INDEPENDENT BANK CORP /MI/ - Quarter Report: 2012 June (Form 10-Q)

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Michigan		38-2032782
(State or jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification Number)

 

230 West Main Street, P.O. Box 491, Ionia, Michigan 48846

 

NONE

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, non-accelerated filer or smaller reporting company.

Large accelerated filer o

Accelerated filer o

Non-accelerated filer o

Smaller reporting company  x

 

Common stock, no par value		8,773,629
Class		Outstanding at August 9, 2012

 

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Number(s)

PART I -	Financial Information
Item 1.	Condensed Consolidated Statements of Financial Condition June 30, 2012 and December 31, 2011	3
	Condensed Consolidated Statements of OperationsThree- and Six-month periods ended June 30, 2012 and 2011	4
	Condensed Consolidated Statements of Comprehensive Income (Loss)  Three- and Six-month periods ended June 30, 2012 and 2011	5
	Condensed Consolidated Statements of Cash Flows Six-month periods ended June 30, 2012 and 2011	6
	Condensed Consolidated Statements of Shareholders' Equity Six-month periods ended June 30, 2012 and 2011	7
	Notes to Interim Condensed Consolidated Financial Statements	8-61
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	62-94
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	95
Item 4.	Controls and Procedures	95
PART II -	Other Information
Item 1A	Risk Factors	96
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	96
Item 3b.	Defaults Upon Senior Securities	96
Item 6.	Exhibits	96

 

·

our ability to successfully raise new equity capital, effect a conversion of our outstanding convertible preferred stock held by the U.S. Treasury into our common stock, and otherwise implement our capital restoration plan;

·

the failure of assumptions underlying the establishment of and provisions made to our allowance for loan losses;

·

the timing and pace of an economic recovery in Michigan and the United States in general, including regional and local real estate markets;

·

the ability of our Bank to remain well-capitalized;

·

the failure of assumptions underlying our estimate of probable incurred losses from vehicle service contract payment plan counterparty contingencies, including our assumptions regarding future cancellations of vehicle service contracts, the value to us of collateral that may be available to recover funds due from our counterparties, and our ability to enforce the contractual obligations of our counterparties to pay amounts owing to us;

·

further adverse developments in the vehicle service contract industry;

·

potential limitations on our ability to access and rely on wholesale funding sources;

·

the risk that sales of our common stock could trigger a reduction in the amount of net operating loss carryforwards that we may be able to utilize for income tax purposes;

·

the continued services of our management team, particularly as we work through our asset quality issues and the implementation of our capital restoration plan;

·

implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act or other new legislation, which may have significant effects on us and the financial services industry, the exact nature and extent of which cannot be determined at this time; and

·

the risk that our common stock may be delisted from the Nasdaq Global Select Market.

		June 30,				December 31,
		2012				2011
		(unaudited)
Assets		(In thousands, except share amounts)
Cash and due from banks		$	60,838			$	62,777
Interest bearing deposits			358,920				278,331
Cash and Cash Equivalents			419,758				341,108
Trading securities			86				77
Securities available for sale			247,047				157,444
Federal Home Loan Bank and Federal Reserve Bank stock, at cost			20,494				20,828
Loans held for sale, carried at fair value			43,386				44,801
Loans held for sale relating to branch sale, carried at lower of cost or fair value			53,180				-
Loans
Commercial			612,044				651,155
Mortgage			547,210				590,876
Installment			199,190				219,559
Payment plan receivables			98,946				115,018
Total Loans			1,457,390				1,576,608
Allowance for loan losses			(51,346	)			(58,884	)
Net Loans			1,406,044				1,517,724
Other real estate and repossessed assets			29,504				34,042
Property and equipment, net			50,802				62,548
Bank-owned life insurance			50,094				49,271
Other intangibles			7,065				7,609
Capitalized mortgage loan servicing rights			10,651				11,229
Prepaid FDIC deposit insurance assessment			11,008				12,609
Vehicle service contract counterparty receivables, net			28,879				29,298
Fixed assets held for sale relating to branch sale			8,491				-
Accrued income and other assets			16,976				18,818
Total Assets		$	2,403,465			$	2,307,406
Liabilities and Shareholders' Equity
Deposits
Non-interest bearing		$	471,718			$	497,718
Savings and interest-bearing checking			852,214				1,019,603
Retail time			392,544				526,525
Brokered time			48,860				42,279
Total Deposits			1,765,336				2,086,125
Deposits held for sale relating to branch sale			417,521				-
Other borrowings			17,929				33,387
Subordinated debentures			50,175				50,175
Vehicle service contract counterparty payables			7,118				6,633
Accrued expenses and other liabilities			32,214				28,459
Total Liabilities			2,290,293				2,204,779
Shareholders' Equity
Convertible preferred stock, no par value, 200,000 shares authorized; 74,426 shares issued and outstanding at June 30, 2012 and December 31, 2011; liquidation preference: $83,061 at  June 30, 2012 and $81,023 at December 31, 2011			82,004				79,857
Common stock, no par value, 500,000,000 shares authorized; issued and outstanding: 8,749,220 shares at June 30, 2012 and 8,491,526 shares at December 31, 2011			249,751				248,950
Accumulated deficit			(208,569	)			(214,259	)
Accumulated other comprehensive loss			(10,014	)			(11,921	)
Total Shareholders' Equity			113,172				102,627
Total Liabilities and Shareholders' Equity		$	2,403,465			$	2,307,406

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2012				2011				2012				2011
		(unaudited)
		(In thousands)
Interest Income
Interest and fees on loans		$	23,696			$	28,102			$	48,042			$	57,586
Interest on securities
Taxable			933				344				1,591				811
Tax-exempt			244				298				540				630
Other investments			382				383				778				818
Total Interest Income			25,255				29,127				50,951				59,845
Interest Expense
Deposits			2,305				4,511				4,729				9,456
Other borrowings			1,120				1,232				2,292				2,555
Total Interest Expense			3,425				5,743				7,021				12,011
Net Interest Income			21,830				23,384				43,930				47,834
Provision for loan losses			1,056				4,156				6,187				14,858
Net Interest Income After Provision for Loan Losses			20,774				19,228				37,743				32,976
Non-interest Income
Service charges on deposit accounts			4,552				4,784				8,753				9,066
Interchange income			2,407				2,308				4,729				4,476
Net gains (losses) on assets
Mortgage loans			3,579				1,793				7,439				3,728
Securities			169				115				853				328
Other than temporary impairment loss on securities
Total impairment loss			(85	)			327				(262	)			(142	)
Loss recognized in other comprehensive loss			-				(327	)			-				-
Net impairment loss recognized in earnings			(85	)			-				(262	)			(142	)
Mortgage loan servicing			(1,088	)			(126	)			(352	)			770
Title insurance fees			489				318				997				791
(Increase) decrease in fair value of U.S. Treasury warrant			(25	)			642				(179	)			996
Other			3,044				2,622				5,648				5,154
Total Non-interest Income			13,042				12,456				27,626				25,167
Non-interest Expense
Compensation and employee benefits			13,506				13,029				25,988				25,378
Loan and collection			2,407				3,580				5,297				7,447
Occupancy, net			2,490				2,663				5,206				5,764
Data processing			2,450				2,415				4,789				4,725
Furniture, fixtures and equipment			1,307				1,502				2,601				2,920
Legal and professional			1,268				801				2,165				1,579
Communications			826				889				1,701				1,837
FDIC deposit insurance			816				652				1,673				1,887
Net losses on other real estate and repossessed assets			633				777				1,620				2,183
Credit card and bank service fees			624				1,013				1,275				2,060
Advertising			639				670				1,195				1,224
Vehicle service contract counterparty contingencies			326				1,311				797				3,657
Provision for loss reimbursement on sold loans			126				363				558				769
Costs (recoveries) related to unfunded lending commitments			(12	)			89				(59	)			184
Other			2,077				2,151				2,726				4,159
Total Non-interest Expense			29,483				31,905				57,532				65,773
Income (Loss) Before Income Tax			4,333				(221	)			7,837				(7,630	)
Income tax benefit			-				(258	)			-				(266	)
Net Income (Loss)		$	4,333			$	37			$	7,837			$	(7,364	)
Convertible preferred stock dividends and discount accretion			1,092				1,051				2,148				2,059
Net Income (Loss) Applicable to Common Stock		$	3,241			$	(1,014	)			5,689			$	(9,423	)
Net Income (Loss) Per Common Share
Basic		$	.38			$	(.12	)		$	.66			$	(1.16	)
Diluted			.11				(.12	)			.19				(1.16	)
Dividends Per Common Share
Declared		$	.00			$	.00			$	.00			$	.00
Paid			.00				.00				.00				.00

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2012				2011				2012				2011
		(unaudited)								(unaudited)
		(In thousands)								(In thousands)
Net income (loss)		$	4,333			$	37			$	7,837			$	(7,364	)
Other comprehensive income (loss), before tax
Unrealized losses on available for sale securities
Unrealized gain (loss) arising during period			2,756				394				1,896				715
Change in unrealized losses for which a portion of other than temporary impairment has been recognized in earnings			204				738				333				411
Reclassification adjustments for (gains) losses included in earnings			(151	)			(64	)			(843	)			(204	)
Unrealized losses on available for sale securities, net			2,809				1,068				1,386				922
Unrealized losses on derivative instruments
Unrealized loss arising during period			(24	)			(240	)			(75	)			(263	)
Reclassification adjustment for expense recognized in earnings			120				201				305				403
Reclassfication adjustment for accretion on settled derivatives			146				147				291				369
Unrealized gains on derivative instruments			242				108				521				509
Other comprehensive income (loss), before tax			3,051				1,176				1,907				1,431
Income tax expense related to components of other comprehesive   income (loss)			-				501				-				501
Other comprehensive income			3,051				675				1,907				930
Comprehensive income (loss)		$	7,384			$	712			$	9,744			$	(6,434	)

		Six months ended June 30,
		2012				2011
		(unaudited - In thousands)
Net Income (Loss)		$	7,837			$	(7,364	)
Adjustments to Reconcile Net Income (Loss) to Net Cash from Operating Activities
Proceeds from sales of loans held for sale			246,587				187,558
Disbursements for loans held for sale			(237,733	)			(160,040	)
Provision for loan losses			6,187				14,858
Deferred loan fees			(404	)			(214	)
Depreciation, amortization of intangible assets and premiums and accretion of discounts on securities and loans			(2,351	)			(6,442	)
Net gains on sales of mortgage loans			(7,439	)			(3,728	)
Net gains on securities			(853	)			(328	)
Securities impairment recognized in earnings			262				142
Net losses on other real estate and repossessed assets			1,620				2,183
Vehicle service contract counterparty contingencies			797				3,657
Share based compensation			304				455
Decrease in accrued income and other assets			3,288				4,346
Increase in accrued expenses and other liabilities			4,262				2,632
Total Adjustments			14,527				45,079
Net Cash from Operating Activities			22,364				37,715
Cash Flow from (used in) Investing Activities
Proceeds from the sale of securities available for sale			18,999				70,322
Proceeds from the maturity or call of securities available for sale			60,728				295
Principal payments received on securities available for sale			11,220				3,872
Purchases of securities available for sale			(179,262	)			(83,906	)
Redemption of Federal Home Loan Bank stock			-				2,397
Redemption of Federal Reserve Bank stock			334				228
Net decrease in portfolio loans (loans originated, net of principal payments)			53,220				108,369
Proceeds from the collection of vehicle service contract counterparty receivables			396				671
Proceeds from the sale of other real estate and repossessed assets			8,912				10,084
Capital expenditures			(3,257	)			(1,554	)
Net Cash from (used in) Investing Activities			(28,710	)			110,778
Cash Flow from (used in) Financing Activities
Net increase (decrease) in total deposits			99,472				(187,153	)
Net increase (decrease) in other borrowings			9				(8	)
Proceeds from Federal Home Loan Bank advances			12,000				7,000
Payments of Federal Home Loan Bank advances			(27,467	)			(37,115	)
Net increase in vehicle service contract counterparty payables			485				2,858
Proceeds from issuance of common stock			497				1,335
Net Cash from (used in) Financing Activities			84,996				(213,083	)
Net Increase (Decrease) in Cash and Cash Equivalents			78,650				(64,590	)
Cash and Cash Equivalents at Beginning of Period			341,108				385,374
Cash and Cash Equivalents at End of Period		$	419,758			$	320,784
Cash paid during the period for
Interest		$	5,914			$	11,361
Income taxes			186				26
Transfers to other real estate and repossessed assets			5,994				10,462
Transfer of payment plan receivables to vehicle service contract counterparty receivables			849				8,010
Transfers to loans held for sale			54,127				-
Transfers to fixed assets held for sale			11,065				-
Transfers to deposits held for sale			420,261				-

 

		Six months ended
		June 30,
		2012				2011
		(unaudited)
		(In thousands)
Balance at beginning of period		$	102,627			$	119,085
Net income (loss)			7,837				(7,364	)
Issuance of common stock			497				1,335
Share based compensation			304				455
Net change in accumulated other comprehensive loss, net of related tax effect			1,907				930
Balance at end of period		$	113,172			$	114,441

See notes to interim condensed consolidated financial statements (unaudited)

		Amortized				Unrealized
		Cost				Gains				Losses				Fair Value
		(In thousands)
June 30, 2012
U.S. agency		$	38,039			$	124			$	20			$	38,143
U.S. agency residential mortgage-backed			156,231				994				61				157,164
Private label residential mortgage-backed			9,887				-				2,208				7,679
Obligations of states and political subdivisions			40,383				643				62				40,964
Trust preferred			4,700				-				1,603				3,097
Total		$	249,240			$	1,761			$	3,954			$	247,047
December 31, 2011
U.S. agency		$	24,980			$	58			$	21			$	25,017
U.S. agency residential mortgage-backed			93,415				1,007				216				94,206
Private label residential mortgage-backed			11,066				-				2,798				8,268
Obligations of states and political subdivisions			26,865				510				58				27,317
Trust preferred			4,697				-				2,061				2,636
Total		$	161,023			$	1,575			$	5,154			$	157,444

 

		Less Than Twelve Months								Twelve Months or More								Total
						Unrealized								Unrealized								Unrealized
		Fair Value				Losses				Fair Value				Losses				Fair Value				Losses
		(In thousands)
June 30, 2012
U.S. agency		$	7,507			$	20			$	-			$	-			$	7,507			$	20
U.S. agency residential mortgage-backed			30,497				44				10,097				17				40,594				61
Private label residential mortgage-backed			-				-				7,677				2,208				7,677				2,208
Obligations of states and political subdivisions			8,202				62				-				-				8,202				62
Trust preferred			-				-				3,097				1,603				3,097				1,603
Total		$	46,206			$	126			$	20,871			$	3,828			$	67,077			$	3,954
December 31, 2011
U.S. agency		$	9,974			$	21			$	-			$	-			$	9,974			$	21
U.S. agency residential mortgage-backed			42,500				216				-				-				42,500				216
Private label residential mortgage-backed			163				90				8,102				2,708				8,265				2,798
Obligations of states and political subdivisions			-				-				1,729				58				1,729				58
Trust preferred			591				1,218				2,045				843				2,636				2,061
Total		$	53,228			$	1,545			$	11,876			$	3,609			$	65,104			$	5,154

		June 30, 2012								December 31, 2011
						Net								Net
		Fair				Unrealized				Fair				Unrealized
		Value				Gain (Loss)				Value				Gain (Loss)
		(In thousands)
Private label residential mortgage-backed
Jumbo		$	5,738			$	(1,602	)		$	6,454			$	(1,937	)
Alt-A			1,941				(606	)			1,814				(861	)

		June 30, 2012								December 31, 2011
						Net								Net
		Fair				Unrealized				Fair				Unrealized
		Value				Gain (Loss)				Value				Gain (Loss)
		(In thousands)
Trust preferred securities
Rated issues		$	1,564			$	(329	)		$	1,405			$	(484	)
Unrated issues - no OTTI			1,533				(1,274	)			1,231				(1,577	)