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Independent Bank Corporation Reports 2009 Fourth Quarter And Full Year Results

IONIA, Mich., Feb. 24 /PRNewswire-FirstCall/ --

  • 2009 fourth quarter net loss applicable to common stock of $49.2 million ( $2.05 per share), with results impacted by:
    • Provision for loan losses of $25.1 million.
    • $19.5 million charge to accrue for estimated losses from vehicle service contract counterparties related to the Company's payment plan business.
    • A non-cash charge of $16.7 million for goodwill impairment, with no impact on tangible equity.
  • Pre-tax, pre-provision core operating earnings improved in 2009 over 2008.
  • Net interest margin of 4.85% and 5.08% for the fourth quarter and full year of 2009, which is among the best in the banking industry.
  • Both non-performing loans and non-performing assets declined sequentially for the third consecutive quarter.
  • Capital raising initiatives progressing.
  • Independent Bank remains "well capitalized" for regulatory purposes.

Independent Bank Corporation (Nasdaq: IBCP) reported a fourth quarter 2009 net loss applicable to common stock of $49.2 million, or $2.05 per share, versus a loss of $90.2 million, or $3.92 per share, in the prior-year period.  The net loss applicable to common stock for the year ended Dec. 31, 2009 was $94.5 million, or $3.96 per share, compared to a loss of $91.9 million, or $4.00 per share, for all of 2008.

Michael M. Magee, President and CEO of Independent Bank Corporation, commented: "The Michigan economic climate remains unfavorable and continues to have a negative impact on our financial results.  While this weakness may persist in the near term,  we are encouraged that the relative strength of our pre-tax, pre-provision core operating earnings will help support our organization as we work through our credit issues and efforts to improve our capital position."

Operating Results

The Company's tax equivalent net interest income totaled $33.9 million during the fourth quarter of 2009, an increase of $0.5 million, or 1.4% from the year-ago period, and a decrease of $1.9 million, or 5.3% from the third quarter of 2009.  The Company's tax equivalent net interest income as a percent of average interest-earning assets (the "net interest margin") was 4.85% during the fourth quarter of 2009, compared to 4.80% in the year-ago period, and 5.15% in the third quarter of 2009.  Average interest-earning assets were virtually unchanged at $2.78 billion in the fourth quarter of 2009, compared to $2.77 billion in the year-ago quarter and $2.76 billion in the third quarter of 2009.  However, the mix of such average interest-earning assets changed as higher-yielding loans declined and lower-yielding short-term investments rose.  In order to expand its liquidity, the Company increased its level of overnight cash balances with the Federal Reserve Bank to $223.5 million at Dec. 31, 2009.  This change in the mix of assets reduced the fourth quarter net interest margin compared to earlier quarters in 2009.

For all of 2009, tax equivalent net interest income totaled $140.8 million, an increase of $6.1 million, or 4.5% from 2008.  The Company's net interest margin for 2009 increased to 5.08% compared to 4.63% in 2008.  The benefit of the increase in the net interest margin in 2009 was partially offset by a $138.2 million decline in average interest-earning assets.

Service charges on deposits and VISA check card interchange income totaled $6.2 million and $1.5 million, respectively, in the fourth quarter of 2009, an increase of 2.7% and 9.5%, respectively, from the comparable period in 2008.  For all of 2009, service charges on deposits and VISA check card interchange income totaled $24.4 million and $5.9 million, respectively, compared to $24.2 million and $5.7 million, respectively, during 2008.  

Securities losses totaled $0.03 million and $6.9 million in the fourth quarters of 2009 and 2008, respectively.  The securities losses in the fourth quarter of 2008, include a decline in the fair value of trading securities of $0.7 million and a write down of $6.2 million (from a par value of $10.0 million to a fair value of $3.8 million) related to the dissolution of a money-market auction rate security and the distribution of the underlying Bank of America preferred stock.  This Bank of America preferred stock was sold during 2009.   For all of 2009, the Company recorded securities gains of $3.7 million compared to securities losses of $15.0 million in 2008.

Gains on the sale of mortgage loans were $2.1 million in the fourth quarter of 2009, compared to $1.2 million in the year-ago quarter.  For all of 2009, gains on the sale of mortgage loans totaled $10.9 million compared to $5.2 million in 2008.  The growth in gains relates primarily to an increase in loan sales.  This was principally due to a rise in refinancing activity.

Mortgage loan servicing generated income of $1.2 million in the fourth quarter of 2009, versus a loss of $3.6 million in the year-ago period.  This improvement was due to the change in the impairment reserve (a $0.9 million recovery in the fourth quarter of 2009 compared to a $4.3 million charge in the year-ago quarter) that was partially offset by a $0.3 million increase in the amortization of capitalized mortgage loan servicing rights.  The recovery of previously recorded impairment charges in the last quarter of 2009 primarily reflects somewhat higher mortgage loan interest rates at the end of the fourth quarter of 2009, resulting in lower estimated future prepayment rates.  For all of 2009, mortgage loan servicing generated income of $2.3 million, versus a loss of $2.1 million in 2008.  Capitalized mortgage loan servicing rights totaled $15.3 million at Dec. 31, 2009 compared to $12.0 million at Dec. 31, 2008.  The Company services approximately $1.73 billion in mortgage loans for others on which servicing rights have been capitalized.

Non-interest expenses totaled $71.2 million in the fourth quarter of 2009, compared to $85.1 million in the year-ago period.  The decline in non-interest expenses was primarily due to a decrease in the goodwill impairment charge.  This charge totaled $16.7 million and $50.0 million in 2009 and 2008, respectively.  The decline in the goodwill impairment charge was partially offset by an increase in estimated losses related to vehicle service contract counterparties at the Company's Mepco Finance Corporation ("Mepco") business unit of $18.5 million and an increase in FDIC insurance of $1.2 million.   For all of 2009, non-interest expenses totaled $187.6 million versus $177.2 million in 2008.  

The 2009 goodwill impairment charge of $16.7 million relates to the Company's vehicle service contract payment plan business.  In the fourth quarter of 2009, the Company updated its goodwill impairment testing, having also performed interim tests earlier in the year.  The results of the year-end goodwill impairment testing showed that the estimated fair value of Mepco was now less than the carrying value of its equity. The fair value of Mepco is principally based on estimated future earnings utilizing a discounted cash flow methodology.  Mepco recorded a loss in the fourth quarter and for the full year of 2009.  Further, Mepco's largest business counterparty, which accounted for nearly one-half of Mepco's payment plan business, has defaulted in its obligations to Mepco, and this counterparty is expected to cease its operations in 2010.  These factors adversely impacted the level of Mepco's expected future earnings, and hence its fair value, and the Company concluded that goodwill was now impaired, resulting in this $16.7 million non-cash charge.

The 2008 goodwill impairment charge of $50.0 million related to the Company's banking operations. During the fourth quarter of 2008, the Company updated its goodwill impairment testing, having also performed interim tests earlier in the year.  The Company's common stock price dropped further in the fourth quarter of 2008, which resulted in a wider difference between its market capitalization and book value.  The results of the goodwill impairment testing showed that the estimated fair value of the Company's Independent Bank reporting unit was less than its carrying value of equity, resulting in the non-cash charge.  

Fourth quarter 2009 non-interest expenses included a $19.5 million charge (compared to $1.0 million in the fourth quarter of 2008) related to Mepco's business of servicing payment plans for vehicle service contracts.  These payment plans (which are classified as finance receivables in the Company's Consolidated Statements of Financial Condition) permit a consumer to purchase a vehicle service contract or product warranty by making installment payments, generally for a term of 12 to 24 months, to the sellers of those contracts or product warranties (one of the "counterparties").  Mepco purchases these payment plans from these counterparties on a recourse basis.  When consumers stop making payments or exercise their right to voluntarily cancel the contract, the remaining unpaid balance of the payment plan is recouped by Mepco from the counterparties that sold the vehicle service contract or product warranty and provided the coverage.  Payment defaults and voluntary cancellations have increased significantly during 2009, reflecting both weak economic conditions and adverse publicity impacting the vehicle service contract industry.  When counterparties do not honor their contractual obligations to Mepco to repay advanced funds, we recognize estimated losses.  Mepco pursues collection (including commencing legal action) of funds due to it under its various contracts with counterparties.   During the last half of 2009, we identified a counterparty that is experiencing particularly severe financial difficulties and have accrued for estimated potential losses related to that relationship.  For all of 2009, the expense for vehicle service contract counterparty risk totaled $31.2 million compared to $1.0 million in 2008.  

Pre-Tax, Pre-Provision Core Operating Earnings

The Company is presenting pre-tax, pre-provision core operating earnings in this release for purposes of additional analysis of operating results.  Pre-tax, pre-provision core operating earnings, as defined by management, represents the Company's income (loss) excluding:  income tax expense (benefit), the provision for loan losses, securities gains or losses, vehicle service contract counterparty contingencies, and any impairment charges (including goodwill, losses on other real estate or repossessed assets, and fair-value adjustments) or elevated loan and collection costs caused by the current economic cycle.

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