Independent Bank Corporation — 2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011; filed March 13, 2012. The company is a Michigan bank holding company whose principal subsidiary, Independent Bank, operates primarily in Michigan. The filing incorporates its financial statements and MD&A by reference to Exhibit 13; the supplied filing text does not include those details.
Financial performance and condition
- Profitability: The company reported a net loss. Loss from continuing operations applicable to common stock equaled 1.02% of average assets and 68.44% of average common equity. The absolute consolidated net loss is not clear from the supplied text.
- Credit costs and asset quality: The 2011 provision for loan losses was $27.9 million; net charge-offs were $37.0 million, or 2.16% of average loans. The allowance was $58.9 million, equal to 3.63% of loans. Nonaccrual loans were $59.3 million; loans 90 days or more past due, excluding nonaccruals, were $0.6 million; and troubled debt restructurings not included in those categories were $116.6 million.
- Balance sheet and lending: Total loans, including loans held for sale, were $1.621 billion at year-end, down from $1.863 billion in 2010. The bank reported $1.577 billion of loans excluding loans held for sale and $2.086 billion of deposits.
- Deposits and funding: Average deposits were $2.131 billion, down from $2.417 billion in 2010; the average rate paid fell to 0.72% from 1.17%. Wholesale funding was approximately $75.7 million, or 3.6% of total funding. Uninsured deposits were $123.1 million; brokered deposits were $42.3 million, of which $30.6 million matured within 12 months.
- Capital: The bank’s total capital-to-risk-weighted-assets ratio was 11.41%, above its board target of 11%. Its Tier 1 leverage ratio was 6.77%, below its board target of 8%. Both ratios exceeded federal “well-capitalized” thresholds, but the company met only one of its two board-set targets.
- Other material figures: Mepco reported a $4.8 million net loss. Net deferred tax assets were approximately $75.2 million and fully valuation-allowed. Trust preferred securities included in Tier 1 capital totaled $38.2 million. Cash-flow totals, consolidated debt totals, revenue, net interest income, and net interest margin are not clearly provided in the supplied text.
Material changes versus the prior comparable period
- Total loans fell approximately 13% from year-end 2010; payment plan receivables fell from $201.3 million to $115.0 million as Mepco’s business was scaled back.
- Net charge-offs declined to $37.0 million from $60.6 million in 2010, and the provision for loan losses declined to $27.9 million from $46.8 million. Nonaccrual loans also fell from $66.7 million to $59.3 million, while troubled debt restructurings increased from $113.8 million to $116.6 million.
- Average deposits declined, while their average cost decreased. Deposit insurance expense fell to $3.5 million from $6.8 million.
- Mepco’s vehicle-service-contract counterparty contingencies expense declined to $11.0 million from $18.6 million; the related net receivable balance fell to $29.3 million from $37.3 million.
Outlook, risks, contingencies, and unusual items
- Management’s referenced projections anticipated that the bank could remain well-capitalized, achieve the remaining Capital Plan target, and return to profitability in 2012. These are forward-looking expectations, not guarantees; the filing text does not provide the underlying forecast figures.
- The company had not completed the Capital Plan’s planned cash equity offering and was reconsidering its size and timing, including whether a smaller raise could preserve tax attributes. A conversion of Treasury-held Series B preferred stock and any capital raise could substantially dilute common shareholders. The preferred stock represented $74.4 million of liquidation value; accrued unpaid dividends were approximately $6.6 million.
- In October 2011, the company and bank entered an MOU with the Federal Reserve and Michigan regulator requiring, among other things, a revised capital plan and enhanced asset and risk reporting. The company stated it believed it had met the MOU requirements.
- Common and preferred dividends were suspended, and interest on subordinated debentures was being deferred. The filing reports $11.0 million of accrued unpaid dividends on trust preferred securities and Series B preferred stock. The right to defer subordinated-debt interest was expected to expire in late 2014.
- Mepco’s counterparties may fail to meet refund obligations; receivables are often unsecured or incompletely secured, and the company faced related litigation and collection uncertainty. Actual losses could exceed recorded estimates.
- Other principal risks include continued weakness in Michigan’s economy and real estate markets, loan losses and allowance-estimation risk, liquidity and wholesale-funding access, interest-rate exposure, regulatory requirements, and potential dilution or limitations on tax-loss carryforwards. Ordinary-course litigation accruals were described as immaterial, but additional losses were possible and not estimable.
Important facts for investors to verify
- Review Exhibit 13 for complete 2011 income statements, balance sheets, cash flows, net interest margin, liquidity details, and management’s explanations of year-over-year results.
- Confirm the capital plan’s status, the shortfall against the 8% Tier 1 leverage target, and the timing, terms, and dilution of any capital raise or Treasury conversion.
- Assess loan quality, including the size and performance of troubled debt restructurings, collateral values, charge-offs, and allowance adequacy.
- Evaluate Mepco counterparty recoveries, litigation, collateral, and the assumptions underlying contingency reserves.
- Monitor deposit stability, near-term brokered-deposit maturities, wholesale funding availability, and the company’s ability to meet obligations during 2012.