Independent Bank Corporation Reports 2011 Third Quarter Results

31 Oct, 2011, 08:30 ET from Independent Bank Corporation

IONIA, Mich., Oct. 31, 2011 /PRNewswire/ -- Independent Bank Corporation (Nasdaq: IBCP) reported a third quarter 2011 net loss applicable to common stock of $5.2 million, or $0.61 per share, versus a loss of $7.7 million, or $1.03 per share, in the prior-year quarter.  For the nine months ended Sept. 30, 2011 and 2010, the Company reported a net loss applicable to common stock of $14.6 million, or $1.78 per share, and $15.9 million, or $3.71 per share, respectively.  Year-to-date 2010 results include an $18.1 million gain on the extinguishment of debt that was recorded in the second quarter of that year.  Excluding this gain, 2011 results improved significantly over 2010, due primarily to declines in the provision for loan losses and in non-interest expenses that were partially offset by decreases in net interest income and non-interest income.  

Michael M. Magee, the Chief Executive Officer of Independent Bank Corporation, commented: "Our results for the third quarter of 2011 reflect continued progress in improving asset quality, as evidenced by a reduction in our non-performing loans, loan net charge-offs and the provision for loan losses as compared to the year ago quarter.  We remain focused on continuing to improve our operating results and asset quality metrics.  Net interest income has declined in 2011 compared to a year ago, which adversely impacted our core operating results.  This decline in net interest income has been driven by our maintenance of high levels of liquidity and our need to reduce total loans in order to preserve our regulatory capital ratios.  However, third quarter 2011 net interest income did increase by about two percent as compared to the second quarter, due primarily to a decline in our cost of funds as we have significantly reduced higher costing brokered time deposits.  As we announced earlier in 2011, we continue to evaluate our alternatives in connection with our capital plan initiatives in consultation with our financial advisors and the U.S. Treasury.  In particular, we are continuing to explore the merits of a smaller capital raise with a goal of preserving the potential future use of our net deferred tax asset, which totaled approximately $71.5 million at Sept. 30, 2011 and on which we have established a $70.6 million valuation allowance.  The potential future recovery of this valuation allowance represents a source of capital that would be of significant benefit to our shareholders."

Operating Results

The Company's net interest income totaled $23.8 million during the third quarter of 2011, a decrease of $3.2 million, or 11.9%, from the year-ago period, and an increase of $0.4 million, or 1.7%, from the second quarter of 2011.  The Company's net interest income as a percent of average interest-earning assets (the "net interest margin") was 4.59% during the third quarter of 2011 compared to 4.26% in the year-ago period, and 4.36% in the second 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 $2.06 billion in the third quarter of 2011 compared to $2.52 billion in the year-ago quarter and $2.15 billion in the second quarter of 2011.  The 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 both the year-ago period and prior quarter due to a decline in the cost of funds which primarily reflects a reduction in higher costing brokered time deposits during 2011.

Service charges on deposit accounts totaled $4.6 million during the third quarter of 2011, a decrease of $0.9 million, or 16.2%, from the year-ago period.  The decrease in such service charges in 2011 principally relates to a decline in non-sufficient funds ("NSF") occurrences and related NSF fees.

Interchange income totaled $2.4 million during the third quarter of 2011, an increase of $0.3 million, or 13.5%, from the year-ago period.  The growth in interchange income primarily reflects an increase in debit card transaction volumes and PIN-based interchange fees. The Dodd-Frank Wall Street Reform and Consumer Protection Act includes a provision under which interchange fees for debit cards have been set by the Federal Reserve under a restrictive "reasonable and proportional cost" per transaction standard. On June 29, 2011 the Federal Reserve issued final rules (which were effective Oct. 1, 2011) on interchange fees for debit cards.  Overall, these final rules establish price caps for debit card interchange fees that are approximately 50% lower than previous averages.  However, debit card issuers with less than $10 billion in assets are exempt from this rule.  Even though our subsidiary bank is exempt from these new rules, competitive market factors could impact future interchange income.

Net gains on the sale of mortgage loans were $2.0 million in the third quarter of 2011, compared to $3.8 million in the year-ago quarter.  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 third quarter 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 losses of $2.7 million and $1.4 million in the third quarters of 2011 and 2010, respectively. This variance is primarily due to changes in the impairment reserve on capitalized mortgage loan servicing rights.  In the third quarters of 2011 and 2010, the Company recorded impairment charges of $3.1 million and $1.3 million, respectively, which primarily reflects lower mortgage loan interest rates at each quarter end resulting in higher estimated future prepayment rates being used in the valuation of capitalized mortgage loan servicing rights, which totaled $11.5 million at Sept. 30, 2011.  The Company was servicing approximately $1.78 billion in mortgage loans for others on which servicing rights had been capitalized at Sept. 30, 2011.

In the second quarter of 2010, the Company recorded an $18.1 million gain on the extinguishment of debt.  On June 23, 2010, the Company issued 5.1 million shares of its common stock (having a fair value of approximately $23.5 million on the date of the exchange) in exchange for $41.4 million in liquidation value of trust preferred securities and $2.3 million of accrued and unpaid interest on such securities.

Non-interest expenses totaled $31.5 million in the third quarter of 2011, as compared to $37.5 million in the year-ago period.  The decrease in non-interest expenses was primarily due to declines in loan and collection costs (down $1.1 million), vehicle service contract counterparty contingencies (down $4.6 million), FDIC deposit insurance (down $0.8 million) and credit card and bank service fees (down $0.5 million).  These decreases were partially offset by an increase in net losses on other real estate and repossessed assets (up $0.6 million) and lower recoveries related to unfunded lending commitments (down $0.6 million).  The overall decline in non-interest expenses principally reflects the Company's ongoing efforts to reduce operating and credit related costs.

Asset Quality

Commenting on asset quality, CEO Magee added:  "Our provision for loan losses decreased by $3.4 million, or 35.3%, in the third quarter of 2011 compared to the year-ago level, primarily reflecting a reduction in non-performing loans, a lower level of watch credits, reduced loan net charge-offs, and an overall decline in total loan balances.  Non-performing loans have declined by nearly 25% thus far in 2011.  In addition, thirty- to eighty-nine day delinquency rates at Sept. 30, 2011 were at 0.98% for commercial loans and 1.79% for mortgage and consumer loans. These are near the lowest levels that we have seen in over two 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

9/30/2011  

12/31/2010  

9/30/2010  

(Dollars in millions)

Commercial

$ 22.3

$ 29.6

$ 29.8

Consumer/installment

3.1

4.2

4.9

Mortgage

24.2

30.9

32.9

Payment plan receivables (2)

1.3

2.9

2.5

 Total

$ 50.9

$ 67.6

$ 70.1

Ratio of non-performing loans to total portfolio loans

3.13%

3.73%

3.67%

Ratio of non-performing assets to total assets

3.66%

4.22%

4.20%

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

115.56%

100.50%

102.31%

(1) Excludes loans that are classified as "troubled debt restructurings" that are still performing.

(2) Represents payment plans for which no payments have been received for 90 days or more and for which Mepco Finance Corporation ("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.

The decrease in non-performing loans since year-end 2010 is due principally to declines in non-performing commercial loans and residential mortgage loans. These declines primarily reflect loan net charge-offs, pay-offs, negotiated transactions and the migration of loans into ORE during the first nine months of 2011.  Non-performing commercial loans 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 commercial loans have declined for eleven consecutive quarters and are at their lowest level since early 2007.  Non-performing residential mortgage loans are primarily due to delinquencies reflecting both weak economic conditions and soft residential real estate values.  Retail non-performing loans have declined by 54% since they peaked in the second quarter of 2009.  Other real estate and repossessed assets totaled $34.0 million at Sept. 30, 2011, compared to $39.4 million at Dec. 31, 2010, and $45.0 million at Sept. 30, 2010.  

The provision for loan losses was $6.2 million and $9.5 million in the third quarters of 2011 and 2010, respectively.  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 $7.9 million (1.89% annualized of average loans) in the third quarter of 2011, compared to $13.4 million (2.70% annualized of average loans) in the third quarter of 2010 and $9.4 million (2.21% annualized of average loans) in the second quarter of 2011.  The decline in third quarter 2011 loan net charge-offs compared to year-ago levels is primarily due to declines in both commercial and mortgage loan net charge-offs.  Loan net charge-offs were $30.1 million (2.35% annualized of average loans) and $49.2 million (3.13% annualized of average loans) for the first nine months of 2011 and 2010, respectively.  At Sept. 30, 2011, the allowance for loan losses totaled $58.8 million, or 3.61% 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 $2.32 billion at Sept. 30, 2011, a decrease of $217.9 million, or 8.6%, from Dec. 31, 2010.  Loans, excluding loans held for sale, were $1.63 billion at Sept. 30, 2011, compared to $1.81 billion at Dec. 31, 2010.  Deposits totaled $2.08 billion at Sept. 30, 2011, a decrease of $173.2 million from Dec. 31, 2010.  The decline in deposits is entirely due to a planned reduction of brokered time deposits.

Cash and cash equivalents totaled $355.8 million at Sept. 30, 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 time deposits and other borrowings) during the first nine months of 2011.

Stockholders' equity totaled $110.8 million at Sept. 30, 2011, or 4.78% of total assets.  The Company's wholly owned subsidiary, Independent Bank, remains "well capitalized" for regulatory purposes with the following ratios:

Regulatory Capital Ratio

9/30/11

12/31/2010

Well Capitalized Minimum

Tier 1 capital to average total assets

 7.07%

 6.58%

5.00%

Tier 1 capital to risk-weighted assets

10.29%

 9.77%

6.00%

Total capital to risk-weighted assets

11.57%

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, stockholders 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

September 30,

December 31,

2011

2010

(unaudited)

Assets

(In thousands, except share amounts)

Cash and due from banks

$

58,119

$

48,933

Interest bearing deposits

297,685

336,441

Cash and Cash Equivalents

355,804

385,374

Trading securities

99

32

Securities available for sale

94,788

67,864

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

21,005

23,630

Loans held for sale, carried at fair value

28,709

50,098

Loans

 Commercial

656,268

707,530

 Mortgage

609,173

658,679

 Installment

227,059

245,644

 Payment plan receivables

135,042

201,263

Total Loans

1,627,542

1,813,116

 Allowance for loan losses

(58,820)

(67,915)

Net Loans

1,568,722

1,745,201

Other real estate and repossessed assets

34,029

39,413

Property and equipment, net

64,142

68,359

Bank-owned life insurance

49,309

47,922

Other intangibles

7,951

8,980

Capitalized mortgage loan servicing rights

11,549

14,661

Prepaid FDIC deposit insurance assessment

13,308

15,899

Vehicle service contract counterparty receivables, net

40,133

37,270

Accrued income and other assets

27,825

30,545

Total Assets

$

2,317,373

$

2,535,248

Liabilities and Shareholders' Equity

Deposits

 Non-interest bearing

$

505,621

$

451,856

 Savings and NOW

1,010,939

995,662

 Retail time

527,933

530,774

 Brokered time

34,148

273,546

Total Deposits

2,078,641

2,251,838

Other borrowings

35,726

71,032

Subordinated debentures

50,175

50,175

Vehicle service contract counterparty payables

9,934

11,739

Accrued expenses and other liabilities

32,095

31,379

Total Liabilities

2,206,571

2,416,163

Shareholders' Equity

 Preferred stock, no par value, 200,000 shares authorized; 74,426 shares issued and outstanding at September 30, 2011 and December 31, 2010; per share liquidation preference: $1,075 at September 30, 2011 and $1,036 at December 31, 2010

78,802

75,700

 Common stock, no par value, 500,000,000 shares authorized; issued and outstanding:  8,413,333 shares at September 30, 2011 and 7,860,483 shares at December 31, 2010

248,505

246,407

 Accumulated deficit

(204,491)

(189,902)

 Accumulated other comprehensive loss

(12,014)

(13,120)

Total Shareholders' Equity

110,802

119,085

Total Liabilities and Shareholders' Equity

$

2,317,373

$

2,535,248

INDEPENDENT BANK CORPORATION AND SUBSIDIARIES

Consolidated Statements of Operations

Three Months Ended

Nine Months Ended

September 30,

June 30,

September 30,

September 30,

2011

2011

2010

2011

2010

(unaudited)

(In thousands)

Interest Income

 Interest and fees on loans

$

27,222

$

28,102

$

34,370

$

84,808

$

110,072

 Interest on securities

   Taxable

297

344

509

1,108

2,571

   Tax-exempt

301

298

383

931

1,594

 Other investments

367

383

425

1,185

1,186

Total Interest Income

28,187

29,127

35,687

88,032

115,423

Interest Expense

 Deposits

3,230

4,511

6,737

12,686

22,464

 Other borrowings

1,183

1,232

1,965

3,738

7,372

Total Interest Expense

4,413

5,743

8,702

16,424

29,836

Net Interest Income

23,774

23,384

26,985

71,608

85,587

Provision for loan losses

6,171

4,156

9,543

21,029

39,237

Net Interest Income After Provision for Loan Losses

17,603

19,228

17,442

50,579

46,350

Non-interest Income

 Service charges on deposit accounts

4,623

4,784

5,516

13,689

16,624

 Interchange income

2,356

2,308

2,075

6,832

6,097

 Net gains (losses) on assets

   Mortgage loans

2,025

1,793

3,829

5,753

8,044

   Securities

(57)

115

(3)

271

1,625

   Other than temporary loss on securities available for sale

     Total impairment loss

(4)

327

(316)

(146)

(434)

     Loss recognized in other comprehensive income

-

(327)

-

-

-

       Net impairment loss recognized in earnings

(4)

-

(316)

(146)

(434)

 Mortgage loan servicing

(2,655)

(126)

(1,377)

(1,885)

(2,988)

 Title insurance fees

299

318

533

1,090

1,393

 Decrease in fair value of U.S. Treasury warrant

29

642

-

1,025

-

 Gain on extinguishment of debt

-

-

(20)

-

18,066

 Other

2,639

2,622

2,241

7,793

6,177

Total Non-interest Income

9,255

12,456

12,478

34,422

54,604

Non-interest Expense

 Compensation and employee benefits

12,654

13,029

12,806

38,032

39,449

 Loan and collection

2,658

3,580

3,805

10,105

11,376

 Occupancy, net

2,651

2,663

2,721

8,415

8,225

 Data processing

2,502

2,415

2,248

7,227

7,187

 Vehicle service contract counterparty contingencies

1,345

1,311

5,968

5,002

14,247

 Furniture, fixtures and equipment

1,308

1,502

1,591

4,228

4,958

 Net losses on other real estate and repossessed assets

1,931

777

1,296

4,114

4,879

 Credit card and bank service fees

869

1,013

1,378

2,929

4,553

 FDIC deposit insurance

885

652

1,651

2,772

5,216

 Communications

863

889

1,054

2,700

3,142

 Legal and professional

751

801

831

2,330

2,861

 Advertising

740

670

692

1,964

2,145

 Costs (recoveries) related to unfunded lending commitments

(172)

89

(807)

12

(471)

 Other

2,477

2,514

2,274

7,405

6,836

Total Non-interest Expense

31,462

31,905

37,508

97,235

114,603

Loss Before Income Tax

(4,604)

(221)

(7,588)

(12,234)

(13,649)

Income tax benefit

(482)

(258)

(978)

(748)

(1,086)

                                                      Net Income (Loss)

$

(4,122)

$

37

$

(6,610)

$

(11,486)

$

(12,563)

Preferred stock dividends and discount accretion

1,043

1,051

1,109

3,102

3,299

Net Loss Applicable to Common Stock

$

(5,165)

$

(1,014)

$

(7,719)

$

(14,588)

$

(15,862)

INDEPENDENT BANK CORPORATION AND SUBSIDIARIES

Selected Financial Data

Three Months Ended

Nine Months Ended

September 30,

June 30,

September 30,

September 30,

2011

2011

2010

2011

2010

(unaudited)

Per Common Share Data

Net Loss Per Common Share (A)

 Basic (B)

$

(.61)

$

(.12)

$

(1.03)

$

(1.78)

$

(3.71)

 Diluted (C)

(.61)

(.12)

(1.03)

(1.78)

(3.71)

Cash dividends declared per common share

.00

.00

.00

.00

.00

Selected Ratios (D)

As a Percent of Average Interest-Earning Assets

 Interest income

5.44%

5.43%

5.63%

5.45%

5.89%

 Interest expense

0.85

1.07

1.37

1.02

1.52

 Net interest income

4.59

4.36

4.26

4.43

4.37

Net Loss to (A)

 Average common shareholders' equity

(56.07)%

(11.94)%

(60.51)%

(52.57)%

(58.95)%

 Average assets

(0.89)

(0.17)

(1.11)

(0.81)

(0.75)

Average Shares

 Basic (B)

8,400,950

8,287,012

7,512,508

8,208,793

4,274,752

 Diluted (C)

50,999,510

49,640,081

56,407,159

50,783,918

34,366,555

(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.

SOURCE Independent Bank Corporation



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