| FOR IMMEDIATE RELEASE | CONTACT: Robert N. Shuster
Executive Vice President and
Chief Financial Officer
616/522-1765 |
INDEPENDENT BANK CORPORATION
REPORTS FIRST QUARTER 2008 RESULTS
IONIA,Mich., Apr. 24, 2008 — Independent Bank Corporation (NASDAQ: IBCP), a leading Michigan-based community bank, reported first quarter 2008 net income from continuing operations of $0.3 million, or $0.01 per diluted share, versus net income from continuing operations of $3.9 million, or $0.17 per diluted share, in the prior-year period. For the quarter ended March 31, 2008, the Company recorded net income of $0.3 million, or $0.01 per diluted share, compared to net income of $4.2 million, or $0.18 per diluted share, in the first quarter of 2007.
Return on average equity and return on average assets (based on net income from continuing operations) were 0.56% and 0.04%, respectively, in the first quarter of 2008, compared to 6.08% and 0.48%, respectively, in the first quarter of 2007.
The year-on-year decline in first quarter 2008 income from continuing operations was primarily attributable to a $3.2 million ($0.09 per diluted share after tax) increase in the provision for loan losses, a $2.2 million ($0.06 per diluted share after tax) negative fair value adjustment on certain preferred securities, and a $0.7 million ($0.02 per diluted share after tax) impairment charge on capitalized mortgage loan servicing rights. These items were partially offset by a $0.8 million ($0.02 per diluted share after tax) increase on net gains on mortgage loans, a $0.5 million ($0.01 per diluted share after tax) benefit related to the Visa, Inc. initial public offering (Visa IPO) as described below and a $1.6 million ($0.07 per diluted share) reduction in our federal income taxes due to the release of a previously established tax reserve resulting from a favorable development on the treatment of a particular tax position.
Michael M. Magee, President and CEO of Independent Bank Corporation, commented: “Our first quarter results were primarily impacted by an increase in the loan loss provision and loan and collection expenses when compared to the year ago period, as several commercial real estate loans shifted from watch credit to non-performing status, generally a product of soft residential real estate values in various regions of Michigan. Despite these issues, we remained profitable during the first quarter, increased our net interest margin and continued to grow some categories of non-interest income.”
Operating Results
The Company’s tax equivalent net interest income totaled $31.8 million during the first quarter of 2008, an increase of $0.6 million or 1.8% from the year-ago period, and an increase of $0.3 million, or 0.8% from the fourth quarter of 2007. The Company’s tax equivalent net interest income as a percent of average interest-earning assets (the “net interest margin”) was 4.30% during the first quarter of 2008 compared to 4.23% in the year ago period, and 4.22% in the fourth quarter of 2007. As noted in the Company’s fourth quarter 2007 earnings release, based on current conditions, declining short-term interest rates were expected to have a beneficial impact on the future net interest margin. While some of this benefit was evident in the first quarter of 2008, the full realization of this benefit has been partially offset by the adverse impact of an increased level of non-performing assets. Interest income was reduced by $0.8 million in the first quarter of 2008 (compared to $0.3 million in the first quarter of 2007) due to the reversal of interest on loans placed on non-accrual during the quarter. Service charges on deposits totaled $5.6 million in the first quarter of 2008, a 15.5% increase from the comparable period in 2007. VISA check card interchange income increased by 44.3% to $1.4 million for the first quarter of 2008, up from $1.0 million in the first quarter of 2007. The increase in deposit-related revenues resulted primarily from customers added as a result of the acquisition of ten branches on March 23, 2007 as well as an increase in debit card usage by the Company’s customer base.
Pursuant to Statement of Financial Accounting Standards No. 159 – The Fair Value Option for Financial Assets and Financial Liabilities (“FASB 159”), the Company elected, effective January 1, 2008, to measure the majority of its preferred stock investments at fair value. As a result of this election, the Company recorded net losses on securities of $2.2 million in the first quarter of 2008. This loss represents the change in fair value of these preferred stocks between the beginning and end of the first quarter of 2008. At March 31, 2008 these preferred stocks had a total fair value of $12.9 million. This preferred stock portfolio included issues of Fannie Mae, Freddie Mac, Merrill Lynch and Goldman Sachs. Changes in the fair value of these securities will now be recorded as a component of non-interest income each quarter.
Gains on the sale of mortgage loans were $1.9 million in the first quarter of 2008 compared to $1.1 million in the year-ago quarter. The gains in the first quarter of 2008 were favorably impacted by $0.8 million related to the election, effective January 1, 2008, of fair value accounting (FASB 159) for mortgage loans held for sale and the adoption of Staff Accounting Bulletin No. 109, “Written Loan Commitments Recorded at Fair Value through Earnings,” on commitments to originate mortgage loans. Mortgage loan sales totaled $84.4 million in the first quarter of 2008 compared to $69.2 million in the first quarter of 2007. Mortgage loans originated totaled $118.2 million in the first quarter of 2008 compared to $116.8 million in the comparable quarter of 2007. The growth in mortgage loan originations is primarily due to a decline in mortgage loan interest rates leading to an increase in refinancing activity. However, this growth was substantially offset by a decline in purchase money mortgage activity due to lower home sales volumes. Loans held for sale were $33.1 million at March 31, 2008, compared to $34.0 million at December 31, 2007.
Mortgage loan servicing resulted in a loss of $0.3 million in the first quarter of 2008 versus income of $0.5 million in the year-ago period. This decline is primarily due to a $0.7 million impairment charge recorded on capitalized mortgage loan servicing rights in the first quarter of 2008 (compared to a $0.1 million impairment charge in the first quarter of 2007) as well as a $0.2 million increase in the amortization of this asset due to a rise in mortgage loan prepayment activity. At March 31, 2008, the Company was servicing approximately $1.64 billion in mortgage loans for others on which servicing rights have been capitalized.
Other non-interest income includes revenue of $0.37 million from the Company’s redemption of 8,551 shares of Visa, Inc. Class B Common Stock as part of the Visa IPO. The Company continues to hold 13,566 shares of Visa, Inc. Class B Common Stock at March 31, 2008.
Non-interest expense totaled $30.3 million in the first quarter of 2008 compared to $28.0 million in the year-ago period. Several categories of operating costs (such as occupancy, data processing and communications) increased in 2008 primarily related to the acquisition of ten branches on March 23, 2007. FDIC deposit insurance expense increased by $0.7 million in the first quarter of 2008 compared to the year-ago period reflecting higher rates and the full utilization of the Company’s assessment credits in 2007. Loan and collection expenses also rose in the first quarter of 2008 primarily due to the elevated level of non-performing loans. The first quarter of 2008 included a reversal of the $0.15 million expense previously recorded for the Company’s allocable portion of the Visa litigation settlement because of the aforementioned Visa IPO. The first quarter of 2007 included a $0.3 million goodwill impairment charge and $0.4 million of non-recurring expenses associated with the conversion of the ten branches that were acquired.
Asset Quality
The increase in non-performing loans since year-end 2007 is due principally to an increase in non-performing commercial loans. The increase in non-performing commercial loans is primarily attributable to the addition of several large credits with real estate developers becoming past due in 2008. These delinquencies largely reflect cash flow difficulties encountered by many real estate developers in Michigan as they confront a significant decline in sales of real estate. The elevated level of non-performing mortgage loans is primarily due to a rise in foreclosures reflecting both weak economic conditions and soft residential real estate values in many parts of Michigan. Other real estate and repossessed assets totaled $12.6 million at March 31, 2008, compared to $9.7 million at December 31, 2007.
The provision for loan losses was $11.3 million and $8.1 million in the first quarters of 2008 and 2007, respectively. The level of the provision for loan losses in each period reflects the Company’s 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 $6.8 million (1.07% annualized of average loans) in the first quarter of 2008, compared to $4.0 million (0.65% annualized of average loans) in the first quarter of 2007. The first quarter 2008 loan net charge-offs were divided among the following categories: commercial loans, $3.5 million; consumer, $1.1 million (including $0.1 million of deposit overdrafts); mortgage, $2.1 million; and finance receivables, $0.1 million. The commercial loan and mortgage loan net charge-offs in the first quarter of 2008 primarily reflect write-downs to expected liquidation values for real estate or other collateral securing the loans. At March 31, 2008, the allowance for loan losses totaled $49.9 million, or 1.97% of portfolio loans, compared to $45.3 million or 1.78% of portfolio loans at December 31, 2007.
Commenting on asset quality, CEO Magee stated: “As I indicated in our fourth quarter 2007 earnings release, we remain concerned about ongoing challenges within our commercial (primarily real estate development-related credits) and mortgage loan portfolios. Our elevated level of non-performing loans is closely aligned with a general slowing in the residential housing market, and the effect this slowing has had on borrowers, including several residential real estate developers who became past due on their loans in recent quarters. The rise in non-performing commercial loans during the first three months of 2008 was disappointing, however, nearly all of these loans were already in watch credit and therefore had been identified as a potential problem.”
A breakdown of non-performing loans by loan type is as follows:
| Loan Type | 3/31/2008 | | 12/31/2007 | | 3/31/2007 |
|---|
|
|
|
|
| (Dollars in Millions) |
|---|
| Commercial | | | | $72.1 | | | $49.0 | | | $27.5 | |
| Consumer | | | | 3.4 | | | 3.4 | | | 2.8 | |
| Mortgage | | | | 24.8 | | | 23.1 | | | 15.7 | |
| Finance receivables | | |
| (excludes discontinued | | |
| operations) | | | | 1.9 | | | 1.7 | | | 2.1 | |
|
|
|
|
| Total | | | | $102.2 | | | $77.2 | | | $48.1 | |
|
|
|
|
| Ratio of non-performing | | |
| loans to total portfolio | | |
| loans | | | | 4.03 | % | | 3.03 | % | | 1.93 | % |
|
|
|
|
| Ratio of the allowance for | | |
| loan losses to | | |
| non-performing loans | | | | 48.84 | % | | 58.63 | % | | 62.94 | % |
|
|
|
|
Balance Sheet
Total assets were $3.25 billion at March 31, 2008, compared to $3.28 billion at December 31, 2007. Loans, excluding loans held for sale, were $2.54 billion at March 31, 2008 compared to $2.55 billion at December 31, 2007. Deposits totaled $2.25 billion at March 31, 2008, a decrease of $253.3 million from December 31, 2007. The decrease in deposits reflects a $268.5 million decline in brokered certificates of deposits (“brokered CD’s”). During the first quarter of 2008 maturing or callable brokered CD’s were replaced with borrowings from the Federal Home Loan Bank and Federal Reserve Bank due to significantly lower comparative costs.
Stockholders’ equity totaled $238.5 million at March 31, 2008, or 7.35% of total assets, representing a net book value per share of $10.36. The Company remains “well capitalized” for regulatory purposes.
Magee concluded, “Despite the macroeconomic headwinds facing the state of Michigan, Independent Bank remains committed to the people and communities of our state, as illustrated by the 107 full service branches we operate in convenient locations throughout the region.”
“Every credit cycle provides its fair share of challenges and in the current cycle, we have taken the opportunity to enhance our portfolio and risk management functions within the bank, where appropriate. While not yet evident in our asset quality measures, we are confident that our current risk management practices and proactive oversight of problem loans will lead to lower credit costs and a decline in non-performing assets in the future.”
Conference Call
Michael M. Magee, President and Chief Executive Officer, Robert N. Shuster, Chief Financial Officer and Stefanie M. Kimball, Chief Lending Officer, will review first quarter 2008 results in a conference call for investors and analysts beginning at 10:00 a.m. ET on Friday, April 25, 2008.
To participate in the live conference call, please dial 1-800-860-2442. The call can also be accessed (listen-only mode) via the Company’s website atwww.ibcp.com in the “Investor Relations” section. A playback of the call can be accessed by dialing 1-877-344-7529 (Replay Passcode # 417873). The replay will be available through May 2, 2008.
In addition, a Power Point presentation associated with the first quarter 2008 conference call will be available on the Company’s website atwww.ibcp.com in the “Investor Relations” section under the “Presentations” tab beginning on Friday, April 25, 2008.
About Independent Bank Corporation
Independent Bank Corporation (NASDAQ: IBCP) is a Michigan-based bank holding company with total assets of over $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. Payment plans to purchase vehicle service contracts are also available through Mepco Finance Corporation, a wholly owned subsidiary of Independent Bank. 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 our website at:www.ibcp.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 or past 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 are 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.
INDEPENDENT BANK CORPORATION AND SUBSIDIARIES
Consolidated Statements of Financial Condition
| March 31,
2008 | | December 31,
2007 |
|---|
|
| |
| |
| (unaudited) |
|---|
|
| |
| Assets | (in thousands) |
|---|
| Cash and due from banks | | | $ | 58,210 | | $ | 79,289 | |
| Securities available for sale | | | | 358,333 | | | 364,194 | |
| Federal Home Loan Bank and Federal Reserve Bank stock, at cost | | | | 26,352 | | | 21,839 | |
| Loans held for sale | | | | 33,056 | | | 33,960 | |
| Loans | | |
| Commercial | | | | 1,060,290 | | | 1,066,276 | |
| Mortgage | | | | 866,229 | | | 873,945 | |
| Installment | | | | 363,743 | | | 368,478 | |
| Finance receivables | | | | 248,085 | | | 238,197 | |
|
| |
| |
| Total Loans | | | | 2,538,347 | | | 2,546,896 | |
| Allowance for loan losses | | | | (49,911 | ) | | (45,294 | ) |
|
| |
| |
| Net Loans | | | | 2,488,436 | | | 2,501,602 | |
| Property and equipment, net | | | | 73,343 | | | 73,558 | |
| Bank owned life insurance | | | | 43,413 | | | 42,934 | |
| Goodwill | | | | 66,754 | | | 66,754 | |
| Other intangibles | | | | 14,469 | | | 15,262 | |
| Capitalized mortgage loan servicing rights | | | | 15,297 | | | 15,780 | |
| Accrued income and other assets | | | | 69,748 | | | 60,910 | |
|
| |
| |
| Total Assets | | | $ | 3,247,411 | | $ | 3,276,082 | |
|
| |
| |
| Liabilities and Shareholders' Equity | | |
| Deposits | | |
| Non-interest bearing | | | $ | 291,000 | | $ | 294,332 | |
| Savings and NOW | | | | 1,005,040 | | | 987,299 | |
| Retail time | | | | 708,156 | | | 707,419 | |
| Brokered time | | | | 247,603 | | | 516,077 | |
|
| |
| |
| Total Deposits | | | | 2,251,799 | | | 2,505,127 | |
| Federal funds purchased | | | | 45,831 | | | 54,452 | |
| Other borrowings | | | | 543,180 | | | 302,539 | |
| Subordinated debentures | | | | 92,888 | | | 92,888 | |
| Financed premiums payable | | | | 42,145 | | | 44,911 | |
| Liabilities of discontinued operations | | | | | | | 34 | |
| Accrued expenses and other liabilities | | | | 33,028 | | | 35,629 | |
|
| |
| |
| Total Liabilities | | | | 3,008,871 | | | 3,035,580 | |
|
| |
| |
| Shareholders' Equity | | |
| Preferred stock, no par value--200,000 shares authorized; none | | |
| outstanding | | |
| Common stock, $1.00 par value--40,000,000 shares authorized; | | |
| issued and outstanding: 23,015,040 shares at March 31, 2008 | | |
| and 22,647,511 shares at December 31, 2007 | | | | 22,765 | | | 22,601 | |
| Capital surplus | | | | 196,675 | | | 195,302 | |
| Retained earnings | | | | 19,062 | | | 22,770 | |
| Accumulated other comprehensive income (loss) | | | | 38 | | | (171 | ) |
|
| |
| |
| Total Shareholders' Equity | | | | 238,540 | | | 240,502 | |
|
| |
| |
| Total Liabilities and Shareholders' Equity | | | $ | 3,247,411 | | $ | 3,276,082 | |
|
| |
| |
INDEPENDENT BANK CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
| Three Months Ended |
|---|
| March 31,
2008 | | December 31,
2007 | | March 31,
2007 |
|---|
|
| |
| |
| |
| (unaudited) |
|---|
|
| |
| (in thousands) |
|---|
| Interest Income | | | | | | | | | | | |
| Interest and fees on loans | | | $ | 48,126 | | $ | 50,891 | | $ | 49,953 | |
| Securities available for sale | | |
| Taxable | | | | 2,304 | | | 2,258 | | | 2,477 | |
| Tax-exempt | | | | 2,247 | | | 2,297 | | | 2,600 | |
| Other investments | | | | 357 | | | 328 | | | 314 | |
|
| |
| |
| |
| Total Interest Income | | | | 53,034 | | | 55,774 | | | 55,344 | |
|
| |
| |
| |
| Interest Expense | | |
| Deposits | | | | 16,212 | | | 20,684 | | | 22,408 | |
| Other borrowings | | | | 6,437 | | | 5,022 | | | 3,304 | |
|
| |
| |
| |
| Total Interest Expense | | | | 22,649 | | | 25,706 | | | 25,712 | |
|
| |
| |
| |
| Net Interest Income | | | | 30,385 | | | 30,068 | | | 29,632 | |
| Provision for loan losses | | | | 11,316 | | | 9,393 | | | 8,139 | |
|
| |
| |
| |
| Net Interest Income After Provision for Loan Losses | | | | 19,069 | | | 20,675 | | | 21,493 | |
|
| |
| |
| |
| Non-interest Income | | |
| Service charges on deposit accounts | | | | 5,647 | | | 6,418 | | | 4,888 | |
| Net gains (losses) on assets | | |
| Mortgage loans | | | | 1,867 | | | 904 | | | 1,081 | |
| Securities | | | | (2,163 | ) | | (964 | ) | | 79 | |
| VISA check card interchange income | | | | 1,371 | | | 1,376 | | | 950 | |
| Mortgage loan servicing | | | | (323 | ) | | 364 | | | 527 | |
| Title insurance fees | | | | 417 | | | 344 | | | 414 | |
| Other income | | | | 2,676 | | | 2,731 | | | 2,731 | |
|
| |
| |
| |
| Total Non-interest Income | | | | 9,492 | | | 11,173 | | | 10,670 | |
|
| |
| |
| |
| Non-interest Expense | | |
| Compensation and employee benefits | | | | 14,184 | | | 13,438 | | | 13,968 | |
| Occupancy, net | | | | 3,114 | | | 2,754 | | | 2,614 | |
| Loan and collection | | | | 1,925 | | | 1,437 | | | 1,006 | |
| Furniture, fixtures and equipment | | | | 1,817 | | | 1,944 | | | 1,900 | |
| Data processing | | | | 1,725 | | | 1,854 | | | 1,438 | |
| Advertising | | | | 1,100 | | | 1,549 | | | 1,152 | |
| Branch acquisition and conversion costs | | | | | | | | | | 422 | |
| Goodwill impairment | | | | | | | | | | 343 | |
| Other expenses | | | | 6,386 | | | 6,609 | | | 5,123 | |
|
| |
| |
| |
| Total Non-interest Expense | | | | 30,251 | | | 29,585 | | | 27,966 | |
|
| |
| |
| |
| Income (Loss) From Continuing Operations Before Income Tax | | | | (1,690 | ) | | 2,263 | | | 4,197 | |
| Income tax expense (benefit) | | | | (2,031 | ) | | (15 | ) | | 305 | |
|
| |
| |
| |
| Income From Continuing Operations | | | | 341 | | | 2,278 | | | 3,892 | |
| Discontinued operations, net of tax | | | | | | | 154 | | | 351 | |
|
| |
| |
| |
| Net Income | | | $ | 341 | | $ | 2,432 | | $ | 4,243 | |
|
| |
| |
| |
INDEPENDENT BANK CORPORATION AND SUBSIDIARIES
Selected Financial Data
| Three Months Ended |
|---|
| March 31,
2008 | | December 31,
2007 | | March 31,
2007 |
|---|
|
| |
| |
| |
| (unaudited) |
|---|
|
| |
| Per Share Data (A) | | | | | | | | | | | |
| Income From Continuing | | |
| Operations | | |
| Basic | | | $ | .02 | | $ | .10 | | $ | .17 | |
| Diluted | | | | .01 | | | .10 | | | .17 | |
| Net Income | | |
| Basic | | | $ | .02 | | $ | .11 | | $ | .19 | |
| Diluted | | | | .01 | | | .11 | | | .18 | |
| Cash dividends declared | | | | .11 | | | .21 | | | .21 | |
| | | |
| | | |
| Selected Ratios (annualized) | | |
| As a Percent of Average Interest-Earning Assets | | |
| Tax equivalent interest income | | | | 7.37 | % | | 7.65 | % | | 7.74 | % |
| Interest expense | | | | 3.07 | | | 3.43 | | | 3.51 | |
| Tax equivalent net interest income | | | | 4.30 | | | 4.22 | | | 4.23 | |
| Income From Continuing Operations | | |
| Average equity | | | | 0.56 | % | | 3.68 | % | | 6.08 | % |
| Average assets | | | | 0.04 | | | 0.28 | | | 0.48 | |
| Net Income to | | |
| Average equity | | | | 0.56 | % | | 3.93 | % | | 6.63 | % |
| Average assets | | | | 0.04 | | | 0.30 | | | 0.53 | |
| | | |
| | | |
| Average Shares (A) | | |
| Basic | | | | 22,638,898 | | | 22,600,461 | | | 22,828,615 | |
| Diluted | | | | 22,768,219 | | | 22,703,111 | | | 23,143,875 | |
(A) Average shares of common stock for basic net income per share include shares issued and outstanding during the period. Average shares of common stock for diluted net income per share include shares to be issued upon exercise of stock options and stock units for deferred compensation plan for non-employee directors.
