Independent Bank Corporation
3rd Quarter 2007 Earnings Conference Call — October 30, 2007
Overview of 3rd Quarter 2007 Results
Michael M. Magee, President and Chief Executive Officer
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Safe Harbor Statement
This presentation may contain certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include expressions such as “expects,” “intends,” “believes” and “should” which are necessarily statements of belief as to expected outcomes of future events. Actual results could materially differ from those contained in, or implied by such statements. Independent Bank Corporation undertakes no obligation to release revisions to these forward-looking statements or reflect events or circumstances after the date of this presentation.
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Financial Overview
3Q07 | 2Q07 | 3Q06 | 9M'07 | 9M'06 | |||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Income from continuing | |||||||||||||||||||||||
operations (millions) | $ | 3.7 | $ | 0.1 | $ | 9.4 | $ | 7.7 | $ | 32.9 | |||||||||||||
EPS - continuing operations | $ | 0.16 | $ | 0.00 | $ | 0.40 | $ | 0.34 | $ | 1.41 | |||||||||||||
ROA - continuing operations | 0.45% | 0.01% | 1.09% | 0.31% | 1.29% | ||||||||||||||||||
ROE - continuing operations | 5.93% | 0.17% | 14.33% | 4.05% | 17.26% | ||||||||||||||||||
Total assets (billions) at | |||||||||||||||||||||||
period end | $3.26 | $3.26 | $3.47 | ||||||||||||||||||||
Stockholders' equity | |||||||||||||||||||||||
(millions) at period end | $244.4 | $244.0 | $260.4 | ||||||||||||||||||||
Common shares | |||||||||||||||||||||||
outstanding (millions) | |||||||||||||||||||||||
at period end | 22.65 | 22.64 | 22.85 |
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3Q:07 — High-Level Overview
• | Strategic Achievements |
– | Completed charter consolidation | |
– | Ongoing efforts to improve expense management underway | |
– | Returning to our community banking roots | |
– | Continued to build a brand presence in existing markets | |
– | Efforts to improve credit quality remain a top priority- focused on loan monitoring + portfolio management function |
• | Operational Achievements |
– | Net Interest Margin: Increased on a Y/Y and Q/Q basis | |
– | Continued strength in several categories of non-interest income |
• | Strategic challenges |
– | Michigan economy remains weak | |
– | Residential + commercial real estate markets value impacted by slowing demand, inventory build |
• | Operational challenges |
– | Asset quality and related increase in non-performing loans |
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Economic Headwinds Persist
• | U.S. economy facing near-term challenges. |
– | Housing recession? U.S. housing starts hit a 14-year low in October 2007 | |
– | Higher energy prices and depreciation of residential real estate assets may impact consumer spending, a key component of GDP | |
– | Consumer reliance on revolving credit could be impacted by tighter credit environment |
• | Michigan economy remains one of the weakest in U.S. |
– | Decline of manufacturing industry, particularly in Eastern MI | |
– | Job growth remains stagnant | |
– | Depreciation of both commercial and residential property values | |
– | Unfavorable business taxes and stringent labor laws |
• | Impact to the regional banking industry.Slowing loan growth, weaker credit quality, increased credit costs; net interest margin pressure; competition in the regional banking market remains stiff |
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Bank Charter Consolidation
• | Charter consolidation completed. On September 15, 2007 we completed the consolidation of our four bank charters. |
• | Regulatory status change. Independent Bank became a Federal Reserve Bank member (previously our four banks were “non-member” state chartered banks). |
• | Net impact to IBCP associates. Excluding employees added with the TCF branch acquisition, at September 30, 2007 the total number of employees was down 163 (nearly 11%) since year-end 2006. This reduced number of employees includes about 40 fewer at Mepco due to sale of insurance premium finance business and 11 fewer at First Home Financial as this business was dissolved at the end of the second quarter. |
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Charter Consolidation — Expected Benefits
• | Streamlined operations and legal governance structure |
• | Stronger risk management processes |
• | More rapid development and deployment of new products and services |
• | Improved productivity and resource utilization leading to $4-$5 million in estimated annual cost savings |
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3rd Quarter 2007 Financial Review
Robert N. Shuster, Executive Vice President and CFO
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3rd Quarter 2007 Recap
• | Positive Factors |
– | Net interest margin increased on a quarter-over-quarter and year-over-year basis | |
– | 50 bps cut in the federal funds rate expected to have a modest positive impact on our future net interest margin | |
– | Balance sheet structured to benefit from further cuts in short-term rates and/or a steeper yield curve | |
– | Cost reduction initiatives led to 4.8% sequential quarterly decline in total non-interest expenses |
• | Challenges |
– | Credit costs | |
– | Asset quality diminished by an increase in non-performing loans; largely attributable to non-performing commercial loans and real estate mortgage loans | |
– | Weak Michigan economy |
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Tax Equivalent Net Interest Margin
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TE Net Interest Income
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Non-Interest Income
Category ($ in 000's) | 3Q07 | 2Q07 | 3Q06 | ||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
Total non-interest income | 12,529 | 12,773 | 10,721 | ||||||||
Service charges - deposits | 6,565 | 6,380 | 5,285 | ||||||||
VISA check card income | 1,287 | 1,292 | 870 | ||||||||
Net gains - mortgage loan sales | 1,094 | 1,238 | 1,115 | ||||||||
Mortgage loan servicing fees | 633 | 712 | 561 | ||||||||
Mutual fund and annuity commissions | 517 | 467 | 324 |
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Non-Interest Expense
Category ($ in 000's) | 3Q07 | 2Q07 | 3Q06 | ||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
Total non-interest expense | 28,372 | 29,801 | 23,350 | ||||||||
Salaries(a) | 9,771 | 10,776 | 9,483 | ||||||||
Performance-based compensation | 1,287 | 1,153 | (140 | ) | |||||||
Amortization of intangible assets | 934 | 935 | 600 | ||||||||
Loan and collection | 1,285 | 1,221 | 909 |
(a) The third and second quarters of 2007 include $0.17 million and $0.95 million, respectively, of severance expense.
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Provision for Loan Losses
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Asset Quality Measures — Non-Performing Loans
Non-performing loans by loan type ($ in 000's) | 9/30/07 | 6/30/07 | 12/31/06 | ||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
Commercial (a) | 52,003 | 32,697 | 21,624 | ||||||||
Mortgage | 21,354 | 18,346 | 12,954 | ||||||||
Consumer | 3,112 | 2,683 | 2,496 | ||||||||
Finance receivables* | 2,741 | 1,164 | 2,148 | ||||||||
Total | $ | 79,210 | $ | 54,890 | $ | 39,222 | |||||
As a % of total loans | 3.15 | % | 2.20 | % | 1.58 | % | |||||
(a) The 9/30/07 balance includes one relationship (consisting of three loans) totaling $8.4 million that was brought current on 10/5/07. | *Excludes discontinued operations |
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Allowance for Loan Losses
Allocation ($ in 000's) | 9/30/07 | 6/30/07 | 12/31/06 | ||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
Specific loan allocations | 10,426 | 9,070 | 2,631 | ||||||||
Adversely rated loans | 13,321 | 10,905 | 9,303 | ||||||||
Historical losses | 9,946 | 10,089 | 7,482 | ||||||||
Other factors/subjective | 8,634 | 8,149 | 7,463 | ||||||||
Total | $ | 42,327 | $ | 38,213 | $ | 26,879 | |||||
As a % of portfolio loans | 1.69 | % | 1.53 | % | 1.08 | % | |||||
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Asset Quality Measures — Net Loan Charge-Offs
Net loan charge-offs by loan type ($ in 000's) | 3Q07 | 2Q07 | 1Q07 | ||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
Commercial | 3,893 | 5,478 | 1,900 | ||||||||
Mortgage | 1,819 | 945 | 760 | ||||||||
Consumer | 922 | 917 | 1,179 | ||||||||
Finance receivables* | 14 | 24 | 121 | ||||||||
Total | $ | 6,648 | $ | 7,364 | $ | 3,960 | |||||
As a % of average loans | 1.05 | % | 1.18 | % | 0.65 | % | |||||
*Excludes discontinued operations |
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Balance Sheet Overview
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IBCP — Cash Dividend Outlook
• | We view our dividend policy on a long-term basis and are confident that our elevated credit costs will eventually subside and we will more than earn our cash dividend. |
• | Parent company liquidity is very strong, particularly following the Sept. 2007 issuance of $20 million in new trust preferred securities. |
• | Our bank subsidiary remains “well capitalized.” Further, because we anticipate modest near-term asset growth, the down streaming of additional capital is not expected to be necessary. |
• | Our Board of Directors will consider our Jan. 31, 2008 cash dividend at a regular Board meeting on Nov. 20, 2007. We fully expect to continue our 21 cents per share quarterly cash dividend. |
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3rd Quarter 2007 Credit Review
Stefanie M. Kimball, Executive Vice President and CLO
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Commercial Loans Have Declined in 2007
12/31/2003 | 12/31/2004 | 12/31/2005 | 12/31/2006 | 3/31/2007 | 6/30/2007 | 9/30/2007 | |||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
North | $ | 227,941 | $ | 270,917 | $ | 175,797 | $ | 178,542 | $ | 183,794 | $ | 181,196 | $ | 170,572 | |||||||||
West | $ | 144,555 | $ | 171,909 | $ | 304,652 | $ | 335,852 | $ | 338,084 | $ | 336,302 | $ | 332,130 | |||||||||
South | $ | 138,247 | $ | 171,047 | $ | 191,538 | $ | 211,986 | $ | 206,976 | $ | 211,730 | $ | 230,202 | |||||||||
East & Thumb | $ | 92,815 | $ | 317,378 | $ | 358,108 | $ | 357,541 | $ | 352,648 | $ | 350,541 | $ | 332,072 | |||||||||
IBC | $ | 603,558 | $ | 931,251 | $ | 1,030,095 | $ | 1,083,921 | $ | 1,081,502 | $ | 1,079,769 | $ | 1,064,976 |
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Total Internal Watch Credits Continued to Rise
in the 3rd Quarter
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30+ Delinquency on Accrual
*30+ delinquency includes an $8.4 million credit relationship brought current subsequent
to 9/30/07. Delinquency adjusted for this relationship would have been down (dotted line).
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Commercial Non-Accruals Continued to Rise
in the 3rd Quarter
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Select Commercial Real Estate Loan Segments
have Contributed Disproportionately to the
Level of Watch Credits
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Previous High Growth Markets Slowed Dramatically
Creating a Higher Percentage of Watch Credits
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Factors Impacting Current Credit Quality
• | Michigan’s economic environment continues to challenge businesses in the State, particularly those dependent upon the sale of residential real estate. |
• | Significant commercial real estate de-valuations have been experienced. |
• | Most of IBC’s commercial real estate exposure in these segments has already been placed on watch status. |
• | We have implemented industry proven and internal best practice credit processes across the regions with charter consolidation. |
• | Geographic diversification within the State mitigates the stress currently experienced in SE Michigan. |
• | Strategic initiatives to grow other segments of the commercial loan portfolio are underway, enhancing the portfolio’s industry diversification. |
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Credit Quality Best Practices in Place to Weather the “Credit Storm”
• | Quarterly Watch Process to proactively manage higher risk loans is in place. |
• | Risk Ratings are independently assigned and structure recommendations made upfront by Credit Officers. |
• | A Special Assets Group has been assembled to provide more effective management of our most troubled loans. A select group of law firms supports the team, providing professional advice and systemic feedback. |
• | Loan Review provides portfolio/individual loan feedback to evaluate the effectiveness of processes by market. |
• | Accountability is ensured with management by objectives for each Lender and Senior Lender that emphasize credit quality in addition to growth and profitability. |
• | Risk Based Pricing will be enhanced with improvements underway to our pricing model. |
• | Collateral Monitoring enhancements are being implemented for both Commercial Real Estate and C & I Lending. |
• | Portfolio Concentrations are monitored with select loan types encouraged. |
• | Leading Edge Underwriting Technology platform has been implemented with future phases planned to deliver enhanced monitoring. |
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Initiatives in Process to Enhance the Client Experience
• | Dedicated relationship managers in each market utilize a community banking approach to provide a comprehensive spectrum of banking services:“Small enough to know you, Large enough to serve you” |
• | We are implementing streamlined underwriting and loan approval processes to improve our level of efficiency in serving clients. We will further enhance these processes with our new technology. |
• | We are designing enhanced documentation processes to improve the client closing experience. |
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Q & A
Michael M. Magee, Jr.
President and Chief Executive Officer
Robert N. Shuster
Executive Vice President and
Chief Financial Officer
Stefanie M. Kimball
Executive Vice President and
Chief Lending Officer
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Thank you for participating in the conference call.