Independent Bank Corporation — Q1 2012 Form 10-Q
Business context and period. Michigan-based bank holding company reporting the three months ended March 31, 2012, compared with Q1 2011. Operations include Independent Bank and Mepco, a vehicle service contract payment-plan business. Unless noted, amounts below are in millions of dollars.
Financial performance and position
| Metric | Q1 2012 / March 31, 2012 | Comparable / prior date |
|---|---|---|
| Net interest income | $22.1 | $24.5 in Q1 2011 |
| Net interest margin | 4.14% | 4.34% in Q1 2011 |
| Provision for loan losses | $5.1 | $10.7 in Q1 2011 |
| Non-interest income | $14.6 | $12.7 in Q1 2011 |
| Non-interest expense | $28.0 | $33.9 in Q1 2011 |
| Net income (loss) | $3.5; $2.4 applicable to common stock | $(7.4); $(8.4) applicable to common stock in Q1 2011 |
| Basic / diluted EPS | $0.29 / $0.07 | $(1.06) / $(1.06) in Q1 2011 |
| Operating cash flow | $13.3 | $34.8 in Q1 2011 |
| Cash and cash equivalents | $352.8 | $341.1 at December 31, 2011 |
| Total assets | $2,419.3 | $2,307.4 at December 31, 2011 |
| Portfolio loans, net of allowance | $1,478.7 | $1,517.7 at December 31, 2011 |
| Deposits | $2,184.3 | $2,086.1 at December 31, 2011 |
| Other borrowings / subordinated debentures | $33.0 / $50.2 | $33.4 / $50.2 at December 31, 2011 |
| Shareholders’ equity / tangible common equity | $105.0 / $16.8; TCE to tangible assets 0.70% | $102.6 / $15.2; 0.66% at December 31, 2011 |
Material changes versus comparable periods
- Return to quarterly profitability reflected higher non-interest income and lower loan-loss provision and non-interest expenses, partly offset by lower net interest income.
- Net interest income fell 9.6%; average interest-earning assets declined $131.5 million and net interest margin contracted 20 basis points. Management cited a shift from higher-yielding loans toward lower-yielding cash and securities.
- Non-performing loans declined to $51.7 million from $59.9 million at year-end; non-performing assets fell to $82.7 million from $93.9 million. The allowance was $56.0 million, or 3.65% of portfolio loans, versus $58.9 million, or 3.73%.
- Cash flow from investing was $(99.6) million, mainly reflecting $150.6 million of securities purchases; financing provided $98.0 million, including $98.2 million of deposit growth. Cash increased $11.7 million during the quarter.
- Mortgage-loan sale gains rose to $3.9 million from $1.9 million. Counterparty-contingency expense at Mepco declined to $0.5 million from $2.3 million.
Outlook, capital, risks and unusual items
- Management forecast a return to profitability in 2012 and expected the Bank to remain federally “well-capitalized,” relying partly on further asset reduction and lower credit costs. This is a forecast, not guaranteed guidance; management noted meaningful sensitivity to economic conditions and credit losses.
- The Bank’s March 31 capital ratios were 11.81% total capital to risk-weighted assets and 6.84% Tier 1 capital to average assets. It met federal well-capitalized thresholds, but the latter remained below the Board’s 8.00% Capital Plan target. Regulators had accepted the plan subject to execution of strategies and achievement of the target.
- The company and Bank were subject to a regulatory Memorandum of Understanding, capital-plan requirements, restrictions on dividends and certain transactions, and enhanced monitoring. Potential responses if capital targets are missed include further asset sales, cost reductions, or a sale of the Bank.
- Mepco had $28.9 million of net vehicle-service-contract counterparty receivables and was pursuing collections, including litigation and collateral recovery. Recovery estimates depend on cancellations, collateral values, and counterparties’ ability and willingness to pay; actual losses could exceed reserves.
- Liquidity included $299.2 million of interest-bearing deposits. Wholesale funding was approximately $79.0 million, including $46.0 million of brokered CDs; access to wholesale funding and retention of deposits remain risks. Management expected available liquidity to cover near-term brokered-CD maturities.
- Preferred dividends and interest on subordinated debentures/trust preferred securities were being deferred; common dividends were suspended. The filing reports $7.6 million of accrued and unpaid preferred dividends in the financial-statement note, while the defaults section reports $7.1 million in arrears.
- Q1 net income included $3.9 million of mortgage-sale gains, $0.7 million of securities gains, and a $0.2 million securities impairment charge. The filing also reports a $0.2 million adverse warrant fair-value change. Diluted EPS of $0.07 differs from basic EPS of $0.29 because of the diluted-share calculation involving convertible preferred stock.
- Michigan’s economic and real-estate conditions, loan-loss estimates, mortgage servicing rights, vehicle-service-contract counterparties, regulatory capital, wholesale funding, and possible dilution or tax limitations from equity issuance are key risks. No material change to the previously disclosed risk factors was reported.
Important facts for investors to verify
- Progress toward the Capital Plan’s 8.00% Tier 1 leverage target, capital-raising plans, and any regulatory developments.
- Whether lower non-performing loans and credit costs persist, including trends in troubled debt restructurings, charge-offs, and collateral values.
- Collections, litigation outcomes, and reserve adequacy for Mepco’s $28.9 million counterparty receivables.
- Deposit stability, uninsured deposit exposure, brokered-CD maturities, and continued access to wholesale funding.
- The preferred-dividend arrears difference reported in the filing, the terms and likelihood of conversion of Treasury preferred stock, and resulting potential common-share dilution.