Independent Bank Corporation Reports 2011 Second Quarter Results

IONIA, Mich., Aug. 1, 2011 /PRNewswire/ -- Independent Bank Corporation (Nasdaq: IBCP) reported a second quarter 2011 net loss applicable to common stock of $1.0 million, or $0.12 per share, versus net income applicable to common stock of $6.8 million, or $0.44 per diluted share, in the prior-year period.  For the six months ended June 30, 2011 and 2010, the Company reported a net loss applicable to common stock of $9.4 million, or $1.16 per share, and $8.1 million, or $3.10 per share, respectively.  2010 results include an $18.1 million gain on the extinguishment of debt.  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 a decrease in net interest income.  

Michael M. Magee, the Chief Executive Officer of Independent Bank Corporation, commented: "Our results for the second quarter of 2011 reflect further 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.  In addition, prior to preferred stock dividends, we were able to achieve a small net profit this quarter.  We remain focused on continuing to improve our operating results, and we are optimistic that recent improvements we have observed in the Michigan economy will help support our efforts. Net interest income continued to decline in the first half of 2011, 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.  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 $69.4 million at June 30, 2011 and on which we have established a $68.5 million valuation allowance."

Operating Results

The Company's net interest income totaled $23.4 million during the second quarter of 2011, a decrease of $5.2 million, or 18.2%, from the year-ago period, and a decrease of $1.1 million, or 4.4%, from the first quarter of 2011.  The Company's net interest income as a percent of average interest-earning assets (the "net interest margin") was 4.36% during the second quarter of 2011 compared to 4.38% in the year-ago period, and 4.34% in the first quarter of 2011.  The decrease in net interest income is primarily due to a reduction in average interest-earning assets, which declined to $2.15 billion in the second quarter of 2011 compared to $2.61 billion in the year-ago quarter and $2.27 billion in the first 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.

Service charges on deposit accounts totaled $4.8 million during the second quarter of 2011, a decrease of $1.0 million, or 18.0%, 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 that is in part, attributed to overdraft fee legislation that went into effect during the third quarter of 2010.

Interchange income totaled $2.3 million during the second quarter of 2011, an increase of $0.2 million, or 10.6%, 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 are 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 are effective October 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 current 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 $1.8 million in the second quarter of 2011, compared to $2.4 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 were relatively low during the second 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.

Net securities gains totaled $0.1 million during the three months ended June 30, 2011, compared to $1.4 million for the comparable period in 2010.  The second quarter 2011 net securities gains were primarily due to the sale of U.S. Treasury securities.  The second quarter 2010 net securities gains were primarily due to the sale of agency residential mortgage-backed securities.  

Mortgage loan servicing generated losses of $0.1 million and $2.0 million in the second 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 second quarters of 2011 and 2010, the Company recorded impairment charges of $0.6 million and $2.5 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.  Capitalized mortgage loan servicing rights totaled $14.7 million at June 30, 2011.  The Company was servicing approximately $1.79 billion in mortgage loans for others on which servicing rights had been capitalized at June 30, 2011.

During the second quarter of 2011, the Company recorded $0.6 million of income related to a decline in the fair value of the common stock warrant issued to the U.S. Treasury in Apr. 2010.  This warrant is included in accrued expenses and other liabilities in the Company's Consolidated Statements of Financial Condition and is recorded at fair value.  Changes in the fair value are recorded in non-interest income.

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 $31.7 million in the second quarter of 2011, as compared to $37.6 million in the year-ago period.  The decrease in non-interest expenses was primarily due to declines in compensation and employee benefits (down $0.4 million), vehicle service contract counterparty contingencies (down $3.6 million), net losses on other real estate ("ORE") and repossessed assets (down $0.8 million), FDIC deposit insurance (down $1.1 million) and credit card and bank service fees (down $0.5 million).  These decreases were partially offset by an increase in loan and collection expenses (up $0.8 million).  The overall decline in non-interest expenses principally reflects the Company's ongoing efforts to reduce operating and credit related costs.

Pre-Tax, Pre-Provision Core Operating Earnings

The Company is presenting pre-tax, pre-provision core operating earnings in this release for purposes of additional analysis of operating results.  Pre-tax, pre-provision core operating earnings, as defined by management, represents the Company's income (loss) excluding:  income tax expense (benefit), the provision for loan losses, costs (recoveries) related to unfunded lending commitments, securities gains or losses, vehicle service contract counterparty contingencies, any impairment charges or recoveries (including capitalized mortgage loan servicing rights, goodwill and losses on ORE or repossessed assets) and elevated loan and  collection costs caused by the current economic cycle.

The following table reconciles the consolidated net income (loss) presented in accordance with U.S. generally accepted accounting principles ("GAAP") to pre-tax, pre-provision core operating earnings.   Pre-tax, pre-provision core operating earnings is not a measurement of the Company's financial performance under GAAP and should not be considered as an alternative to net income (loss) under GAAP.  Pre-tax, pre-provision core operating earnings has limitations as an analytical tool and should not be considered in isolation or as a substitute for an analysis of the Company's results as reported under GAAP.  However, the Company believes presenting pre-tax, pre-provision core operating earnings provides investors with the ability to gain a further understanding of its underlying operating trends separate from the direct effects of any impairment charges, credit issues, certain fair value adjustments, securities gains or losses, and challenges inherent in the real estate downturn and other economic cycle issues.  It displays core operating earnings trends before the impact of these challenges.  The Asset Quality section of this release isolates the challenges and issues related to the credit quality of the Company's loan portfolio and the impact on its results as reflected in the provision for loan losses.

The decline in the Company's pre-tax, pre-provision core operating earnings in 2011 as compared 2010 is principally due to a decrease in net interest income as described above.

Asset Quality

Commenting on asset quality, CEO Magee added:  "Our provision for loan losses decreased by $8.3 million, or 65.5%, in the second 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 36% over the past year.  In addition, thirty- to eighty-nine day delinquency rates at June 30, 2011 declined to 1.01% for commercial loans and 1.55% 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:

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 half 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 ten 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 in many parts of Michigan.  Retail non-performing loans have declined for eight consecutive quarters and are at their lowest level since early 2008.  Other real estate and repossessed assets totaled $37.6 million at June 30, 2011, compared to $39.4 million at Dec. 31, 2010, and $41.8 million at June 30, 2010.  

The provision for loan losses was $4.4 million and $12.7 million in the second 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 $9.4 million (2.21% annualized of average loans) in the second quarter of 2011, compared to $13.2 million (2.52% annualized of average loans) in the second quarter of 2010 and $12.9 million (2.93% annualized of average loans) in the first quarter of 2011.  The decline in second 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 $22.3 million (2.58% annualized of average loans) and $35.8 million (3.33% annualized of average loans) for the first six months of 2011 and 2010, respectively.  At June 30, 2011, the allowance for loan losses totaled $61.1 million, or 3.65% 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 June 30, 2011, a decrease of $217.6 million, or 8.6%, from Dec. 31, 2010.  Loans, excluding loans held for sale, were $1.68 billion at June 30, 2011, compared to $1.81 billion at Dec. 31, 2010.  Deposits totaled $2.06 billion at June 30, 2011, a decrease of $187.2 million from Dec. 31, 2010.  The decline in deposits is almost entirely due to a planned reduction of brokered time deposits.

Cash and cash equivalents totaled $320.8 million at June 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 half of 2011.

Stockholders' equity totaled $114.4 million at June 30, 2011, or 4.94% of total assets.  The Company's wholly owned subsidiary, Independent Bank, remains "well capitalized" for regulatory purposes with the following ratios:

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, business segments and subsidiaries, and estimates of credit quality trends. Such statements reflect the view of Independent Bank Corporation's management as of this date with respect to future events and are not guarantees of future performance, involve assumptions and are subject to substantial risks and uncertainties, such as the changes in Independent Bank Corporation's plans, objectives, expectations and intentions. Should one or more of these risks materialize or should underlying beliefs or assumptions prove incorrect, the Company's actual results could differ materially from those discussed. Factors that could cause or contribute to such differences 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.

SOURCE Independent Bank Corporation

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