less than 0.025% of deposits.
MDFI Assessments. Michigan banks are required to pay supervisory fees to the MDFI to fund the MDFI's operations. The amount of supervisory fees paid by a bank is based upon the bank's total assets.
Capital Requirements. The FDIC has established the following minimum capital standards for state-chartered, FDIC-insured non-member banks, such as the Banks: a leverage requirement consisting of a minimum ratio of Tier 1 capital to total assets of 3% for the most highly-rated banks with minimum requirements of 4% to 5% for all others, and a risk-based capital requirement consisting of a minimum ratio of total capital to total risk-weighted assets of 8%, at least one-half of which must be Tier 1 capital. Tier 1 capital consists principally of shareholders' equity. These capital requirements are minimum requirements. Higher capital levels will be required if warranted by the particular circumstances or risk profiles of individual institutions. For example, FDIC regulations provide that higher capital may be required to take adequate account of, among other things, interest rate risk and the risks posed by concentrations of credit, nontraditional activities or securities trading activities.
Federal law provides the federal banking regulators with broad power to take prompt corrective action to resolve the problems of undercapitalized institutions. The extent of the regulators' powers depends on whether the institution in question is "well capitalized," "adequately capitalized," "undercapitalized," "significantly undercapitalized," or "critically undercapitalized." Federal regulations define these capital categories as follows:
At December 31, 2001, each of the Banks' ratios exceeded minimum requirements for the well-capitalized category.
Depending upon the capital category to which an institution is assigned, the regulators' corrective powers include: requiring the submission of a capital restoration plan; placing limits on asset growth and restrictions on activities; requiring the institution to issue additional capital stock (including additional voting stock) or to be acquired; restricting transactions with affiliates; restricting the interest rate the institution may pay on deposits; ordering a new election of directors of the institution; requiring that senior executive officers or directors be dismissed; prohibiting the institution from accepting deposits from correspondent banks; requiring the institution to divest certain subsidiaries; prohibiting the payment of principal or interest on subordinated debt; and ultimately, appointing a receiver for the institution.
In general, a depository institution may be reclassified to a lower category than is indicated by its capital levels if the appropriate federal depository institution regulatory agency determines the institution to be otherwise in an unsafe or unsound condition or to be engaged in an unsafe or unsound practice. This could include a failure by the institution, following receipt of a less-than-satisfactory rating on its most recent examination report, to correct the deficiency.
Dividends. Under Michigan law, banks are restricted as to the maximum amount of dividends they may pay on their common stock.
ITEM 1. BUSINESS (Continued)
The Banks may not pay dividends except out of their net income after deducting their losses and bad debts. A Michigan state bank may not declare or pay a dividend unless the bank will have a surplus amounting to at least 20% of its capital after the payment of the dividend.
Federal law generally prohibits a depository institution from making any capital distribution (including payment of a dividend) or paying any management fee to its holding company if the depository institution would thereafter be undercapitalized. The FDIC may prevent an insured bank from paying dividends if the bank is in default of payment of any assessment due to the FDIC. In addition, the FDIC may prohibit the payment of dividends by the Bank, if such payment is determined, by reason of the financial condition of the bank, to be an unsafe and unsound banking practice.
Insider Transactions. The Banks are subject to certain restrictions imposed by the Federal Reserve Act on "covered transactions" with the Registrant or its subsidiaries on investments in the stock or other securities of the Registrant or its subsidiaries and the acceptance of the stock or other securities of the Registrant or its subsidiaries as collateral for loans. Certain limitations and reporting requirements are also placed on extensions of credit by the Banks to their directors and officers, to directors and officers of the Registrant and its subsidiaries, to principal shareholders of the Registrant, and to "related interests" of such directors, officers and principal shareholders. In addition, federal law and regulations may affect the terms upon which any person becoming a director or officer of the Registrant or one of its subsidiaries or a principal shareholder of the Registrant may obtain credit from banks with which the Banks maintain a correspondent relationship.
Safety and Soundness Standards. Pursuant to FDICIA, the FDIC adopted guidelines to establish operational and managerial standards to promote the safety and soundness of federally insured depository institutions. The guidelines establish standards for internal controls, information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, compensation, fees and benefits, asset quality and earnings.
Investment and Other Activities. Under federal law and FDIC regulations, FDIC-insured state banks are prohibited, subject to certain exceptions, from making or retaining equity investments of a type, or in an amount, that are not permissible for a national bank. FDICIA, as implemented by FDIC regulations, also prohibits FDIC-insured state banks and their subsidiaries, subject to certain exceptions, from engaging as a principal in any activity that is not permitted for a national bank or its subsidiary, respectively, unless the bank meets, and continues to meet, its minimum regulatory capital requirements and the FDIC determines the activity would not pose a significant risk to the deposit insurance fund of which the bank is a member. Impermissible investments and activities must be otherwise divested or discontinued within certain time frames set by the FDIC in accordance with FDICIA. These restrictions are not currently expected to have a material impact on the operations of the Banks.
Consumer Banking. The Banks' business includes making a variety of types of loans to individuals. In making these loans, the Banks are subject to State usury and regulatory laws and to various Federal statutes, including the privacy of consumer financial information provisions of the Gramm Leach-Bliley Act and regulations promulgated thereunder, the Equal Credit Opportunity Act, Fair Credit Reporting Act, Truth in Lending Act, Real Estate Settlement Procedures Act, and Home Mortgage Disclosure Act, and the regulations promulgated thereunder, which prohibit discrimination, specify disclosures to be made to borrowers regarding credit and settlement costs, and regulate the mortgage loan servicing activities of the Banks, including the maintenance and operation of escrow accounts and the transfer of mortgage loan servicing. In receiving deposits, the Banks are subject to extensive regulation under state and Federal law and regulations, including the Truth in Savings Act, the Expedited Funds Availability Act, the Bank Secrecy Act, the Electronic Funds Transfer Act, and the Federal Deposit Insurance Act. Violation of these laws could result in the imposition of significant damages and fines upon the Banks and their respective directors and officers.
Branching Authority. Michigan banks, such as the Banks, have the authority under Michigan law to establish branches anywhere in the State of Michigan, subject to receipt of all required regulatory approvals.
Banks may establish interstate branch networks through acquisitions of other banks. The establishment of de novo interstate branches or the acquisition of individual branches of a bank in another state (rather than the acquisition of an out-of-state bank in its entirety) is allowed only if specifically authorized by state law.
ITEM 1. BUSINESS (Continued)
Michigan permits both U.S. and non-U.S. banks to establish branch offices in Michigan. The Michigan Banking Code permits, in appropriate circumstances and with the approval of the Michigan Office of Financial and Insurance Services, Division of Financial Institutions (1) acquisition of Michigan banks by FDIC-insured banks, savings banks or savings and loan associations located in other states, (2) sale by a Michigan bank of branches to an FDIC-insured bank, savings bank or savings and loan association located in a state in which a Michigan bank could purchase branches of the purchasing entity, (3) consolidation of Michigan banks and FDIC-insured banks, savings banks or savings and loan associations located in other states having laws permitting such consolidation, (4) establishment of branches in Michigan by FDIC-insured banks located in other states, the District of Columbia or U.S. territories or protectorates having laws permitting a Michigan bank to establish a branch in such jurisdiction, and (5) establishment by foreign banks of branches located in Michigan.
ITEM 1. BUSINESS -- STATISTICAL DISCLOSURE I. (A) DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY; (B) INTEREST RATES AND INTEREST DIFFERENTIAL (C) INTEREST RATES AND DIFFERENTIAL
The information set forth in the tables captioned "Average Balances and Tax Equivalent Rates" and "Change in Tax Equivalent Net Interest Income" on page A-3 of the Appendix to the Registrant's definitive proxy statement, dated March 15, 2002, relating to the April 16, 2002 Annual Meeting of Shareholders (as filed with the commission and filed as exhibit 13 to this report on Form 10-K) is incorporated herein by reference.
II. INVESTMENT PORTFOLIO
(A) The following table sets forth the book value of securities at December 31:
ITEM 1. BUSINESS -- STATISTICAL DISCLOSURE (Continued)
II. INVESTMENT PORTFOLIO (Continued)
(B) The following table sets forth contractual maturities of securities at December 31, 2001 and the weighted average yield of such securities:
The rates set forth in the tables above for obligations of state and political subdivisions and preferred stock have been restated on a tax equivalent basis assuming a marginal tax rate of 35%. The amount of the adjustment is as follows:
ITEM 1. BUSINESS -- STATISTICAL DISCLOSURE (Continued) III. LOAN PORTFOLIO
(A) The following table sets forth loans outstanding at December 31:
The loan portfolio is periodically and systematically reviewed and the results of these reviews are reported to the Boards of Directors of the Registrant and the Banks. The purpose of these reviews is to assist in assuring proper loan documentation, to facilitate compliance with consumer protection laws and regulations, to provide for the early identification of potential problem loans (which enhances collection prospects) and to evaluate the adequacy of the allowance for loan losses.
(B) The following table sets forth scheduled loan repayments (excluding 1-4 family residential mortgages and installment loans) at December 31, 2001:
The following table sets forth loans due after one year which have predetermined (fixed) interest rates and/or adjustable (variable) interest rates at December 31, 2001:
ITEM 1. BUSINESS -- STATISTICAL DISCLOSURE (Continued)
III. LOAN PORTFOLIO (Continued)
(C) The following table sets forth non-performing loans at December 31:
(1) The accrual of interest income is discontinued when a loan becomes 90 days past due and the borrower's capacity to repay the loan and collateral values appear insufficient. Non-accrual loans may be restored to accrual status when interest and principal payments are current and the loan appears otherwise collectible.
(2) Interest in the amount of $626,000 would have been earned in 2001 had loans in categories (a) and (c) remained at their original terms, however, only $190,000 was included in interest income for the year with respect to these loans.
Other loans of concern identified by the loan review department which are not included as non-performing totaled approximately $4,000,000 at December 31, 2001. These loans involve circumstances which have caused management to place increased scrutiny on the credits and may, in some instances, represent an increased risk of loss to the Banks.
At December 31, 2001, there was no concentration of loans exceeding 10% of total loans which is not already disclosed as a category of loans in this section "Loan Portfolio" (Item III(A)).
There were no other interest-bearing assets at December 31, 2001, that would be required to be disclosed above (Item III(C)), if such assets were loans.
There were no foreign loans outstanding at December 31, 2001.
ITEM 1. BUSINESS -- STATISTICAL DISCLOSURE (Continued) IV. SUMMARY OF LOAN LOSS EXPERIENCE
(A) The following table sets forth loan balances and summarizes the changes in the allowance for loan losses for each of the years ended December 31:
The allowance for loan losses reflected above is a valuation allowance in its entirety and the only allowance available to absorb probable loan losses.
Further discussion of the provision and allowance for loan losses as well as non-performing loans, a critical accounting policy, is presented in Management's Discussion and Analysis of Financial Condition and Results of Operations, incorporated herein by reference to Item 7, Part II of this report.
ITEM 1. BUSINESS -- STATISTICAL DISCLOSURE (Continued) IV. SUMMARY OF LOAN LOSS EXPERIENCE (Continued)
(B) The Banks have allocated the allowance for loan losses to provide for the possibility of losses being incurred within the categories of loans set forth in the table below. The amount of the allowance that is allocated and the ratio of loans within each category to total loans at December 31 follows:
ITEM 1. BUSINESS -- STATISTICAL DISCLOSURE (Continued)
V. DEPOSITS
The following table sets forth average deposit balances and the weighted-average rates paid thereon for the years ended December 31:
The following table summarizes time deposits in amounts of $100,000 or more by time remaining until maturity at December 31, 2001:
VI. RETURN ON EQUITY AND ASSETS
The ratio of net income to average shareholders' equity and to average total assets, and certain other ratios, for the years ended December 31 follow:
Additional performance ratios are set forth in Selected Consolidated Financial Data, incorporated herein by reference in Item 6, Part II of this report. Any significant changes in the current trend of the above ratios are reviewed in Management's Discussion and Analysis of Financial Condition and Results of Operations, incorporated herein by reference in Item 7, Part II of this report.
VII. SHORT-TERM BORROWINGS
Short-term borrowings are discussed in note 8 to the consolidated financial statements incorporated herein by reference in Item 8, Part II of this report.
ITEM 2.
ITEM 2. PROPERTIES
The Registrant and the Banks operate a total of 94 facilities in Michigan. The individual properties are not materially significant to the Registrants' or the Banks' business or to the consolidated financial statements.
With the exception of the potential remodeling of certain facilities to provide for the efficient use of work space or to maintain an appropriate appearance, each property is considered reasonably adequate for current and anticipated needs.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
Due to the nature of their business, the Banks are often subject to numerous legal actions. These legal actions, whether pending or threatened, arise through the normal course of business and are not considered unusual or material.
Currently, no material legal proceedings are pending which involve the Registrant or the Banks.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ADDITIONAL ITEM - EXECUTIVE OFFICERS
Executive officers of the Registrant are appointed annually by the Board of Directors at the meeting of Directors following the Annual Meeting of Shareholders. There are no family relationships among these officers and/or the Directors of the Registrant nor any arrangement or understanding between any officer and any other person pursuant to which the officer was elected.
The following sets forth certain information with respect to the Registrant's executive officers and certain key officers of its subsidiaries (included for information purposes only) at December 31, 2001.
Prior to being named President and Chief Executive Officer in 1998, Mr. Reglin was Senior Vice President of Independent Bank West Michigan since 1991.
Prior to being named Executive Vice President and Chief Financial Officer in 2001, Mr. Shuster was President and Chief Executive Officer of Independent Bank MSB since 1999 and President and CEO of Mutual Savings Bank, f.s.b since 1994.
Prior to being named Senior Vice President in 1999, Mr. Graves was Vice President of the Registrant's commercial loan services department.
Mr. Butler joined the Registrant in 1998 as Senior Vice President. Prior to that time Mr. Butler was Vice President, Mortgage Servicing Operations at the former First of America Bank -- Michigan, N.A.
The President and Chief Executive Officer of each of the Registrant's subsidiary banks serve as members of various committees of the Registrant.
PART II.
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The information set forth under the caption "Quarterly Summary " on Page A-35 of the Appendix to the Registrant's definitive proxy statement, dated March 15, 2002, relating to the April 16, 2002 Annual Meeting of Shareholders (as filed with the commission and as filed as exhibit 13 to this report on Form 10-K) is incorporated herein by reference.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The information set forth under the caption "Selected Consolidated Financial Data" on Page A-13 of the Appendix to the Registrant's definitive proxy statement, dated March 15, 2002, relating to the April 16, 2002 Annual Meeting of Shareholders (as filed with the commission and as filed as exhibit 13 to this report on Form 10-K) is incorporated herein by reference.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The information set forth under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" on pages A-2 through A-12 of the Appendix to the Registrant's definitive proxy statement, dated March 15, 2002, relating to the April 16, 2002 Annual Meeting of Shareholders (as filed with the commission and as filed as exhibit 13 to this report on Form 10-K) is incorporated herein by reference.
ITEM 7a.
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information set forth in the caption "Asset/liability management" on page A-11 of the Appendix to the Registrant's definitive proxy statement, dated March 15, 2002, relating to the April 16, 2002 Annual Meeting of Shareholders (as filed with the commission and filed as exhibit 13 to this report on Form 10-K) is incorporated herein by reference.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following consolidated financial statements of the Registrant and the independent auditor's report are set forth on pages A-14 through A-34 of the Appendix to the Registrant's definitive proxy statement, dated March 15, 2002, relating to the April 16, 2002 Annual Meeting of Shareholders (as filed with the commission and as filed as exhibit 13 to this report on Form 10-K) is incorporated herein by reference.
Independent Auditor's Report
Consolidated Statements of Financial Condition at December 31, 2001 and 2000
Consolidated Statements of Operations for the years ended December 31, 2001, 2000 and 1999
Consolidated Statements of Cash Flows for the years ended December 31, 2001, 2000 and 1999
Consolidated Statements of Shareholders' Equity for the years ended December 31, 2001, 2000 and 1999
Consolidated Statements of Comprehensive Income for the years ended December 31, 2001, 2000 and 1999
Notes to Consolidated Financial Statements
PART II.
The supplementary data required by this item set forth under the caption "Quarterly Financial Data" on page A-35 of the Appendix to the Registrant's definitive proxy statement, dated March 15, 2002, relating to the April 16, 2002 Annual Meeting of Shareholders (as filed with the commission and as filed as exhibit 13 to this report on Form 10-K) is incorporated herein by reference.
The portions of the Appendix to the Registrant's definitive proxy statement, dated March 15, 2002, relating to the April 16, 2002 Annual Meeting of Shareholders (as filed with the commission and as filed as exhibit 13 to this report on Form 10-K) which are not specifically incorporated by reference as part of this Form 10-K are not deemed to be a part of this report.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
PART III.
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS - The information with respect to Directors of the Registrant, set forth under the captions "Election of Directors" and "Section 16(a) Beneficial Ownership Reporting Compliance" on pages 2 through 4 and page 14, respectively, of the Registrant's definitive proxy statement, dated March 15, 2002, relating to the April 16, 2002 Annual Meeting of Shareholders (as filed with the commission) is incorporated herein by reference.
EXECUTIVE OFFICERS - Reference is made to additional item under Part I of this report on Form 10-K.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The information set forth under the captions "Summary Compensation Table", "Option Grants in 2001" and "Aggregated Stock Option Exercises in 2001 and Year End Option Values" on pages 11 through 12 of the Registrant's definitive proxy statement, dated March 15, 2002, relating to the April 16, 2002 Annual Meeting of Shareholders (as filed with the commission) is incorporated herein by reference. Information under the caption "Committee Report on Executive Compensation" on pages 8 through 10 of the definitive proxy statement is not incorporated by reference herein and is not deemed to be filed with the Securities and Exchange Commission.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information set forth under the captions "Voting Securities and Record Date", "Election of Directors" and "Securities Ownership of Management" on pages 1, 2 and 11, respectively, of the Registrant's definitive proxy statement, dated March 15, 2002, relating to the April 16, 2002 Annual Meeting of Shareholders (as filed with the commission) is incorporated herein by reference. Information under the captions "Shareholder Return Performance Graph" and "Committee Report on Executive Compensation" on pages 8 through 10 of the definitive proxy statement is not incorporated by reference herein and is not deemed to be filed with the Securities and Exchange Commission.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information set forth under the caption "Transactions Involving Management" on page 13 of the Registrant's definitive proxy statement, dated March 15, 2002, relating to the April 16, 2002 Annual Meeting of Shareholders (as filed with the commission) is incorporated herein by reference.
PART IV.
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements All financial statements of the Registrant are incorporated herein by reference as set forth in the Appendix to the Registrant's definitive proxy statement, dated March 15, 2002, relating to the April 16, 2002 Annual Meeting of Shareholders (filed as exhibit 13 to this report on Form 10-K.)
2. Financial Statement Schedules Not applicable
3. Exhibits (Numbered in accordance with Item 601 of Regulation S-K) The Exhibit Index is located on the final page of this report on Form 10-K.
(b) Reports on Form 8-K A report on Form 8-K was filed on January 18, 2002, under item 9. The report included supplemental data to the Registrant's press release dated January 18, 2002, regarding its earnings during the quarter ended December 31, 2001.
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, dated March 19, 2002.
INDEPENDENT BANK CORPORATION
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Each director of the Registrant, whose signature appears below hereby appoints Charles C. Van Loan and Robert N. Shuster and each of them severally, as his attorney-in-fact, to sign in his name and on his behalf, as a director of the Registrant, and to file with the Commission any and all amendments to this Report on Form 10-K.
Keith E. Bazaire, Director s/ ------------------------------------------
Terry L. Haske, Director s/Terry L. Haske ------------------------------------------
Robert L. Hetzler, Director s/ ------------------------------------------
Thomas F. Kohn, Director s/Thomas F. Kohn ------------------------------------------
Robert J. Leppink, Director s/ ------------------------------------------
Charles A. Palmer, Director s/Charles A. Palmer ------------------------------------------
Charles C. Van Loan, Director s/Charles C. Van Loan ------------------------------------------
Arch V. Wright, Jr., Director s/Arch V. Wright, Jr. ------------------------------------------
Jeffrey A. Bratsburg, Director s/Jeffrey A. Bratsburg ------------------------------------------
EXHIBIT INDEX
Exhibit number and description EXHIBITS FILED HEREWITH
13 Appendix to the Registrant's definitive proxy statement, dated March 15, 2002, relating to the April 16, 2002 Annual Meeting of Shareholders. This appendix was filed with the Commission as part of the Company's proxy statement and was delivered to the Company's shareholders in compliance with Rule 14(a)-3 of the Securities Exchange Act of 1934, as amended.
21 List of Subsidiaries.
23 Consent of Independent Accountants
24 Power of Attorney (Included on page 21).
EXHIBITS INCORPORATED BY REFERENCE
2 Agreement and plan of reorganization between Independent Bank Corporation and Mutual Savings Bank, f.s.b., dated March 24, 1999 (incorporated herein by reference to Exhibit 2.1 to the Registrants Form S-4 Registration Statement dated May 28, 1999, filed under Registration No. 333-79679).
3.1 Restated Articles of Incorporation (incorporated herein by reference to Exhibit 3(i) to the Registrant's report on Form 10-Q for the quarter ended June 30, 1994).
3.1(a) Amendments to Article III and Article VI of the Articles of Incorporation (incorporated herin by reference to Exhibit 3.1(a) to the Registrant's report on Form 10-K for the year ended December 31, 2000).
3.2 Amended and Restated Bylaws (incorporated herein by reference to Exhibit 3(ii) to the Registrant's report on Form 10-Q for the quarter ended June 30, 1994).
4 Automatic Dividend Reinvestment and Stock Purchase Plan, as amended (incorporated herein by reference to the Registrant's Form S-3 Registration Statement dated September 17, 1998, filed under Registration No. 3380088).
4.1 Form of Indenture, dated as of December 17, 1996 (incorporated herein by reference to the Registrant's Form S-2 Registration Statement dated December 6, 1996, filed under Registration No. 33-14507) .
4.2 Form of Subordinated Debenture (included as an exhibit to Exhibit 4.1), (incorporated herein by reference to the Registrant's Form S-2 Registration Statement dated December 6, 1996, filed under Registration No. 33- 14507).
4.3 Certificate of Trust of IBC Capital Finance (incorporated herein by reference to the Registrant's Form S- 2 Registration Statement dated December 6, 1996, filed under Registration No. 33-14507).
4.4 Trust Agreement of IBC Capital Finance dated as of November 7, 1996 (incorporated herein by reference to the Registrant's Form S-2 Registration Statement dated December 6, 1996, filed under Registration No. 33-14507).
4.5 Form of Amended and Restated Trust Agreement of IBC Capital Finance dated as of December 17, 1996 (incorporated herein by reference to the Registrant's Form S-2 Registration Statement dated December 6, 1996, filed under Registration No. 33-14507).
4.6 Form of Preferred Security Certificate of IBC Capital Finance (included as an exhibit to Exhibit 4.5.), (incorporated herein by reference to the Registrant's Form S-2 Registration Statement dated December 6, 1996, filed under Registration No. 33-14507).
EXHIBIT INDEX (Continued)
4.7 Form of Preferred Securities Guarantee Agreement for IBC Capital Finance (incorporated herein by reference to the Registrant's Form S-2 Registration Statement dated December 6, 1996, filed under Registration No. 33-14507).
4.8 Form of Agreement as to Expenses and Liabilities (included as an exhibit to Exhibit 4.5), (incorporated herein by reference to the Registrant's Form S-2 Registration Statement dated December 6, 1996, filed under Registration No. 33-14507).
10.1* Deferred Benefit Plan for Directors (incorporated herein by reference to Exhibit 10(C) to the Registrant's report on Form 10-K for the year ended December 31, 1984).
10.2 The form of Indemnity Agreement approved by the Registrant's shareholders at its April 19, 1988 Annual Meeting, as executed with all of the Directors of the Registrant (incorporated herein by reference to Exhibit 10(F) to the Registrant's report on Form 10-K for the year ended December 31, 1988).
10.3* Incentive Share Grant Plan, as amended, approved by the Registrant's shareholders at its April 21, 1992 Annual Meeting (incorporated herein by reference to Exhibit 10 to the Registrant's report on Form 10-K for the year ended December 31, 1992).
10.4* Non-Employee Director Stock Option Plan, as amended, approved by the Registrant's shareholders at its April 15, 1997 Annual Meeting (incorporated herein by reference to Exhibit 4 to the Registrant's Form S-8 Registration Statement dated July 28, 1997, filed under registration No. 333-32269).
10.5* Employee Stock Option Plan, as amended, approved by the Registrant's shareholders at its April 18, 2000 Annual Meeting (incorporated herein by reference to Exhibit 4 to the Registrant's Form S-8 Registration Statement dated October 8, 2000, filed under registration No. 333-47352).
10.6 The form of Management Continuity Agreement as executed with executive officers and certain senior managers (incorporated herein by reference to Exhibit 10 to the Registrant's report on Form 10-K for the year ended December 31, 1998).
* Represents a compensation plan.