Independent Bank Corporation Reports 2011 Fourth Quarter and Full Year Results

Feb 02, 2012, 08:30 ET from Independent Bank Corporation

IONIA, Mich., Feb. 2, 2012 /PRNewswire/ -- Independent Bank Corporation (NASDAQ: IBCP) reported a fourth quarter 2011 net loss applicable to common stock of $9.8 million, or $1.15 per share, versus a loss of $4.9 million, or $0.65 per share, in the prior-year period.  The net loss applicable to common stock for the year ended Dec. 31, 2011 was $24.4 million, or $2.94 per share, compared to a loss of $20.8 million, or $4.09 per share, for all of 2010.  The full year 2010 results included an $18.1 million gain on the extinguishment of debt that was recorded in June 2010.  Excluding the aforementioned gain on extinguishment of debt, the 2011 net loss applicable to common stock declined by $14.5 million compared to 2010, due primarily to declines in the provision for loan losses and in non-interest expenses that were partially offset by declines in net interest income and non-interest income.

Michael M. Magee, Chairman and CEO of Independent Bank Corporation, commented: "Although our fourth quarter and full year 2011 operating results fell short of our expectations, I believe that significant progress was made in our goal to return to consistent profitability.  Fourth quarter 2011 results did include approximately $6 million in additional non-interest expenses associated with the write-off of or additional reserves on certain receivables at our Chicago-based Mepco Finance Corporation, primarily as a result of a settlement of the bankruptcy estate of a  former business counterparty. In addition, in the last quarter of 2011, we established a valuation allowance of approximately $1 million on our remaining net deferred tax asset.  This net deferred tax asset was comprised of certain state income tax related items at Mepco.  The fourth quarter of 2011 also included credit costs (provision for loan losses, loan and collection expenses and net losses on other real estate and repossessed assets) of nearly $11 million.  During 2011, we made meaningful progress in reducing risk in our balance sheet, with declines in non-performing assets, troubled debt restructurings, watch credits, and payment plan and vehicle service contract counterparty receivables. We are optimistic that despite a challenging environment for revenue growth, the Company can return to profitability during 2012 through a combination of further reductions in credit costs and non-interest expenses.  Although we have been successful in improving our regulatory capital ratios and exceeding our goal of 11% total capital to risk-weighted assets, we continue to work with our financial advisors on strategies to further improve these ratios.  Our capital initiatives remain centered on strategies that preserve the potential future use of our net deferred tax asset, which totaled approximately $75.2 million at Dec. 31, 2011 and on which we have established a full valuation allowance.  The potential future recovery of this valuation allowance represents a source of capital that would be of significant value to our shareholders."

Operating Results

The Company's net interest income totaled $23.0 million during the fourth quarter of 2011, a decrease of $3.1 million, or 11.9% from the year-ago period, and a decrease of $0.8 million, or 3.4% from the third quarter of 2011.  The Company's net interest income as a percent of average interest-earning assets (the "net interest margin") was 4.40% during the fourth quarter of 2011, compared to 4.35% in the year-ago period, and 4.59% in the third quarter of 2011.  The year-over-year decrease in net interest income is due to a reduction in average interest-earning assets, which declined to $2.08 billion in the fourth quarter of 2011 compared to $2.38 billion in the year-ago quarter and $2.06 billion in the third quarter of 2011.  The year-over-year decline in average interest-earning assets primarily reflects the Company's efforts to reduce total assets in order to improve its regulatory capital ratios.  The net interest margin increased from the year-ago period primarily due to a decline in the cost of funds which principally reflects a reduction in higher costing brokered time deposits during 2011.  However, the fourth quarter 2011 net interest margin decreased compared to the third quarter of 2011 due primarily to a change in asset mix, as higher yielding loans declined and lower yielding short-term investments increased.  

For all of 2011, net interest income totaled $94.6 million, a decrease of $17.1 million, or 15.3% from 2010.  The Company's net interest margin for all of 2011 increased to 4.42% compared to 4.36% in 2010.  The reasons for the decline in net interest income for full year 2011 are consistent with those described above for the comparative quarterly periods.

Service charges on deposits totaled $4.6 million and $18.3 million, respectively, for the fourth quarter and full year of 2011, representing decreases of 5.5% and 14.9%, respectively, from the comparable year ago periods.  These decreases principally relate to a decline in customer overdraft occurrences.

Interchange income totaled $2.3 million and $9.1 million for the fourth quarter and full year of 2011, respectively, representing increases of 4.6% and 10.1%, respectively, over the year ago comparative periods.  These increases primarily reflect a rise in customer debit card transaction volume and PIN-based interchange fees.  

Net gains on the sale of mortgage loans were $3.5 million in the fourth quarter of 2011, compared to $4.3 million in the year-ago quarter.  For all of 2011, net gains on the sale of mortgage loans totaled $9.3 million compared to $12.3 million in 2010. The decrease in net gains relates primarily to a decline in mortgage loan sales volume.  Although mortgage loan interest rates hit record lows during the last half of 2011, refinance activity has been, to date, somewhat moderate as many borrowers already refinanced in earlier periods (and the interest rate differential between the rate at which they refinanced earlier and current interest rates is not that significant).  Also, many borrowers are unable to refinance because of negative equity in their homes or credit-related impediments.

Mortgage loan servicing generated a loss of $0.1 million in the fourth quarter of 2011, compared to income of $2.5 million in the year-ago period.  This decline was due to the change in the impairment reserve (a $0.2 million impairment charge in the fourth quarter of 2011 compared to a $2.7 million recovery in the year-ago quarter) that was partially offset by a $0.3 million decrease in the amortization of capitalized mortgage loan servicing rights.  The recovery of previously recorded impairment charges in the last quarter of 2010 primarily reflected higher mortgage loan interest rates at that time, resulting in lower estimated future prepayment rates.  However, during 2011 mortgage loan interest rates generally declined and hit record lows at the end of the year.  For all of 2011, mortgage loan servicing generated a loss of $2.0 million as compared to a loss of $0.5 million in 2010.  The full year comparative variance is primarily due to changes in the impairment reserve ($3.3 million charge in 2011 versus a $0.9 million charge in 2010).  Capitalized mortgage loan servicing rights totaled $11.2 million at Dec. 31, 2011 compared to $14.7 million at Dec. 31, 2010.  As of Dec. 31, 2011, the Company serviced approximately $1.77 billion in mortgage loans for others on which servicing rights have been capitalized.

Non-interest expenses totaled $36.7 million in the fourth quarter of 2011, compared to $40.4 million in the year-ago period.  The quarterly year-over-year decline in non-interest expenses was primarily due to decreases in net losses on other real estate and repossessed assets (down $3.1 million) and loan and collection costs (down $1.6 million).  For all of 2011, non-interest expenses totaled $133.9 million versus $155.0 million in 2010.  The full year decline in non-interest expenses was primarily due to decreases in loan and collection costs (down $2.9 million), vehicle service contract counterparty contingencies expense (down $7.6 million), net losses on other real estate and repossessed assets (down $3.9 million), credit card and bank service fees (down $2.1 million) and FDIC deposit insurance (down $3.3 million).  

Fourth quarter and full year 2011 non-interest expenses included vehicle service contract counterparty contingencies expense of $6.0 million and $11.0 million, respectively (compared to $4.4 million and $18.6 million in the comparable respective periods in 2010) related to Mepco Finance Corporation's ("Mepco") business of purchasing and servicing payment plans for vehicle service contracts.  When consumers stop making payments or exercise their right to voluntarily cancel the service contract, the remaining unpaid balance of the payment plan is normally recouped by Mepco from the counterparties that sold the vehicle service contract and provided the coverage.  When counterparties do not honor their contractual obligations to Mepco to repay advanced funds, Mepco recognizes estimated probable incurred losses.  Mepco pursues collection (including commencing legal action) of funds due to it under its various contracts with counterparties.   The fourth quarter of 2011 included approximately $5.4 million of vehicle service contract counterparty contingencies expense and $0.5 million of legal and professional fees principally related to the settlement (in Dec. 2011) of the bankruptcy estate of Mepco's former largest counterparty.  The $5.4 million charge primarily represents receivables that Mepco no longer expects to recover from the distribution of the bankruptcy estate assets.  Mepco has been and will continue to pursue various other counterparties to recover amounts due to Mepco as the result of this counterparty's default.  At Dec. 31, 2011 and 2010 the Company had $29.3 million and $37.3 million, respectively, of vehicle service contract counterparty receivables, net.  During 2011, payment plan receivables declined by $86.2 million (or 42.9%) to $115.0 million at Dec. 31, 2011, due primarily to a planned reduction in such receivables.

Asset Quality

Commenting on asset quality, CEO Magee noted:  "We are pleased to report improvements in asset quality metrics in 2011 compared to 2010.  Our provision for loan losses decreased by $18.8 million, or 40.2%, primarily reflecting a reduction in non-performing loans and loan net charge-offs, as well as an overall decline in total loan balances.  Non-performing loans and loan net charge-offs declined by 11.4% and by 38.9%, respectively. In addition, thirty- to eighty-nine day delinquency rates at Dec. 31, 2011 were at 0.64% for commercial loans and 1.54% for mortgage and consumer loans. These are at or near the lowest levels that we have seen in many years.  We continue to focus on improving asset quality and reducing credit related costs."

A breakdown of non-performing loans(1) by loan type is as follows:

Loan Type

12/31/2011

12/31/2010

12/31/2009

(Dollars in Millions)

Commercial

$ 29.3

$ 29.6

$  50.4

Consumer/installment

3.5

4.2

8.4

Mortgage

26.2

30.9

48.0

Payment plan receivables(2)

0.9

2.9

3.1

 Total

$ 59.9

$ 67.6

$109.9

Ratio of non-performing loans to total portfolio loans

3.80%

3.73%

4.78%

Ratio of non-performing assets to total assets

4.07%

4.22%

4.77%

Ratio of the allowance for loan losses to non-performing loans

98.33%

100.50%

74.35%

(1)

Excludes loans that are classified as "troubled debt restructured" that are still performing.

(2)

Represents payment plans for which no payments have been received for 90 days or more and for which Mepco has not yet completed the process to charge the applicable counterparty for the balance due. These balances exclude receivables due from Mepco counterparties related to the cancellation of payment plan receivables.

Non-performing loans have declined by $7.7 million, or 11.4%, since year-end 2010.  All categories of non-performing loans declined, but the principal decrease since year-end 2010 was in residential mortgage loans. The decline in non-performing loans primarily reflects loan net charge-offs, pay-offs, negotiated transactions and the migration of loans into ORE during 2011.  Non-performing commercial loans have declined by $48.7 million, or 62.5%, since they peaked in the fourth quarter of 2008.  Non-performing commercial loans now relate largely to delinquencies caused by cash-flow difficulties encountered by owners of income-producing properties (due to higher vacancy rates and/or lower rental rates).  Non-performing retail (residential mortgage and consumer/installment) loans have declined by $29.5 million, or 49.9%, since they peaked in the second quarter of 2009.  Non-performing residential mortgage loans are primarily due to delinquencies reflecting both weak economic conditions and soft residential real estate values.  Other real estate and repossessed assets totaled $34.0 million at Dec. 31, 2011, compared to $39.4 million at Dec. 31, 2010.  

The provision for loan losses was $6.9 million and $7.5 million in the fourth quarters of 2011 and 2010, respectively.  For all of 2011, the provision for loan losses totaled $27.9 million versus $46.8 million in 2010.  The level of the provision for loan losses in each period reflects the Company's overall assessment of the allowance for loan losses, taking into consideration factors such as loan mix, levels of non-performing and classified loans, and loan net charge-offs.  Loan net charge-offs were $6.9 million (1.70% annualized of average loans) in the fourth quarter of 2011, compared to $11.4 million (2.42% annualized of average loans) in the fourth quarter of 2010.  Loan net charge-offs were $37.0 million (2.20% of average loans) and $60.6 million (2.97% of average loans) for all of 2011 and 2010, respectively.  The declines in 2011 loan net charge-offs by category were: commercial loans $16.5 million, or 47.0%; mortgage loans $4.9 million, or 25.9%; and consumer/installment loans $2.2 million, or 36.2%.  At Dec. 31, 2011, the allowance for loan losses totaled $58.9 million, or 3.73% of portfolio loans, compared to $67.9 million, or 3.75% of portfolio loans, at Dec. 31, 2010.

Balance Sheet, Liquidity and Capital

Total assets were $2.31 billion at Dec. 31, 2011, a decrease of $227.8 million, or 9.0%, from Dec. 31, 2010.  Loans, excluding loans held for sale, were $1.58 billion at Dec. 31, 2011, compared to $1.81 billion at Dec. 31, 2010.  Deposits totaled $2.09 billion at Dec. 31, 2011, a decrease of $165.7 million from Dec. 31, 2010.  The decline in deposits is due to a planned reduction of brokered time deposits ("Brokered CDs").  Excluding Brokered CDs, deposits increased by $65.6 million, or 3.3%, during 2011.  

Cash and cash equivalents totaled $341.1 million at Dec. 31, 2011, versus $385.4 million at Dec. 31, 2010.  Although still at elevated levels, the Company has utilized some of its liquidity to reduce wholesale funding (Brokered CDs and other borrowings) and increase securities available for sale during 2011.

Shareholders' equity totaled $102.6 million at Dec. 31, 2011, or 4.45% of total assets.  The Company's wholly owned subsidiary, Independent Bank, remains "well capitalized" for regulatory purposes with the following ratios:

Regulatory Capital Ratio

12/31/2011

12/31/2010

Well Capitalized Minimum

Tier 1 capital to average total assets

6.77%

6.58%

5.00%

Tier 1 capital to risk-weighted assets

10.13%

9.77%

6.00%

Total capital to risk-weighted assets

11.41%

11.06%

10.00%

About Independent Bank Corporation

Independent Bank Corporation (NASDAQ: IBCP) is a Michigan-based bank holding company with total assets of approximately $2.3 billion.  Founded as First National Bank of Ionia in 1864, Independent Bank Corporation now operates over 100 offices across Michigan's Lower Peninsula through one state-chartered bank subsidiary.  This subsidiary (Independent Bank) provides a full range of financial services, including commercial banking, mortgage lending, investments and title services.  Independent Bank Corporation is committed to providing exceptional personal service and value to its customers, shareholders and the communities it serves.  

For more information, please visit the Company's Web site at:  IndependentBank.com

Any statements in this news release 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 news release 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  operations, products or services, and forecasts of the Company's revenue, earnings or other measures of economic performance, including statements of profitability, estimates of credit quality trends, and statements about the potential value of our deferred tax assets. 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.  These forward-looking statements involve assumptions and are subject to substantial risks and uncertainties, such as 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 include the ability of Independent Bank Corporation to meet the objectives of its capital restoration plan, the ability of Independent Bank to remain well-capitalized under federal regulatory standards, the pace of economic recovery within Michigan and beyond, our ability to collect receivables from Mepco Finance Corporation's counterparties related to cancellations of payment plans, 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 news release or in any documents, Independent Bank Corporation claims the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.

INDEPENDENT BANK CORPORATION AND SUBSIDIARIES

Consolidated Statements of Financial Condition

December 31,

2011

2010

(unaudited)

Assets

(In thousands, except share amounts)

Cash and due from banks

$

62,777

$

48,933

Interest bearing deposits

278,331

336,441

Cash and Cash Equivalents

341,108

385,374

Trading securities

77

32

Securities available for sale

157,444

67,864

Federal Home Loan Bank and Federal Reserve Bank stock, at cost

20,828

23,630

Loans held for sale, carried at fair value

44,801

50,098

Loans

 Commercial

651,155

707,530

 Mortgage

590,876

658,679

 Installment

219,559

245,644

 Payment plan receivables

115,018

201,263

Total Loans

1,576,608

1,813,116

 Allowance for loan losses

(58,884)

(67,915)

Net Loans

1,517,724

1,745,201

Other real estate and repossessed assets

34,042

39,413

Property and equipment, net

62,548

68,359

Bank-owned life insurance

49,271

47,922

Other intangibles

7,609

8,980

Capitalized mortgage loan servicing rights

11,229

14,661

Prepaid FDIC deposit insurance assessment

12,609

15,899

Vehicle service contract counterparty receivables, net

29,298

37,270

Accrued income and other assets

18,818

30,545

Total Assets

$

2,307,406

$

2,535,248

Liabilities and Shareholders' Equity

Deposits

 Non-interest bearing

$

497,718

$

451,856

 Savings and interest-bearing checking

1,019,603

995,662

 Retail time

526,525

530,774

 Brokered time

42,279

273,546

Total Deposits

2,086,125

2,251,838

Other borrowings

33,387

71,032

Subordinated debentures

50,175

50,175

Vehicle service contract counterparty payables

6,633

11,739

Accrued expenses and other liabilities

28,459

31,379

Total Liabilities

2,204,779

2,416,163

Shareholders' Equity

 Preferred stock, no par value, 200,000 shares authorized; 74,426 shares

   issued and outstanding at December 31, 2011 and December 31, 2010;

   per share liquidation preference: $1,089 at  December 31, 2011 and

   $1,036 at December 31, 2010

79,857

75,700

 Common stock, no par value, 500,000,000 shares authorized;

    issued and outstanding:  8,491,526 shares at December 31, 2011

    and 7,860,483 shares at December 31, 2010

248,950

246,407

 Accumulated deficit

(214,259)

(189,902)

 Accumulated other comprehensive loss

(11,921)

(13,120)

Total Shareholders' Equity

102,627

119,085

Total Liabilities and Shareholders' Equity

$

2,307,406

$

2,535,248

INDEPENDENT BANK CORPORATION AND SUBSIDIARIES

Consolidated Statements of Operations

Three Months Ended

Twelve Months Ended

December 31,

September 30,

December 31,

December 31,

2011

2011

2010

2011

2010

(unaudited)

(In thousands)

Interest Income

 Interest and fees on loans

$

25,766

$

27,222

$

32,210

$

110,574

$

142,282

 Interest on securities

   Taxable

314

297

481

1,422

3,052

   Tax-exempt

288

301

338

1,219

1,932

 Other investments

362

367

399

1,547

1,585

Total Interest Income

26,730

28,187

33,428

114,762

148,851

Interest Expense

 Deposits

2,571

3,230

5,700

15,257

28,164

 Other borrowings

1,198

1,183

1,662

4,936

9,034

Total Interest Expense

3,769

4,413

7,362

20,193

37,198

Net Interest Income

22,961

23,774

26,066

94,569

111,653

Provision for loan losses

6,917

6,171

7,528

27,946

46,765

Net Interest Income After Provision for Loan Losses

16,044

17,603

18,538

66,623

64,888

Non-interest Income

 Service charges on deposit accounts

4,617

4,623

4,887

18,306

21,511

 Interchange income

2,259

2,356

2,160

9,091

8,257

 Net gains (losses) on assets

   Mortgage loans

3,509

2,025

4,286

9,262

12,330

   Securities

(22)

(57)

14

249

1,639

   Other than temporary loss on      securities available for sale

     Total impairment loss

(614)

(4)

(28)

(760)

(462)

     Loss recognized in other        comprehensive income

-

-

-

-

-

       Net impairment loss recognized in          earnings

(614)

(4)

(28)

(760)

(462)

 Mortgage loan servicing

(126)

(2,655)

2,465

(2,011)

(523)

 Title insurance fees

375

299

644

1,465

2,037

 Decrease in fair value of U.S. Treasury    warrant

112

29

393

1,137

393

 Gain on extinguishment of debt

-

-

-

-

18,066

 Other

2,381

2,639

2,388

10,174

8,565

Total Non-interest Income

12,491

9,255

17,209

46,913

71,813

Non-interest Expense

 Compensation and employee benefits

12,452

12,654

12,262

50,484

51,711

 Loan and collection

2,309

2,658

3,947

12,414

15,323

 Occupancy, net

2,768

2,651

2,791

11,183

11,016

 Vehicle service contract counterparty

   contingencies

6,046

1,345

4,386

11,048

18,633

 Data processing

2,524

2,502

2,367

9,751

9,554

 Net losses on other real estate and    repossessed assets

1,710

1,931

4,843

5,824

9,722

 Furniture, fixtures and equipment

1,307

1,308

1,582

5,535

6,540

 Legal and professional

1,611

751

1,239

3,941

4,100

 Credit card and bank service fees

727

869

1,237

3,656

5,790

 Communications

852

863

996

3,552

4,138

 FDIC deposit insurance

735

885

1,589

3,507

6,805

 Advertising

539

740

567

2,503

2,712

 Provision for loss reimbursement on    sold loans

973

251

55

1,993

215

 Recoveries related to unfunded lending    commitments

(48)

(172)

(65)

(36)

(536)

 Other

2,208

2,226

2,601

8,593

9,277

Total Non-interest Expense

36,713

31,462

40,397

133,948

155,000

Loss Before Income Tax

(8,178)

(4,604)

(4,650)

(20,412)

(18,299)

Income tax expense (benefit)

536

(482)

(504)

(212)

(1,590)

Net Loss

$

(8,714)

$

(4,122)

$

(4,146)

$

(20,200)

$

(16,709)

Preferred stock dividends and discount accretion

1,055

1,043

796

4,157

4,095

Net Loss Applicable to Common Stock

$

(9,769)

$

(5,165)

$

(4,942)

$

(24,357)

$

(20,804)

INDEPENDENT BANK CORPORATION AND SUBSIDIARIES

Selected Financial Data

Three Months Ended

Twelve Months Ended

December 31,

September 30,

December 31,

December 31,

2011

2011

2010

2011

2010

(unaudited)

Per Common Share Data

Net Loss Per Common Share (A)

 Basic (B)

$

(1.15)

$

(.61)

$

(0.65)

$

(2.94)

$

(4.09)

 Diluted (C)

(1.15)

(.61)

(0.65)

(2.94)

(4.09)

Cash dividends declared per common share

.00

.00

.00

.00

.00

Selected Ratios (D)

As a Percent of Average Interest-Earning Assets

 Interest income

5.12

%

5.44

%

5.58

%

5.36

%

5.81

%

 Interest expense

0.72

0.85

1.23

0.94

1.45

 Net interest income

4.40

4.59

4.35

4.42

4.36

Net Loss to (A)

 Average common shareholders' equity

(124.60)

%

(56.07)

%

(43.56)

%

(68.44)

%

(54.38)

%

 Average assets

(1.68)

(0.89)

(0.75)

(1.02)

(0.75)

Average Shares

 Basic (B)

8,480,507

8,400,950

7,646,814

8,277,280

5,089,651

 Diluted (C)

69,908,107

50,999,510

58,713,431

69,687,356

41,467,959

(A) These amounts are calculated using net loss applicable to common stock.

(B) Average shares of common stock for basic net loss per common share include shares issued and outstanding during the period and participating share awards.  

(C) Average shares of common stock for diluted net loss per common share include shares to be issued upon conversion of convertible preferred stock, shares to be issued upon exercise of common stock warrants, shares to be issued upon exercise of stock options, restricted stock units and stock units for a deferred compensation plan for non-employee directors.  For any period in which a loss is recorded, the assumed conversion of convertible preferred stock, assumed exercise of common stock warrants, assumed exercise of stock options, restricted stock units and stock units for a deferred compensation plan for non-employee directors would have an anti-dilutive impact on the loss per share and are thus ignored in the diluted per share calculation.

(D) Ratios have been annualized for quarterly periods.

SOURCE Independent Bank Corporation



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