SELECTED
CONSOLIDATED FINANCIAL DATA
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Year Ended December 31,
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2009
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2008
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2007
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2006
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2005
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(Dollars in thousands, except per share amounts)
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SUMMARY OF OPERATIONS
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|
|
|
|
|
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|
|
Interest income
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$
|
189,056
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|
|
$
|
203,736
|
|
|
$
|
223,254
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|
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$
|
216,895
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|
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$
|
193,035
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Interest expense
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|
|
50,533
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|
73,587
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|
102,663
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|
93,698
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|
63,099
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|
|
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Net interest income
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138,523
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130,149
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120,591
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123,197
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129,936
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Provision for loan losses
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103,032
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71,321
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43,160
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16,344
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7,806
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Net gains (losses) on securities
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3,744
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(14,961
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)
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(705
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)
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|
|
171
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|
1,484
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Other non-interest income
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54,915
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44,682
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47,850
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44,679
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41,342
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Non-interest expenses
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187,587
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177,150
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115,724
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106,216
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101,785
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Income (loss) from continuing operations before income tax
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(93,437
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)
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(88,601
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)
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8,852
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45,487
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63,171
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Income tax expense (benefit)
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(3,210
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)
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3,063
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(1,103
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)
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11,662
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17,466
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Income from continuing operations
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(90,227
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)
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(91,664
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)
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9,955
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33,825
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45,705
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Discontinued operations, net of tax
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402
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(622
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)
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1,207
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Net income (loss)
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$
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(90,227
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)
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$
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(91,664
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)
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$
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10,357
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|
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$
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33,203
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$
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46,912
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Preferred dividends
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4,301
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|
215
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Net income (loss) applicable to common stock
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$
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(94,528
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)
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$
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(91,879
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)
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$
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10,357
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$
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33,203
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$
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46,912
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PER COMMON SHARE DATA (1)
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Income (loss) per common share from
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continuing operations
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Basic
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$
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(3.96
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)
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$
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(4.00
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)
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$
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0.44
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$
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1.48
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$
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1.96
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Diluted
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(3.96
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)
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(4.00
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)
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0.44
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1.45
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1.92
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Net income (loss) per common share
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Basic
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$
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(3.96
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)
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$
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(4.00
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)
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$
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0.46
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$
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1.45
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$
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2.01
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Diluted
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(3.96
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)
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(4.00
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)
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0.45
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1.43
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1.97
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Cash dividends declared
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0.03
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0.14
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0.84
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0.78
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0.71
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Book value
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1.69
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5.49
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10.62
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11.29
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10.75
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SELECTED BALANCES
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Assets
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$
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2,965,364
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$
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2,956,245
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$
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3,247,516
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$
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3,406,390
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$
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3,348,707
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Loans
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2,299,372
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2,459,529
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2,518,330
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2,459,887
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2,365,176
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Allowance for loan losses
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81,717
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57,900
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45,294
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26,879
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|
|
22,420
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Deposits
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2,565,768
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2,066,479
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2,505,127
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2,602,791
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2,474,239
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Shareholders equity
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109,861
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|
194,877
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|
240,502
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258,167
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|
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248,259
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Long-term debt
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0
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0
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|
1,000
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3,000
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5,000
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SELECTED RATIOS
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Tax equivalent net interest income to
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average interest earning assets
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5.08
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%
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4.63
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%
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4.26
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%
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|
|
4.41
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%
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|
|
4.85
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%
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Income (loss) from continuing operations to (2)
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Average common equity
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|
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(90.72
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)
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|
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(39.01
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)
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|
3.96
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|
|
13.06
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|
|
18.63
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Average assets
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|
|
(3.17
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)
|
|
|
(2.88
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)
|
|
|
0.31
|
|
|
|
0.99
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|
|
|
1.42
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Net income (loss) to (2)
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|
|
|
|
|
|
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|
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|
|
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Average common equity
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|
|
(90.72
|
)
|
|
|
(39.01
|
)
|
|
|
4.12
|
|
|
|
12.82
|
|
|
|
19.12
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Average assets
|
|
|
(3.17
|
)
|
|
|
(2.88
|
)
|
|
|
0.32
|
|
|
|
0.97
|
|
|
|
1.45
|
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Average shareholders equity to average
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
assets
|
|
|
5.80
|
|
|
|
7.50
|
|
|
|
7.72
|
|
|
|
7.60
|
|
|
|
7.61
|
|
Tier 1 capital to average assets
|
|
|
5.27
|
|
|
|
8.61
|
|
|
|
7.44
|
|
|
|
7.62
|
|
|
|
7.40
|
|
Non-performing loans to Portfolio
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
|
4.78
|
|
|
|
5.09
|
|
|
|
3.07
|
|
|
|
1.59
|
|
|
|
0.70
|
|
|
|
|
(1) |
|
Per share data has been adjusted for 5% stock dividends in 2006
and 2005. |
|
(2) |
|
These amounts are calculated using income (loss) from continuing
operations applicable to common stock and net income (loss)
applicable to common stock. |
8
MANAGEMENTS
DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Any statements in this document 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
managements beliefs and assumptions based on information
known to Independent Bank Corporations management as of
the date of this document and do not purport to speak as of any
other date. Forward-looking statements may include descriptions
of plans and objectives of Independent Bank Corporations
management for future or past operations, products or services,
and forecasts of the Companys 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 Corporations 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
Corporations plans, objectives, expectations and
intentions. Should one or more of these risks materialize or
should underlying beliefs or assumptions prove incorrect, the
Companys 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
document, Independent Bank Corporation claims the protection of
the safe harbor for forward-looking statements contained in the
Private Securities Litigation Reform Act of 1995.
The following section presents additional information to assess
the financial condition and results of operations of Independent
Bank Corporation (IBC) and its subsidiaries. This
section should be read in conjunction with the consolidated
financial statements and the supplemental financial data
contained elsewhere in this annual report. We also encourage you
to read our Annual Report on
Form 10-K
filed with the U.S. Securities and Exchange Commission
(SEC). That report includes a list of risk factors
that you should consider in connection with any decision to buy
or sell our securities.
Introduction. Our success depends to a great
extent upon the economic conditions in Michigans lower
peninsula. We have in general experienced a slowing economy in
Michigan since 2001. In particular, Michigans current
unemployment rate of nearly 15% is the worst among all states.
Unlike larger banks that are more geographically diversified, we
provide banking services to customers primarily in
Michigans lower peninsula. Our loan portfolio, the ability
of the borrowers to repay these loans, and the value of the
collateral securing these loans will be impacted by local
economic conditions. The continued economic difficulties faced
in Michigan has had and may continue to have many adverse
consequences as described below in Portfolio Loans and
asset quality.
Dramatic declines in the housing market in recent years, with
falling home prices and elevated levels of foreclosures and
unemployment have resulted in and may continue to result in
significant write-downs of asset values by us and other
financial institutions. These write-downs have caused many
financial institutions to seek additional capital, to merge with
larger and stronger institutions and, in some cases, to fail.
Additionally, capital and credit markets have continued to
experience elevated levels of volatility and disruption over the
past two years. This market turmoil and tightening of credit
have led to a lack of general consumer confidence and reduction
of business activity.
In response to these difficult market conditions and the
significant losses that we have incurred in the past two years
that have depleted our capital, we have taken steps or initiated
actions designed to restore our capital levels, improve our
operations and augment our liquidity as described in more detail
below.
On January 29, 2010, we held a special shareholders
meeting at which our shareholders approved an amendment to our
Articles of Incorporation to increase the number of shares of
common stock we are authorized to
9
issue from 60 million to 500 million. They also
approved the issuance of our common stock in exchange for
certain of our trust preferred securities and in exchange for
the shares of our preferred stock held by the
U.S. Department of Treasury (UST). In January
2010, we filed a registration statement with the SEC related to
these proposed exchange offers.
As described in more detail below under Liquidity and
capital resources, we adopted a capital restoration plan
that contemplates three primary initiatives that have been or
will be undertaken in order to increase our common equity
capital, decrease our expenses, and enable us to withstand and
better respond to current market conditions and the potential
for worsening market conditions. Those three initiatives are:
(i) an offer to our trust preferred securities holders to
convert the securities they hold into our common stock;
(ii) an offer to the UST to convert the preferred stock it
holds into our common stock, and (iii) a public offering of
our common stock for cash. We cannot be sure that we will be
able to successfully execute on these identified initiatives in
a timely manner or at all. The successful implementation of our
capital restoration plan is, in many respects, largely out of
our control and depends on factors such as the aggregate amount
of trust preferred securities tendered in these exchange offers,
the willingness of the UST to exchange the shares of our
preferred stock it holds for shares of our common stock, and our
ability to sell our common stock or other securities for cash.
These factors, in turn, may depend on factors outside of our
control such as the stability of the financial markets, other
macro economic conditions, and investors perception of the
ability of the Michigan economy to recover from the current
recession.
If we are not soon able to achieve the minimum capital ratios
set forth in our capital restoration plan (as described below in
Liquidity and capital resources), this inability
would likely materially and adversely affect our business, our
financial condition, and the value of our common stock. An
inability to improve our capital position would make it very
difficult for us to withstand continued losses that we may incur
and that may be increased or made more likely as a result of
continued economic difficulties and other factors.
In addition, we believe that if we are unable to achieve the
minimum capital ratios set forth in our capital restoration plan
by or within a reasonable time after an April 30, 2010,
deadline imposed by our Board of Directors, and if our financial
condition and performance otherwise fail to meaningfully
improve, it is likely we will not be able to remain
well-capitalized under federal regulatory standards. In that
case, we expect our primary bank regulators would also impose
additional regulatory restrictions and requirements through a
regulatory enforcement action. If we fail to remain
well-capitalized under federal regulatory standards, we will be
prohibited from accepting or renewing brokered certificates of
deposit (Brokered CDs) without the prior consent of
the Federal Deposit Insurance Corporation (FDIC),
which would likely have a materially adverse impact on our
business and financial condition. If our regulators take
enforcement action against us, it would likely increase our
expenses and could limit our business operations. There could be
other expenses associated with a continued deterioration of our
capital, such as increased deposit insurance premiums payable to
the FDIC.
Additional restrictions would make it increasingly difficult for
us to withstand the current economic conditions and any
continued deterioration in our loan portfolio. We could then be
required to engage in a sale or other transaction with a third
party or our subsidiary bank could be placed into receivership
by bank regulators. Any such event could be expected to result
in a loss of the entire value of our outstanding shares of
common stock, including any common stock issued in exchange for
our preferred stock or trust preferred securities in any
proposed exchange offers, and it could also result in a loss of
the entire value of our outstanding trust preferred securities
and preferred stock.
It is against this backdrop that we discuss our results of
operations and financial condition in 2009 as compared to
earlier periods.
RESULTS
OF OPERATIONS
Summary. We incurred a loss from continuing
operations of $90.2 million in 2009 compared to a loss of
$91.7 million in 2008 and compared to income from
continuing operations of $10.0 million in 2007. The net
loss in 2009 and 2008 also totaled $90.2 million and
$91.7 million, respectively, compared to net income of
$10.4 million. The net loss applicable to common stock was
$94.5 million and $91.9 million in 2009 and 2008,
respectively. The significant change in 2009 and 2008 compared
to 2007 is due primarily to an increase in the provision for
loan losses, impairment charges on goodwill, increases in
vehicle service contract counterparty contingencies, loan and
10
collection costs and losses on other real estate and repossessed
assets, and a charge to income tax expense for a valuation
allowance on most of our net deferred tax assets. These adverse
changes were partially offset by an increase in net interest
income.
On December 12, 2008 we issued 72,000 shares of
preferred stock and 3,461,538 warrants to purchase our common
stock (at a strike price of $3.12 per share) to the UST in
return for $72.0 million under the Troubled Asset Relief
Program (TARP) Capital Purchase Program
(CPP). (See Liquidity and capital
resources.) As a result, during periods in which this
preferred stock remains outstanding, we will also be reporting
our net income (loss) applicable to common stock.
On January 15, 2007, Mepco Insurance Premium Financing,
Inc., now known as Mepco Finance Corporation
(Mepco), a wholly-owned subsidiary of our bank, sold
substantially all of its assets related to the insurance premium
finance business to Premium Financing Specialists, Inc.
(PFS). Mepco continues to own and operate its
vehicle service contract payment plan business. The assets,
liabilities and operations of Mepcos insurance premium
finance business are reported as discontinued operations for
2007.
We completed the acquisition of ten branches with total deposits
of approximately $241.4 million from TCF National Bank on
March 23, 2007 (the branch acquisition). These
branches are located in or near Battle Creek, Bay City and
Saginaw, Michigan. As a result of this transaction, we received
$210.1 million of cash. We used the proceeds from this
transaction primarily to payoff higher costing short term
borrowings and Brokered CDs. The acquisition of these branches
resulted in an increase in non-interest income, particularly
service charges on deposit accounts and VISA check card
interchange income during the last nine months of 2007 and in
2008 and 2009. However, non-interest expenses also increased due
to compensation and benefits for the employees at these branches
as well as occupancy, furniture and equipment, data processing,
communications, supplies and advertising expenses. As is
customary in branch acquisitions, the purchase price
($28.1 million) was based on acquired deposit balances. We
also reimbursed the seller $0.2 million for certain
transaction related costs. Approximately $10.8 million of
the premium paid was recorded as deposit customer relationship
value, including core deposit value and will be amortized over
15 years (the remainder of the premium paid was recorded as
goodwill). We also incurred other transaction costs (primarily
investment banking fees, legal fees, severance costs and data
processing conversion fees) of approximately $0.8 million,
of which $0.5 million was capitalized as part of the
acquisition price and $0.3 million was expensed. In
addition, the transaction included $3.7 million for the
personal property and real estate associated with these
branches. In the last quarter of 2008 we determined that all of
the goodwill at our Independent Bank reporting unit, including
the goodwill recorded as a part of this branch acquisition, was
impaired, and we recorded a $50.0 million goodwill
impairment charge. (See Non-interest expenses.)
In September 2007 we completed the consolidation of our four
bank charters into one. The primary reasons for this bank
consolidation were:
|
|
|
|
|
To better streamline our operations and corporate governance
structure;
|
|
|
|
To enhance our risk management processes, particularly credit
risk management through more centralized credit management
functions;
|
|
|
|
To allow for more rapid development and deployment of new
products and services; and
|
|
|
|
To improve productivity and resource utilization leading to
lower non-interest expenses.
|
During the last half of 2007 we incurred approximately
$0.8 million of one-time expenses (primarily related to the
data processing conversion and severance costs for employee
positions that were eliminated) associated with this
consolidation. To date, the benefit of the reductions in
non-interest expenses due to the bank consolidation have been
more than offset by higher loan and collection costs and
increased staffing associated with the management of
significantly higher levels of watch credits, non-performing
loans and other real estate owned. (See Portfolio Loans
and asset quality.)
11
KEY
PERFORMANCE RATIOS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2009
|
|
2008
|
|
2007
|
|
Income (loss) from continuing operations
|
|
|
|
|
|
|
|
|
|
|
|
|
Average common equity
|
|
|
(90.72
|
)%
|
|
|
(39.01
|
)%
|
|
|
3.96
|
%
|
Average assets
|
|
|
(3.17
|
)
|
|
|
(2.88
|
)
|
|
|
0.31
|
|
Net income (loss) to
|
|
|
|
|
|
|
|
|
|
|
|
|
Average common equity
|
|
|
(90.72
|
)%
|
|
|
(39.01
|
)%
|
|
|
4.12
|
%
|
Average assets
|
|
|
(3.17
|
)
|
|
|
(2.88
|
)
|
|
|
0.32
|
|
Income (loss) per common share from continuing operations
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(3.96
|
)
|
|
$
|
(4.00
|
)
|
|
$
|
0.44
|
|
Diluted
|
|
|
(3.96
|
)
|
|
|
(4.00
|
)
|
|
|
0.44
|
|
Net income (loss) per share
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(3.96
|
)
|
|
$
|
(4.00
|
)
|
|
$
|
0.46
|
|
Diluted
|
|
|
(3.96
|
)
|
|
|
(4.00
|
)
|
|
|
0.45
|
|
Net interest income. Net interest income is
the most important source of our earnings and thus is critical
in evaluating our results of operations. Changes in our tax
equivalent net interest income are primarily influenced by our
level of interest-earning assets and the income or yield that we
earn on those assets and the manner and cost of funding our
interest-earning assets. Certain macro-economic factors can also
influence our net interest income such as the level and
direction of interest rates, the difference between short-term
and long-term interest rates (the steepness of the yield curve)
and the general strength of the economies in which we are doing
business. Finally, risk management plays an important role in
our level of net interest income. The ineffective management of
credit risk and interest-rate risk in particular can adversely
impact our net interest income.
Tax equivalent net interest income totaled $140.8 million
during 2009, compared to $134.7 million and
$126.7 million during 2008 and 2007, respectively. We
review yields on certain asset categories and our net interest
margin on a fully taxable equivalent basis. This presentation is
not in accordance with generally accepted accounting principles
(GAAP) but is customary in the banking industry. In
this non-GAAP presentation, net interest income is adjusted to
reflect tax-exempt interest income on an equivalent before-tax
basis. This measure ensures comparability of net interest income
arising from both taxable and tax-exempt sources. The
adjustments to determine tax equivalent net interest income were
$2.3 million, $4.6 million and $6.1 million in
2009, 2008 and 2007, respectively, and were computed using a 35%
tax rate. The increase in tax equivalent net interest income in
2009 compared to 2008 reflects a 45 basis point rise in our
tax equivalent net interest income as a percent of average
interest-earning assets (net interest margin) that
was partially offset by a $138.2 million decrease in
average interest-earning assets. The increase in tax equivalent
net interest income in 2008 compared to 2007 reflects a
37 basis point rise in our net interest margin that was
partially offset by a $65.7 million decrease in average
interest-earning assets. The decline in average interest-earning
assets during 2009 and 2008 generally reflects our desire to
reduce total assets in order to try to preserve our regulatory
capital ratios in light of our recent losses.
From September 2007 to December 2008 the Federal Reserve Bank
(FRB) reduced the target federal funds rate from
5.25% to 0.25%, where it has since remained. In addition, the
yield curve has steepened considerably. The current interest
rate environment (lower short-term interest rates and steeper
yield curve) has had a favorable impact on our net interest
margin during 2008 and 2009 which more than offset the adverse
impact of a declining level of average interest earnings assets,
as described above. Our balance sheet during 2008 and much of
2009 was generally structured to benefit from lower short-term
interest rates. For example, most of our Brokered CDs were
callable which allowed us to call (retire) them and replace them
at much lower interest rates. However, some of the benefits of
the current interest rate environment are being partially offset
by our increased level of non-accrual loans that create a drag
on our net interest margin and tax equivalent net interest
income. Average non-accrual loans totaled $120.2 million,
$104.7 million and $53.1 million in 2009, 2008 and
2007, respectively.
During the last half of 2009, we increased our level of
lower-yielding interest bearing cash balances to augment our
liquidity in response to our deteriorating financial condition
(see Liquidity and capital resources below). In
12
addition, due to the challenges facing Mepco (see
Noninterest expense below), we expect the balance of
finance receivables to decline by approximately 40% in 2010.
These finance receivables are the highest yielding segment of
our loan portfolio, with an average yield of approximately 13%.
The combination of these two items (a higher level of
lower-yielding interest bearing cash balances and a decline in
the level of higher-yielding finance receivables) is expected to
have an adverse impact on both our net interest income and net
interest margin in 2010.
AVERAGE
BALANCES AND TAX EQUIVALENT RATES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Balance
|
|
|
Interest
|
|
|
Rate
|
|
|
Balance
|
|
|
Interest
|
|
|
Rate
|
|
|
Balance
|
|
|
Interest
|
|
|
Rate
|
|
|
|
(Dollars in thousands)
|
|
|
ASSETS (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable loans
|
|
$
|
2,461,896
|
|
|
$
|
177,557
|
|
|
|
7.21
|
%
|
|
$
|
2,558,621
|
|
|
$
|
186,259
|
|
|
|
7.28
|
%
|
|
$
|
2,531,737
|
|
|
$
|
201,924
|
|
|
|
7.98
|
%
|
Tax-exempt loans (2)
|
|
|
8,672
|
|
|
|
601
|
|
|
|
6.93
|
|
|
|
10,747
|
|
|
|
751
|
|
|
|
6.99
|
|
|
|
9,568
|
|
|
|
672
|
|
|
|
7.02
|
|
Taxable securities
|
|
|
111,558
|
|
|
|
6,333
|
|
|
|
5.68
|
|
|
|
144,265
|
|
|
|
8,467
|
|
|
|
5.87
|
|
|
|
179,878
|
|
|
|
9,635
|
|
|
|
5.36
|
|
Tax-exempt securities (2)
|
|
|
85,954
|
|
|
|
5,709
|
|
|
|
6.64
|
|
|
|
162,144
|
|
|
|
11,534
|
|
|
|
7.11
|
|
|
|
225,676
|
|
|
|
15,773
|
|
|
|
6.99
|
|
Cash interest bearing
|
|
|
72,606
|
|
|
|
174
|
|
|
|
0.24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other investments
|
|
|
28,304
|
|
|
|
932
|
|
|
|
3.29
|
|
|
|
31,425
|
|
|
|
1,284
|
|
|
|
4.09
|
|
|
|
26,017
|
|
|
|
1,338
|
|
|
|
5.14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest earning assets continuing operations
|
|
|
2,768,990
|
|
|
|
191,306
|
|
|
|
6.91
|
|
|
|
2,907,202
|
|
|
|
208,295
|
|
|
|
7.16
|
|
|
|
2,972,876
|
|
|
|
229,342
|
|
|
|
7.71
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
|
55,451
|
|
|
|
|
|
|
|
|
|
|
|
53,873
|
|
|
|
|
|
|
|
|
|
|
|
57,174
|
|
|
|
|
|
|
|
|
|
Taxable loans discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,542
|
|
|
|
|
|
|
|
|
|
Other assets, net
|
|
|
157,762
|
|
|
|
|
|
|
|
|
|
|
|
227,969
|
|
|
|
|
|
|
|
|
|
|
|
218,553
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
2,982,203
|
|
|
|
|
|
|
|
|
|
|
$
|
3,189,044
|
|
|
|
|
|
|
|
|
|
|
$
|
3,257,145
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
Savings and NOW
|
|
$
|
992,529
|
|
|
|
5,751
|
|
|
|
0.58
|
|
|
$
|
968,180
|
|
|
|
10,262
|
|
|
|
1.06
|
|
|
$
|
971,807
|
|
|
|
18,768
|
|
|
|
1.93
|
|
Time deposits
|
|
|
1,019,624
|
|
|
|
29,654
|
|
|
|
2.91
|
|
|
|
917,403
|
|
|
|
36,435
|
|
|
|
3.97
|
|
|
|
1,439,177
|
|
|
|
70,292
|
|
|
|
4.88
|
|
Long-term debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
247
|
|
|
|
12
|
|
|
|
4.86
|
|
|
|
2,240
|
|
|
|
104
|
|
|
|
4.64
|
|
Other borrowings
|
|
|
394,975
|
|
|
|
15,128
|
|
|
|
3.83
|
|
|
|
682,884
|
|
|
|
26,878
|
|
|
|
3.94
|
|
|
|
205,811
|
|
|
|
13,499
|
|
|
|
6.56
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing liabilities continuing operations
|
|
|
2,407,128
|
|
|
|
50,533
|
|
|
|
2.10
|
|
|
|
2,568,714
|
|
|
|
73,587
|
|
|
|
2.86
|
|
|
|
2,619,035
|
|
|
|
102,663
|
|
|
|
3.92
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits
|
|
|
321,802
|
|
|
|
|
|
|
|
|
|
|
|
301,117
|
|
|
|
|
|
|
|
|
|
|
|
300,886
|
|
|
|
|
|
|
|
|
|
Time deposits discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,166
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
|
80,281
|
|
|
|
|
|
|
|
|
|
|
|
79,929
|
|
|
|
|
|
|
|
|
|
|
|
79,750
|
|
|
|
|
|
|
|
|
|
Shareholders equity
|
|
|
172,992
|
|
|
|
|
|
|
|
|
|
|
|
239,284
|
|
|
|
|
|
|
|
|
|
|
|
251,308
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
2,982,203
|
|
|
|
|
|
|
|
|
|
|
$
|
3,189,044
|
|
|
|
|
|
|
|
|
|
|
$
|
3,257,145
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
|
|
|
$
|
140,773
|
|
|
|
|
|
|
|
|
|
|
$
|
134,708
|
|
|
|
|
|
|
|
|
|
|
$
|
126,679
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income as a percent of average interest earning
assets
|
|
|
|
|
|
|
|
|
|
|
5.08
|
%
|
|
|
|
|
|
|
|
|
|
|
4.63
|
%
|
|
|
|
|
|
|
|
|
|
|
4.26
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
All domestic, except for $5.1 million of finance
receivables in 2009 included in taxable loans from
customers domiciled in Canada. |
|
(2) |
|
Interest on tax-exempt loans and securities is presented on a
fully tax equivalent basis assuming a marginal tax rate of 35%. |
13
CHANGE IN
TAX EQUIVALENT NET INTEREST INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 Compared to 2008
|
|
|
2008 Compared to 2007
|
|
|
|
Volume
|
|
|
Rate
|
|
|
Net
|
|
|
Volume
|
|
|
Rate
|
|
|
Net
|
|
|
|
(In thousands)
|
|
|
Increase (decrease) in interest income (1, 2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable loans
|
|
$
|
(6,989
|
)
|
|
$
|
(1,713
|
)
|
|
$
|
(8,702
|
)
|
|
$
|
2,124
|
|
|
$
|
(17,789
|
)
|
|
$
|
(15,665
|
)
|
Tax-exempt loans (3)
|
|
|
(144
|
)
|
|
|
(6
|
)
|
|
|
(150
|
)
|
|
|
82
|
|
|
|
(3
|
)
|
|
|
79
|
|
Taxable securities
|
|
|
(1,865
|
)
|
|
|
(269
|
)
|
|
|
(2,134
|
)
|
|
|
(2,031
|
)
|
|
|
863
|
|
|
|
(1,168
|
)
|
Tax-exempt securities (3)
|
|
|
(5,105
|
)
|
|
|
(720
|
)
|
|
|
(5,825
|
)
|
|
|
(4,515
|
)
|
|
|
276
|
|
|
|
(4,239
|
)
|
Cash interest bearing
|
|
|
174
|
|
|
|
0
|
|
|
|
174
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other investments
|
|
|
(119
|
)
|
|
|
(233
|
)
|
|
|
(352
|
)
|
|
|
249
|
|
|
|
(303
|
)
|
|
|
(54
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income
|
|
|
(14,048
|
)
|
|
|
(2,941
|
)
|
|
|
(16,989
|
)
|
|
|
(4,091
|
)
|
|
|
(16,956
|
)
|
|
|
(21,047
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in interest expense (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings and NOW
|
|
|
252
|
|
|
|
(4,763
|
)
|
|
|
(4,511
|
)
|
|
|
(70
|
)
|
|
|
(8,436
|
)
|
|
|
(8,506
|
)
|
Time deposits
|
|
|
3,740
|
|
|
|
(10,521
|
)
|
|
|
(6,781
|
)
|
|
|
(22,342
|
)
|
|
|
(11,515
|
)
|
|
|
(33,857
|
)
|
Long-term debt
|
|
|
(12
|
)
|
|
|
0
|
|
|
|
(12
|
)
|
|
|
(97
|
)
|
|
|
5
|
|
|
|
(92
|
)
|
Other borrowings
|
|
|
(11,046
|
)
|
|
|
(704
|
)
|
|
|
(11,750
|
)
|
|
|
20,619
|
|
|
|
(7,240
|
)
|
|
|
13,379
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense
|
|
|
(7,066
|
)
|
|
|
(15,988
|
)
|
|
|
(23,054
|
)
|
|
|
(1,890
|
)
|
|
|
(27,186
|
)
|
|
|
(29,076
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
$
|
(6,982
|
)
|
|
$
|
13,047
|
|
|
$
|
6,065
|
|
|
$
|
(2,201
|
)
|
|
$
|
10,230
|
|
|
$
|
8,029
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The change in interest due to changes in both balance and rate
has been allocated to change due to balance and change due to
rate in proportion to the relationship of the absolute dollar
amounts of change in each. |
|
(2) |
|
All domestic, except for $0.5 million of interest income in
2009 on finance receivables included in taxable loans from
customers domiciled in Canada. |
|
(3) |
|
Interest on tax-exempt loans and securities is presented on a
fully tax equivalent basis assuming a marginal tax rate of 35%. |
COMPOSITION
OF AVERAGE INTEREST EARNING ASSETS AND INTEREST BEARING
LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
As a percent of average interest earning assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans (1)
|
|
|
89.2
|
%
|
|
|
88.4
|
%
|
|
|
85.5
|
%
|
Other interest earning assets
|
|
|
10.8
|
|
|
|
11.6
|
|
|
|
14.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average interest earning assets
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings and NOW
|
|
|
35.8
|
%
|
|
|
33.3
|
%
|
|
|
32.7
|
%
|
Time deposits
|
|
|
14.1
|
|
|
|
23.9
|
|
|
|
21.9
|
|
Brokered CDs
|
|
|
22.7
|
|
|
|
7.7
|
|
|
|
26.5
|
|
Other borrowings and long-term debt
|
|
|
14.3
|
|
|
|
23.5
|
|
|
|
7.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average interest bearing liabilities
|
|
|
86.9
|
%
|
|
|
88.4
|
%
|
|
|
88.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earning asset ratio
|
|
|
92.9
|
%
|
|
|
91.2
|
%
|
|
|
91.3
|
%
|
Free-funds ratio
|
|
|
13.1
|
|
|
|
11.6
|
|
|
|
11.9
|
|
|
|
|
(1) |
|
All domestic, except for 0.2% of finance receivables
in 2009 from customers domiciled in Canada. |
Provision for loan losses. The provision for
loan losses was $103.0 million during 2009 compared to
$71.3 million and $43.2 million during 2008 and 2007,
respectively. Changes in the provision for loan losses reflect
14
our assessment of the allowance for loan losses. The significant
increases in the provision for loan losses over the last three
years principally reflect a rise in the level of net loan
charge-offs and an elevated level of non-performing loans. While
we use relevant information to recognize losses on loans,
additional provisions for related losses may be necessary based
on changes in economic conditions, customer circumstances and
other credit risk factors. (See Portfolio Loans and asset
quality.)
Non-interest income. Non-interest income is a
significant element in assessing our results of operations. On a
long-term basis we are attempting to grow non-interest income in
order to diversify our revenues within the financial services
industry. We regard net gains on mortgage loan sales as a core
recurring source of revenue but they are quite cyclical and
volatile. We regard net gains (losses) on securities as a
non-operating component of non-interest income. As a
result, we believe it is best to evaluate our success in growing
non-interest income and diversifying our revenues by also
comparing non-interest income when excluding net gains (losses)
on assets (mortgage loans and securities).
Non-interest income totaled $58.7 million during 2009
compared to $29.7 million and $47.1 million during
2008 and 2007, respectively. Excluding net gains and losses on
mortgage loans and securities, non-interest income grew by 11.5%
to $44.1 million during 2009 and declined by 9.3% to
$39.5 million during 2008. These variances are primarily
due to changes in the valuation allowance related to capitalized
mortgage loan servicing rights.
NON-INTEREST
INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Service charges on deposit accounts
|
|
$
|
24,370
|
|
|
$
|
24,223
|
|
|
$
|
24,251
|
|
Net gains (losses) on assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage loans
|
|
|
10,860
|
|
|
|
5,181
|
|
|
|
4,317
|
|
Securities
|
|
|
3,826
|
|
|
|
(14,795
|
)
|
|
|
295
|
|
Other than temporary loss on securities available for sale
|
|
|
|
|
|
|
|
|
|
|
|
|
Total impairment loss
|
|
|
(4,073
|
)
|
|
|
(166
|
)
|
|
|
(1,000
|
)
|
Loss recognized in other comprehensive loss
|
|
|
3,991
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net impairment loss recognized in earnings
|
|
|
(82
|
)
|
|
|
(166
|
)
|
|
|
(1,000
|
)
|
VISA check card interchange income
|
|
|
5,922
|
|
|
|
5,728
|
|
|
|
4,905
|
|
Mortgage loan servicing
|
|
|
2,252
|
|
|
|
(2,071
|
)
|
|
|
2,236
|
|
Mutual fund and annuity commissions
|
|
|
2,017
|
|
|
|
2,207
|
|
|
|
2,072
|
|
Bank owned life insurance
|
|
|
1,615
|
|
|
|
1,960
|
|
|
|
1,830
|
|
Title insurance fees
|
|
|
2,272
|
|
|
|
1,388
|
|
|
|
1,551
|
|
Other
|
|
|
5,607
|
|
|
|
6,066
|
|
|
|
6,688
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest income
|
|
$
|
58,659
|
|
|
$
|
29,721
|
|
|
$
|
47,145
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service charges on deposit accounts totaled $24.4 million
during 2009, compared to $24.2 million and
$24.3 million during 2008 and 2007, respectively. The
overall level of service charges on deposits has remained
relatively consistent for the past three years. In late 2009 the
Federal Reserve Board adopted rules that will require a written
opt-in from customers before a bank can assess overdraft fees on
ATM or debit card transactions. These rules are effective
July 1, 2010. We believe that such legislation will have an
adverse impact on our present level of service charges on
deposits accounts.
We realized net gains of $10.9 million on the sale of
mortgage loans during 2009, compared to $5.2 million and
$4.3 million during 2008 and 2007 respectively. Effective
January 1, 2008, we implemented fair value accounting for
mortgage loans held for sale and on commitments to originate
mortgage loans.
The volume of loans sold is dependent upon our ability to
originate mortgage loans as well as the demand for fixed-rate
obligations and other loans that we cannot profitably fund
within established interest-rate risk
15
parameters. (See Portfolio Loans and asset quality.)
Net gains on mortgage loans are also dependent upon economic and
competitive factors as well as our ability to effectively manage
exposure to changes in interest rates and thus can often be a
volatile part of our overall revenues. In 2009, mortgage loan
origination and sales volumes increased from 2008 and 2007
reflecting generally lower interest rates that led to a
significant increase in refinance volumes. Additionally, new tax
credits for first-time home buyers during 2009 also spurred home
sales and hence mortgage loan origination volume. These positive
factors were partially offset by weak economic conditions, lower
home values and more stringent underwriting criteria required by
the secondary mortgage market, which reduced the number of
applicants being approved for mortgage loans.
MORTGAGE
LOAN ACTIVITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2009
|
|
2008
|
|
2007
|
|
|
(Dollars in thousands)
|
|
Mortgage loans originated
|
|
$
|
576,018
|
|
|
$
|
368,517
|
|
|
$
|
507,211
|
|
Mortgage loans sold
|
|
|
540,713
|
|
|
|
267,216
|
|
|
|
288,826
|
|
Mortgage loans sold with servicing rights released
|
|
|
55,495
|
|
|
|
51,875
|
|
|
|
47,783
|
|
Net gains on the sale of mortgage loans
|
|
|
10,860
|
|
|
|
5,181
|
|
|
|
4,317
|
|
Net gains as a percent of mortgage loans sold
|
|
|
2.01
|
%
|
|
|
1.94
|
%
|
|
|
1.49
|
%
|
Fair value adjustments included in the Loan Sales Margin
|
|
|
0.07
|
|
|
|
0.36
|
|
|
|
(0.06
|
)
|
Net gains as a percentage of mortgage loans sold (our Loan
Sales Margin) are impacted by several factors including
competition and the manner in which the loan is sold (with
servicing rights retained or released). Our decision to sell or
retain real estate mortgage loan servicing rights is primarily
influenced by an evaluation of the price being paid for mortgage
loan servicing by outside third parties compared to our
calculation of the economic value of retaining such servicing.
The sale of mortgage loan servicing rights may result in
declines in mortgage loan servicing income in future periods.
Gains on the sale of mortgage loans were also impacted by
recording fair value accounting adjustments. Excluding the
aforementioned accounting adjustments, the Loan Sales Margin
would have been 1.94% in 2009, 1.58% in 2008 and 1.55% in 2007.
The improved Loan Sales Margin in 2009 was generally due to more
favorable competitive conditions in 2009 as many mortgage
brokers left the market during 2008.
We generated securities net gains of $3.7 million in 2009.
The 2009 securities net gains were primarily due to increases in
the fair value and gains on the sale of our Bank of America
preferred stock as well as gains on the sale of municipal
securities. We sold all of our Bank of America preferred stock
in June 2009. The 2009 gains were partially offset by
$0.1 million of other than temporary impairment recognized
on one private label mortgage-backed security and one trust
preferred security.
We incurred securities net losses of $15.0 million in 2008.
These net losses were comprised of $7.7 million of losses
from the sale of securities, $2.8 million of unrealized
losses related to declines in the fair value of trading
securities that were still being held at year-end,
$0.2 million of other than temporary impairment charges and
a $6.2 million charge related to the dissolution of a
security as described below. These losses were partially offset
by $1.9 million of gains on sales of securities (primarily
municipal securities sales). 2008 was an unusual year as we
historically have not incurred any significant net losses on
securities. We elected, effective January 1, 2008, to
measure the majority of our preferred stock investments at fair
value. As a result of this election, we recorded an after tax
cumulative reduction of $1.5 million to retained earnings
associated with the initial adoption of fair value accounting
for these preferred stocks. This preferred stock portfolio
included issues of Fannie Mae, Freddie Mac, Merrill Lynch and
Goldman Sachs. During 2008 we recorded unrealized net losses on
securities of $2.8 million related to the decline in fair
value of the preferred stocks that were still being held at year
end. We also recorded realized net losses of $7.6 million
on the sale of several of these preferred stocks. The 2008
securities net losses also include 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. The conservatorship
of Fannie Mae and Freddie Mac in September 2008 resulted in the
market values of the preferred stocks issued by these entities
plummeting to low single digit prices per share. Prices on other
16
preferred stocks that we owned also declined sharply as the
market for these securities came under considerable stress.
These were the primary factors leading to the large securities
losses that we incurred during 2008.
The $0.7 million of securities net losses in 2007 include
$1.0 million of other than temporary impairment charges.
These charges related to Fannie Mae and Freddie Mac preferred
stocks. We also recorded securities gains of approximately
$0.3 million in 2007 primarily related to the sale of
municipal securities.
GAINS AND
LOSSES ON SECURITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
Proceeds
|
|
Gains
|
|
Losses(1)
|
|
Net
|
|
2009
|
|
$
|
43,525
|
|
|
$
|
3,957
|
|
|
$
|
213
|
|
|
$
|
3,744
|
|
2008
|
|
|
80,348
|
|
|
|
1,903
|
|
|
|
16,864
|
|
|
|
(14,961
|
)
|
2007
|
|
|
61,520
|
|
|
|
327
|
|
|
$
|
1,032
|
|
|
|
(705
|
)
|
|
|
|
(1) |
|
Losses in 2009 include $.08 million of other than temporary
impairment charges while losses in 2008 include a
$6.2 million write-down related to the dissolution of a
money-market auction rate security and the distribution of the
underlying preferred stock, $0.2 million of other than
temporary impairment charges and $2.8 million of losses
recognized on trading securities still held at December 31,
2008 while losses in 2007 include $1.0 million of other
than temporary impairment charges. |
VISA check card interchange income increased to
$5.9 million in 2009 compared to $5.7 million in 2008
and $4.9 million in 2007. The significant increase in 2009
and 2008 compared to 2007 is primarily due to the aforementioned
branch acquisition (which occurred in March 2007). In addition,
these results are also due to increases in the size of our card
base due to growth in checking accounts as well as increases in
the frequency of use of our VISA check card product by our
customer base.
Mortgage loan servicing generated revenue of $2.3 million
and $2.2 million in 2009 and 2007, respectively and an
expense of $2.1 million in 2008. These yearly comparative
variances are primarily due to changes in the valuation
allowance on capitalized mortgage loan servicing rights and the
level of amortization of this asset. The period end valuation
allowance is based on the valuation of the mortgage loan
servicing portfolio and the amortization is primarily impacted
by prepayment activity. In particular, mortgage loan interest
rates declined significantly in December 2008 resulting in
higher estimated future prepayment rates and a significant
increase in the valuation allowance at the end of that year.
CAPITALIZED
MORTGAGE LOAN SERVICING RIGHTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Balance at January 1,
|
|
$
|
11,966
|
|
|
$
|
15,780
|
|
|
$
|
14,782
|
|
Originated servicing rights capitalized
|
|
|
5,213
|
|
|
|
2,405
|
|
|
|
2,873
|
|
Amortization
|
|
|
(4,255
|
)
|
|
|
(1,887
|
)
|
|
|
(1,624
|
)
|
(Increase)/decrease in valuation allowance
|
|
|
2,349
|
|
|
|
(4,332
|
)
|
|
|
(251
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31,
|
|
$
|
15,273
|
|
|
$
|
11,966
|
|
|
$
|
15,780
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation allowance at December 31,
|
|
$
|
2,302
|
|
|
$
|
4,651
|
|
|
$
|
319
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2009 we were servicing approximately
$1.73 billion in mortgage loans for others on which
servicing rights have been capitalized. This servicing portfolio
had a weighted average coupon rate of 5.73% and a weighted
average service fee of approximately 26 basis points.
Remaining capitalized mortgage loan servicing rights at
December 31, 2009 totaled $15.3 million, representing
approximately 89 basis points on the related amount of
mortgage loans serviced for others. The capitalized mortgage
loan servicing had an estimated fair market value of
$16.3 million at December 31, 2009.
Mutual fund and annuity commissions totaled $2.0 million,
$2.2 million and $2.1 million in 2009, 2008 and 2007,
respectively. The decline in 2009 generally reflects difficult
market conditions and reduced commission
17
payouts on certain annuity products. The increase in 2008 is due
to higher sales of these products as a result of growth in the
number of our licensed sales representatives.
In August 2002 we acquired $35.0 million in separate
account bank owned life insurance on which we earned
$1.6 million, $2.0 million and $1.8 million in
2009, 2008 and 2007, respectively, principally as a result of
increases in cash surrender value. Our separate account is
primarily invested in agency mortgage-backed securities. The
reduced crediting rate in 2009 generally reflects lower interest
rates on mortgage-backed securities. The total cash surrender
value of our bank owned life insurance was $46.5 million
and $44.9 million at December 31, 2009 and 2008,
respectively.
Title insurance fees totaled $2.3 million in 2009,
$1.4 million in 2008 and $1.6 million in 2007. The
fluctuation in title insurance fees is primarily a function of
the level of mortgage loans that we originated. The growth in
2009 reflects a significant increase in mortgage loan refinance
volume.
Other non-interest income totaled $5.6 million,
$6.1 million and $6.7 million in 2009, 2008 and 2007,
respectively. 2009 other non-interest income includes
$1.0 million related to foreign currency transaction gains
associated with Canadian dollar denominated finance receivables.
The Canadian dollar appreciated significantly compared to the
U.S. dollar during 2009. Total Canadian dollar denominated
finance receivables had declined to $1.7 million at
December 31, 2009. As a result, we would expect future
foreign currency transaction gains or losses to be relatively
minor. These foreign currency transaction gains were
substantially offset by the change in the results of our private
mortgage reinsurance captive in 2009. Our private mortgage
reinsurance captive incurred a loss of $0.6 million in 2009
compared to income of $0.4 million and $0.3 million in
2008 and 2007, respectively. The 2009 loss reflects increased
mortgage loan defaults and lower real estate values which lead
to higher private mortgage insurance claims. 2008 other
non-interest income included revenue of $0.4 million from
the redemption of 8,551 shares of Visa, Inc. Class B
Common Stock as part of the Visa initial public offering. Other
non-interest income also includes zero, $0.1 million and
$0.5 million in 2009, 2008 and 2007, respectively, of fee
income from our MoneyGram official checks program. This fee
income is determined largely by the level of short-term interest
rates. The very low short term interest rates have currently
eliminated this source of revenue. Finally, 2007 also included
$0.3 million of income from interest rate swap or interest
rate cap termination fees.
Non-interest expense. Non-interest expense is
an important component of our results of operations.
Historically, we primarily focused on revenue growth, and while
we strive to efficiently manage our cost structure, our
non-interest expenses generally increased from year to year
because we expanded our operations through acquisitions and by
opening new branches and loan production offices. Because of the
current challenging economic environment that we are
confronting, our expansion through acquisitions or by opening
new branches is unlikely in the near term. Further, management
is focused on a number of initiatives to reduce and contain
non-interest expenses.
Non-interest expense totaled $187.6 million during 2009,
compared to $177.2 million and $115.7 million during
2008 and 2007, respectively. 2009 non-interest expense includes
$31.2 million for vehicle service contract counterparty
contingencies and a $16.7 million goodwill impairment
charge. 2008 non-interest expense includes a $50.0 million
goodwill impairment charge. 2007 non-interest expense includes
$1.7 million of severance and other (primarily data
processing and legal and professional fees) expenses associated
with the aforementioned bank consolidation and staff reductions
and $0.3 million of goodwill impairment charges. In
addition, the aforementioned branch acquisition resulted in
increases in several categories of non-interest expenses in 2009
and 2008 compared to 2007. Loan and collection costs and losses
on other real estate and repossessed assets have also increased
reflecting higher levels of non-performing loans and other real
estate.
18
NON-INTEREST
EXPENSE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Compensation
|
|
$
|
40,053
|
|
|
$
|
40,181
|
|
|
$
|
40,373
|
|
Performance-based compensation and benefits
|
|
|
2,889
|
|
|
|
4,861
|
|
|
|
4,979
|
|
Other benefits
|
|
|
10,061
|
|
|
|
10,137
|
|
|
|
10,459
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits
|
|
|
53,003
|
|
|
|
55,179
|
|
|
|
55,811
|
|
Vehicle service contract counterparty contingencies
|
|
|
31,234
|
|
|
|
966
|
|
|
|
|
|
Loan and collection
|
|
|
14,727
|
|
|
|
9,431
|
|
|
|
4,949
|
|
Occupancy, net
|
|
|
11,092
|
|
|
|
11,852
|
|
|
|
10,624
|
|
Loss on other real estate and repossessed assets
|
|
|
8,554
|
|
|
|
4,349
|
|
|
|
276
|
|
Data processing
|
|
|
8,386
|
|
|
|
7,148
|
|
|
|
6,957
|
|
Deposit Insurance
|
|
|
7,328
|
|
|
|
1,988
|
|
|
|
628
|
|
Furniture, fixtures and equipment
|
|
|
7,159
|
|
|
|
7,074
|
|
|
|
7,633
|
|
Credit card and bank service fees
|
|
|
6,608
|
|
|
|
4,818
|
|
|
|
3,913
|
|
Advertising
|
|
|
5,696
|
|
|
|
5,534
|
|
|
|
5,514
|
|
Communications
|
|
|
4,424
|
|
|
|
4,018
|
|
|
|
3,809
|
|
Legal and professional
|
|
|
3,222
|
|
|
|
2,032
|
|
|
|
1,978
|
|
Amortization of intangible assets
|
|
|
1,930
|
|
|
|
3,072
|
|
|
|
3,373
|
|
Supplies
|
|
|
1,835
|
|
|
|
2,030
|
|
|
|
2,411
|
|
Goodwill impairment
|
|
|
16,734
|
|
|
|
50,020
|
|
|
|
343
|
|
Other
|
|
|
5,655
|
|
|
|
7,639
|
|
|
|
7,505
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest expense
|
|
$
|
187,587
|
|
|
$
|
177,150
|
|
|
$
|
115,724
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The decline in total compensation and benefits is primarily due
to a reduction in performance based compensation. In addition,
the deferral (as direct loan origination costs) of compensation
and benefits has increased in 2009 as a result of the rise in
mortgage loan origination activity. These compensation cost
reductions were partially offset by additional staff added
during 2009 to manage non-performing assets and loan
collections. The reduction in performance based compensation
reflects our near-term financial performance. In 2009, no
employee stock ownership contribution was made and no bonuses
were paid. In addition, executive and senior officer salaries
were frozen at 2008 levels for 2009. In 2008, no executive
officer bonuses were paid. Salaries in 2007 also include
$1.1 million of severance costs from staff reductions
associated with the bank consolidation as well as downsizing
initiatives.
We maintain performance-based compensation plans. In addition to
commissions and cash incentive awards, such plans include an
employee stock ownership plan and a long-term equity based
incentive plan. The amount of expense recognized in 2009, 2008
and 2007 for share-based awards under our long-term equity based
incentive plan was $0.8 million, $0.6 million and
$0.3 million, respectively.
For 2010, no salary increases were granted for employees, the
employee stock ownership contribution will again be eliminated
and the match of employees 401(k) plan contributions is
also being eliminated.
We recorded an expense of $31.2 million and
$1.0 million for vehicle service contract counterparty
contingencies in 2009 and 2008, respectively (no such expense
was recorded in 2007). This expense relates to Mepcos
business activities.
Mepco purchases payment plans, on a full recourse basis, from
companies (which we refer to as Mepcos
counterparties) that provide vehicle service
contracts and similar products to consumers. The payment plans
(which are classified as finance receivables in our consolidated
statements of financial condition) permit a consumer to purchase
a service contract by making installment payments, generally for
a term of 12 to 24 months, to the
19
sellers of those contracts (one of the
counterparties). Mepco does not evaluate the
creditworthiness of the individual customer but instead
primarily relies on the payment plan collateral (the unearned
vehicle service contract and unearned sales commission) in the
event of default. When consumers stop making payments or
exercise their right to voluntarily cancel the contract, the
remaining unpaid balance of the payment plan is normally
recouped by Mepco from the counterparties that sold the contract
and provided the coverage. The refund obligations of these
counterparties are not fully secured. We record losses, included
in non-interest expenses, for estimated defaults by these
counterparties in their recourse obligations to Mepco.
Over 40% of the payment plans currently held by Mepco were
purchased from a single counterparty. Recently, this
counterparty has experienced decreased sales (and eventually
stopped all new sales efforts in December of 2009) and
significantly increased levels of customer cancellations. In
addition, this counterparty is subject to a multi-state attorney
general investigation and multiple civil lawsuits (including
class action lawsuits) regarding certain of its business
practices. These events have increased costs for the
counterparty, putting further pressure on its cash flow and
profitability. In December of 2009, we were advised that this
counterparty plans to wind down its business operations and is
contemplating a bankruptcy filing in the near future.
Mepco is actively working to reduce its credit exposure to this
counterparty. The amount of payment plans (finance receivables)
purchased from this counterparty and outstanding at
December 31, 2009 totaled approximately
$206.1 million. In addition, as of December 31, 2009,
this counterparty owes Mepco $16.2 million for previously
cancelled payment plans. The wind down of operations by this
counterparty is likely to lead to substantial potential losses
as this entity will not be in a position to honor its recourse
obligations on payment plans that Mepco has purchased which are
cancelled prior to payment in full. In that event, Mepco will
seek to recover amounts owed by the counterparty from various
co-obligors and guarantors and through the liquidation of
certain collateral held by Mepco. However, we are not certain as
to the amount of any such recoveries. In 2009, Mepco recorded a
$19.0 million expense (as part of vehicle service contract
counterparty contingencies that is included in non-interest
expense) to establish a reserve for losses related to this
counterparty.
In addition, several of these vehicle service contract
marketers, including the counterparty described above and other
companies from which Mepco has purchased payment plans, have
been sued or are under investigation for alleged violations of
telemarketing laws and other consumer protection laws. The
actions have been brought primarily by state attorneys general
and the Federal Trade Commission but there have also been class
action and other private lawsuits filed. In some cases, the
companies have been placed into receivership or have
discontinued business. In addition, the allegations,
particularly those relating to blatantly abusive telemarketing
practices by a relatively small number of marketers, have
resulted in a significant amount of negative publicity that has
adversely affected and may in the future continue to adversely
affect sales and customer cancellations of purchased products
throughout the industry, which have already been negatively
impacted by the economic recession. It is possible these events
could also cause federal or state lawmakers to enact legislation
to further regulate the industry. In addition to the
$19.0 million expense described above, Mepco recorded an
additional $12.2 million of expense in 2009 for the default
by other counterparties in their recourse obligations to Mepco.
These charges are being classified in non-interest expense
because they are associated with a default or potential default
of a contractual obligation under our counterparty contracts as
opposed to loss on the administration of the payment plan
itself. Our estimate of probable losses from vehicle service
contract counterparty contingencies requires a significant
amount of judgment because a number of factors can influence the
amount of loss that we may ultimately incur. These factors
include our estimate of future cancellations of vehicle service
contracts, our evaluation of collateral that may be available to
recover funds due from our counterparties, and the amount
collected from counterparties in connection with their
contractual recourse obligations. We apply a rigorous process,
based upon observable contract activity and past experience, to
estimate probable losses and quantify the necessary reserves for
our vehicle service contract counterparty contingencies, but
there can be no assurance that our modeling process will
successfully identify all such losses. As a result, we could
record future losses associated with vehicle service contract
counterparty contingencies that may be significantly different
than the levels that we recorded in 2009.
The above described events have had and may continue to have an
adverse impact on Mepco in several ways. First, we face
increased risk with respect to certain counterparties defaulting
in their contractual obligations to Mepco which could result in
additional charges for losses if these counterparties go out of
business. Second, these events have negatively affected sales
and customer cancellations in the industry, which has had and is
expected to
20
continue to have a negative impact on the profitability of
Mepcos business. As a result of these events and expected
declines in Mepcos future profitability, in 2009, we wrote
down all of the $16.7 million of goodwill associated with
Mepco. In addition, if any federal or state investigation is
expanded to include finance companies such as Mepco, Mepco will
face additional legal and other expenses in connection with any
such investigation. An increased level of private actions in
which Mepco is named as a defendant will also cause Mepco to
incur additional legal expenses as well as potential liability.
Finally, Mepco has incurred and will likely continue to incur
additional legal and other expenses, in general, in dealing with
these industry problems. As of December 31, 2009, the net
finance receivables held by Mepco represented approximately
13.7% of our consolidated total assets. We expect that the
amount of total payment plans (finance receivables) held by
Mepco will decline by approximately 40% in 2010, due to the loss
of business from the above described counterparty as well as our
desire to reduce finance receivables as a percentage of total
assets. This decline in finance receivables is expected to
adversely impact our net interest income and net interest margin.
Loan and collection expenses primarily reflect collection costs
related to non-performing or delinquent loans. The sharp rise in
these expenses in 2009 and 2008, reflects our elevated level of
non-performing loans and other real estate.
Occupancy expenses, net, totaled $11.1 million,
$11.9 million and $10.6 million in 2009, 2008 and
2007, respectively. A portion of the increase in 2009 and 2008,
is due to the above described branch acquisition that occurred
in March 2007. In addition, we closed several loan production
offices in 2008 and occupancy expenses in that year include
$0.2 million of costs associated with such office closings.
Loss on other real estate and repossessed assets primarily
represents the loss on the sale or additional write downs on
these assets subsequent to the transfer of the asset from our
loan portfolio. This transfer occurs at the time we acquire the
collateral that secured the loan. At the time of acquisition,
the real estate or other repossessed asset is valued at fair
value, less estimated costs to sell, which becomes the new basis
for the asset. Any write-downs at the time of acquisition are
charged to the allowance for loan losses. The significant
increase in loss on other real estate and repossessed assets in
2009 and 2008 compared to earlier years is primarily due to
declines in the value of these assets subsequent to the
acquisition date. These declines in value have been accentuated
by the high inventory of foreclosed homes for sale in many of
our markets as well as Michigans weak economic conditions.
Data processing and communications expenses all generally
increased over the periods presented as a result of the growth
of the organization and from the branch acquisition. In
addition, 2009 data processing expense includes
$0.6 million related to a revenue enhancement project
performed by our core data processing company.
Deposit insurance expense increased substantially in 2009,
compared to the prior periods reflecting higher rates and an
industry-wide special assessment of $1.4 million in the
second quarter of 2009. This special assessment was equal to
5 basis points on total assets less Tier 1 capital. In
addition, our balance of total deposits increased during 2009.
During 2007, we fully utilized the assessment credits that
reduced our expense during that year.
As an FDIC insured institution, we are required to pay deposit
insurance premium assessments to the FDIC. Under the FDICs
risk-based assessment system for deposit insurance premiums, all
insured depository institutions are placed into one of four
categories and assessed insurance premiums based primarily on
their level of capital and supervisory evaluations. Insurance
assessments ranged from 0.12% to 0.50% of total deposits for the
first quarter 2009 assessment. Effective April 1, 2009,
insurance assessments ranged from 0.07% to 0.78%, depending on
an institutions risk classification and other factors.
Furniture, fixtures and equipment expense has generally
declined since 2007, due in part to cost reduction initiatives.
In addition, certain fixed assets became fully depreciated in
2008 and were not replaced. The decline in supplies expense
since 2007, was due in part to somewhat lower business volumes
relative to 2007 and the aforementioned cost reduction
initiatives.
Advertising expense was relatively comparable across all years
and primarily represents direct mail costs for our high
performance checking program, costs associated with our VISA
debit card rewards program and media advertising.
21
Credit card and bank service fees increased in each year
presented primarily due to growth in the number of vehicle
service contract payment plans being administered by Mepco. As
described above, we expect payment plans at Mepco to decline in
2010, and would therefore expect these expenses to eventually
decline as well.
Legal and professional fees increased substantially in 2009,
over 2008 and 2007 levels due primarily to increased legal
expenses associated with the issues described above related to
Mepco and due to various regulatory matters and increased
third-party costs principally associated with external reviews
of our loan portfolio.
The amortization of intangible assets primarily relates to the
branch acquisition and the amortization of the deposit customer
relationship value, including core deposit value, that was
acquired in this transaction.
During 2009, we recorded a $16.7 million goodwill
impairment charge at our Mepco segment. In the fourth quarter of
2009 we updated our goodwill impairment testing (interim tests
had also been performed in each of the first three quarters of
2009). The results of the year end goodwill impairment testing
showed that the estimated fair value of our Mepco reporting unit
was now less than the carrying value of equity. The fair value
of Mepco is principally based on estimated future earnings
utilizing a discounted cash flow methodology. As described above
and in the Business segments section below, Mepco
recorded a substantial loss in the fourth quarter of 2009 (Mepco
had been profitable during the first nine months of 2009).
Further, Mepcos largest business counterparty, who
accounted for nearly one-half of Mepcos payment plan
business, defaulted in its obligations to Mepco and this
counterparty is expected to cease its operations in 2010. These
factors adversely impacted the level of Mepcos expected
future earnings and hence its fair value. A step 2 analysis and
valuation was performed. Based on the step 2 analysis (which
involved determining the fair value of Mepcos assets,
liabilities and identifiable intangibles), we concluded that
goodwill was now impaired, resulting in this $16.7 million
charge.
During 2008, we recorded a $50.0 million goodwill
impairment charge. In the fourth quarter of 2008 we updated our
goodwill impairment testing (interim tests had also been
performed in the second and third quarters of 2008). Our common
stock price dropped even further in the fourth quarter of 2008
resulting in a wider difference between our market
capitalization and book value. The results of the year end
goodwill impairment testing showed that the estimated fair value
of our bank reporting unit was less than the carrying value of
equity. This necessitated a step 2 analysis and valuation. Based
on the step 2 analysis (which involved determining the fair
value of our banks assets, liabilities and identifiable
intangibles) we concluded that goodwill was now impaired,
resulting in this $50.0 million charge. The remaining
goodwill at December 31, 2008 of $16.7 million was at
our Mepco reporting unit and the testing performed at that time
indicated that this goodwill was not impaired. Mepco had net
income from continuing operations of $10.7 million and
$5.1 million in 2008 and 2007, respectively. Based
primarily on Mepcos estimated future earnings, the fair
value of this reporting unit (utilizing a discounted cash flow
method) was determined to be in excess of its carrying value at
the end of 2008. A portion of the $50.0 goodwill impairment
charge was tax deductible and a $6.3 million tax benefit
was recorded related to this charge.
During 2007 we recorded a $0.3 million goodwill impairment
charge. This charge related to writing off the remaining
goodwill associated with our mobile home lending subsidiary,
First Home Financial (FHF), that was dissolved in
June 2007.
Other non-interest expense decreased to $5.7 million in
2009, compared to $7.6 million in 2008, and
$7.5 million in 2007. The decrease in 2009, compared to
2008, was primarily due to a decrease in costs associated with a
deferred compensation plan, travel and entertainment expenses
and bank courier costs while the decrease from 2007, was
primarily attributed to decreases in branch conversion costs,
travel and entertainment expenses and bank courier costs.
In July 2007, the State of Michigan replaced its Single Business
Tax (SBT) with a new Michigan Business Tax
(MBT) which became effective in 2008. Financial
institutions are subject to an industry-specific tax which is
based on net capital. Both the MBT and the SBT are recorded in
other non-interest expenses in the consolidated statements of
operations. Our MBT expense was $0.1 million and
$0.2 million in 2009 and 2008, respectively. Our SBT
expense was zero in 2007.
Income tax expense (benefit). Income tax
expense (benefit) was $(3.2) million, $3.1 million,
and $(1.1) million in 2009, 2008 and 2007, respectively. A
valuation allowance of $24.0 million and $27.6 million
in 2009 and 2008,
22
respectively, on deferred tax assets, largely offset the effect
of pre-tax losses. The 2009 valuation allowance is net of a
$4.1 million allocation of deferred taxes on accumulated
other comprehensive income.
We assess the need for a valuation allowance against our
deferred tax assets periodically. The realization of deferred
tax assets (net of the recorded valuation allowance) is largely
dependent upon future taxable income, future reversals of
existing taxable temporary differences and the ability to
carry-back losses to available tax years. In assessing the need
for a valuation allowance, we consider all positive and negative
evidence, including anticipated operating results, taxable
income in carry-back years, scheduled reversals of deferred tax
liabilities and tax planning strategies. In 2008, our conclusion
that we needed a valuation allowance was based on a number of
factors, including our declining operating performance since
2005 and our net operating loss in 2008, overall negative trends
in the banking industry and our expectation that our operating
results will continue to be negatively affected by the overall
economic environment. As a result, we recorded a valuation
allowance in 2008, of $36.2 million on our deferred tax
assets which consisted of $27.6 million recognized as
income tax expense and $8.6 million recognized through the
accumulated other comprehensive loss component of
shareholders equity. The valuation allowance against our
deferred tax assets at December 31, 2008 of
$36.2 million represented our entire net deferred tax asset
except for that amount which could be carried back to 2007 and
recovered in cash as well as for certain deferred tax assets at
Mepco that relate to state income taxes and that can be
recovered based on Mepcos individual earnings. During
2009, we concluded that we needed to continue to carry a
valuation allowance based on similar factors discussed above. As
a result we recorded an additional net valuation allowance of
$24.0 million recognized as income tax expense (which is
net of a $4.1 million allocation of deferred taxes on the
accumulated other comprehensive loss component of
shareholders equity). The valuation allowance against our
deferred tax assets totaled $60.2 million at
December 31, 2009. This valuation allowance represents our
entire net deferred tax asset except for certain deferred tax
assets at Mepco that relate to state income taxes and that can
be recovered based on Mepcos individual earnings.
Despite the valuation allowance, these deferred tax assets
remain available to offset future taxable income. Our deferred
tax assets will be analyzed quarterly for changes affecting the
valuation allowance, which may be adjusted in future periods
accordingly. In making such judgments, significant weight will
be given to evidence that can be objectively verified. We will
analyze changes in near-term market conditions and consider both
positive and negative evidence as well as other factors which
may impact future operating results in making any decision to
adjust this valuation allowance.
The capital initiatives summarized above in
Introduction and detailed below under
Liquidity and capital resources may trigger an
ownership change that would negatively affect our ability to
utilize our net operating loss carryforwards and other deferred
tax assets in the future. As a result, we may suffer
higher-than-anticipated
tax expense, and consequently lower net income and cash flow, in
those future years. As of December 31, 2009, we had federal
net operating loss carryforwards of approximately
$42.8 million. Companies are subject to a change of
ownership test under Section 382 of the Internal Revenue
Code of 1986, as amended (the Code), that, if met,
would limit the annual utilization of tax losses and credits
carrying forward from pre-change of ownership periods, as well
as the ability to use certain unrealized built-in losses.
Generally, under Section 382, the yearly limitation on our
ability to utilize such deductions will be equal to the product
of the applicable long-term tax exempt rate (presently 4.16%)
and the sum of the values of our common shares and of our
outstanding preferred stock, immediately before the ownership
change. In addition to limits on the use of net operating loss
carryforwards, our ability to utilize deductions related to bad
debts and other losses for up to a five-year period following
such an ownership change would also be limited under
Section 382, to the extent that such deductions reflect a
net loss that was built-in to our assets immediately
prior to the ownership change. At this time, we do not know
whether we will be successful in completing the initiatives as
proposed and therefore do not know the likelihood of
experiencing a change of ownership under these tax rules.
Since we currently have a valuation allowance intended to fully
offset these net operating loss carryforwards and other deferred
tax assets, we do not expect these tax rules to cause a material
impact to our net income or loss in the near term.
The income tax (benefit) of $(1.1) million in 2007, and
relative effective tax rate is principally attributed to tax
exempt income representing a much high percentage of pre-tax
income from continuing operations in that year.
23
Our actual federal income tax expense (benefit) is different
than the amount computed by applying our statutory federal
income tax rate to our pre-tax income from continuing operations
primarily due to tax-exempt interest income and tax-exempt
income from the increase in the cash surrender value on life
insurance.
Income tax expense in the consolidated statements of operations
also includes income taxes in a variety of other states due
primarily to Mepcos operations. The amounts of such state
income taxes were zero, $1.0 million and $0.4 million
in 2009, 2008, and 2007, respectively.
Discontinued operations, net of tax. On
January 15, 2007 we sold substantially all of the assets of
Mepcos insurance premium finance business to PFS. We
received $176.0 million of cash that was utilized to payoff
Brokered CDs and short-term borrowings at Mepcos parent
company, Independent Bank. Under the terms of the sale, PFS also
assumed approximately $11.7 million in liabilities. We
allocated $4.1 million of goodwill and $0.3 million of
other intangible assets to this business. Revenues and expenses
associated with Mepcos insurance premium finance business
have been presented as discontinued operations in the
consolidated statements of operations. Likewise, the assets and
liabilities associated with this business have been reclassified
to discontinued operations in the consolidated statements of
financial condition. In 2007 the $0.4 million of income
from discontinued operations relates primarily to operations
during the first 15 days of January 2007 and the recovery
of certain previously charged-off insurance premium finance
receivables.
We have elected to not make any reclassifications in the
consolidated statements of cash flows for discontinued
operations. Prior to the December 2006 announced sale, our
insurance premium finance business was included in the Mepco
segment.
Business segments. Our reportable segments are
based upon legal entities. We currently have two reportable
segments: Independent Bank and Mepco. These business segments
are also differentiated based on the products and services
provided. We evaluate performance based principally on net
income of the respective reportable segments.
The following table presents net income (loss) by business
segment.
BUSINESS
SEGMENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007(1)
|
|
|
Independent Bank
|
|
$
|
(71,095
|
)
|
|
$
|
(92,551
|
)
|
|
$
|
9,729
|
|
Mepco
|
|
|
(11,689
|
)
|
|
|
10,729
|
|
|
|
5,070
|
|
Other (2)
|
|
|
(7,636
|
)
|
|
|
(9,780
|
)
|
|
|
(5,439
|
)
|
Elimination
|
|
|
193
|
|
|
|
(62
|
)
|
|
|
595
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(90,227
|
)
|
|
$
|
(91,664
|
)
|
|
$
|
9,955
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
2007 represents income (loss) from continuing operations after
income taxes and excludes $0.4 million of income from
discontinued operations, net of income taxes. |
|
(2) |
|
Includes amounts relating to our parent company and certain
insignificant operations. |
The losses recorded by the Bank in 2009 and 2008 are primarily
due to higher provisions for loan losses, loan and collection
costs and losses on other real estate. The higher credit related
costs reflect elevated levels of non-performing loans and loan
net charge-offs. (See Portfolio Loans and asset
quality.) 2008 Bank results also included a
$50.0 million goodwill impairment charge. (See
Non-interest expense.) In addition, the Bank results
included $24.0 million and $27.6 million in 2009 and
2008, respectively, of income tax expense for a valuation
allowance against deferred tax assets. (See Income tax
expense (benefit).)
Mepcos net income had generally been increasing due to
growth in finance receivables and lower short-term interest
rates. However, in 2009, Mepco recorded $31.2 million of
vehicle service contract counterparty contingencies expense and
a goodwill impairment charge of $16.7 million, both as
described above. (See Non-interest expense.) All of
Mepcos funding is provided by Independent Bank and is
priced principally based on Brokered CD rates. It is unlikely
that Mepco could obtain such favorable funding costs on its own
in the open market.
24
FINANCIAL
CONDITION
Summary. Our total assets rose slightly to
$2.97 billion at December 31, 2009 compared to
$2.96 billion at December 31, 2008. The increase in
total assets primarily reflects increases in cash and cash
equivalents and in prepaid FDIC deposit insurance assessments
that were substantially offset by decreases in securities
available for sale, loans and goodwill. Loans, excluding loans
held for sale (Portfolio Loans) decreased
$184.0 million in 2009 as every category of loans declined
except for finance receivables. Total deposits increased by
$499.3 million in 2009 principally as a result of an
increase in checking and savings accounts and in Brokered CDs.
Other borrowings decreased by $410.8 million in 2009 as
maturing borrowings from the FRB or Federal Home Loan Bank
(FHLB) were replaced with Brokered CDs.
Securities. We maintain diversified securities
portfolios, which include obligations of
U.S. government-sponsored agencies, securities issued by
states and political subdivisions, corporate securities,
mortgage-backed securities and asset-backed securities. We also
invest in capital securities, which include preferred stocks and
trust preferred securities. We regularly evaluate
asset/liability management needs and attempt to maintain a
portfolio structure that provides sufficient liquidity and cash
flow. We believe that the unrealized losses on securities
available for sale are temporary in nature and are expected to
be recovered within a reasonable time period. We believe that we
have the ability to hold securities with unrealized losses to
maturity or until such time as the unrealized losses reverse.
(See Asset/liability management.)
Securities available for sale declined during 2009 and 2008
because maturities and principal payments in the portfolio were
not replaced with new purchases. We also sold municipal
securities during 2009 and 2008 primarily because our current
tax situation (net operating loss carry forward) negates the
benefit of holding tax exempt securities.
As discussed earlier, we elected effective January 1, 2008,
to measure the majority of our preferred stock investments at
fair value. These investments are classified as trading
securities in our consolidated statements of financial
condition. During 2009 we recorded unrealized net gains on
trading securities of $0.04 million related to an increase
in fair value of preferred stocks and recorded realized net
gains of $0.9 million on the sale of preferred stocks.
During 2008 we recorded unrealized net losses on trading
securities of $2.8 million related to a decline in fair
value of the preferred stocks. We also recorded realized net
losses of $7.6 million in 2008 on the sale of several of
these preferred stocks. (See Non-Interest Income).
At December 31, 2009 we only had $0.1 million of
trading securities remaining.
We recorded other than temporary impairment charges on
securities of $0.1 million, $0.2 million, and
$1.0 million in 2009, 2008, and 2007, respectively. The
2009 impairment charge relates to a private label
mortgage-backed security and a trust preferred security issued
by a small Michigan-based community bank. The 2008 impairment
charge relates to this same trust preferred security. In 2007,
we recorded $1.0 million of impairment charges on Fannie
Mae and Freddie Mac preferred securities. In these instances we
believe that the decline in value is directly due to matters
other than changes in interest rates, are not expected to be
recovered within a reasonable timeframe based upon available
information and are therefore other than temporary in nature.
(See Non-interest income and Asset/liability
management.) In addition, in the fourth quarter of 2008 we
recorded 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.
SECURITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
|
|
Unrealized
|
|
Fair
|
|
|
Cost
|
|
Gains
|
|
Losses
|
|
Value
|
|
|
|
|
(In thousands)
|
|
|
|
Securities available for sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
$
|
171,049
|
|
|
$
|
3,149
|
|
|
$
|
10,047
|
|
|
|
164,151
|
|
December 31, 2008
|
|
|
231,746
|
|
|
|
3,707
|
|
|
|
20,041
|
|
|
|
215,412
|
|
December 31, 2007
|
|
|
363,237
|
|
|
|
6,013
|
|
|
|
5,056
|
|
|
|
364,194
|
|
25
We evaluate securities for
other-than-temporary
impairment at least quarterly and more frequently when economic
or market concerns warrant such evaluation. In performing this
review we consider (1) the length of time and extent that
fair value has been less than cost, (2) the financial
condition and near term prospects of the issuer, (3) the
impact of changes in market interest rates on the fair value of
the security and (4) an assessment of whether we intend to
sell, or it is more likely than not that we will be required to
sell a security in an unrealized loss position before recovery
of its amortized cost basis. If either of these criteria is met,
the entire difference between amortized cost and fair value is
recognized in earnings.
For securities that do not meet the aforementioned criteria, the
amount of impairment recognized in earnings is limited to the
amount related to credit losses, while impairment related to
other factors is recognized in other comprehensive income.
U.S. Agency residential mortgage-backed
securities at December 31, 2009 we had five
securities whose fair value is less than amortized cost. The
unrealized losses are largely attributed to rising interest
rates. As management does not intend to liquidate these
securities and it is more likely than not that we will not be
required to sell these securities prior to recovery of these
unrealized losses, no declines are deemed to be other than
temporary.
Private label residential mortgage and other asset-backed
securities at December 31, 2009 we had 23
securities whose fair value is less than amortized cost. 22 of
the issues are rated by a major rating agency as investment
grade while one is below investment grade. Pricing conditions in
the private label residential mortgage and asset-backed security
markets are characterized by sporadic secondary market flow,
significant implied liquidity risk premiums, a wide
bid / ask spread and an absence of new issuances of
similar securities. This market has been closed to
new issuance since the third quarter of 2007. Investors in this
asset class have suffered significant losses and at present,
there are few active buyers for this product. During the fourth
quarter of 2009, secondary market trading activity increased
modestly. Prices for many securities improved. Much of this
improvement is due to technical issues; namely negative new
supply. One dealer reports that price improvements are generally
met with increased selling which serves to mute sustained price
recovery.
The unrealized losses are largely attributable to credit spread
widening on these securities. The underlying loans within these
securities include Jumbo (60%), Alt A (25%) and manufactured
housing (15%).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2009
|
|
2008
|
|
|
|
|
Net
|
|
|
|
Net
|
|
|
Fair
|
|
Unrealized
|
|
Fair
|
|
Unrealized
|
|
|
Value
|
|
Gain (Loss)
|
|
Value
|
|
Gain (Loss)
|
|
|
|
|
(In thousands)
|
|
|
|
Private label residential mortgage-backed
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jumbo
|
|
$
|
21,718
|
|
|
$
|
(5,749
|
)
|
|
$
|
26,139
|
|
|
$
|
(9,349
|
)
|
Alt-A
|
|
|
9,257
|
|
|
|
(1,807
|
)
|
|
|
10,748
|
|
|
|
(2,685
|
)
|
Other asset-backed Manufactured housing
|
|
|
5,505
|
|
|
|
(194
|
)
|
|
|
7,421
|
|
|
|
(855
|
)
|
All of the private label mortgage-backed transactions have
geographic concentrations in California, ranging from 29% to 59%
of the collateral pool. Typical exposure levels to California
(median exposure is 43%) are consistent with overall market
collateral characteristics. Six transactions have modest
exposure to Florida, ranging from 5% to 11%, and one transaction
has modest exposure to Arizona (5%). The underlying collateral
pools do not have meaningful exposure to Nevada, Michigan or
Ohio. None of the issues involve subprime mortgage collateral.
Thus the impact of this market segment is only indirect, in that
it has impacted liquidity and pricing in general for private
label mortgage-backed securities. The majority of transactions
are backed by fully amortizing loans. However, eight
transactions have concentrations in interest only loans ranging
from 31% to 94%. The structure of the mortgage and asset-backed
securities portfolio provides protection to credit losses. The
portfolio primarily consists of senior securities as
demonstrated by the following: super senior (7%), senior (73%),
senior support (12%) and mezzanine (8%). The mezzanine classes
are from seasoned transactions (65 to 95 months) with
significant levels of subordination (8% to 23%). Except for the
additional discussion below relating to other than temporary
impairment, each private label mortgage and asset-backed
security has sufficient credit enhancement via subordination to
reasonably assure full realization of book value. This assertion
is based on a transaction level review of the portfolio.
Individual security reviews include: external credit ratings,
forecasted weighted average
26
life, recent prepayment speeds, underwriting characteristics of
the underlying collateral, the structure of the securitization
and the credit performance of the underlying collateral. The
review of underwriting characteristics considers: average loan
size, type of loan (fixed or ARM), vintage, rate, FICO,
loan-to-value,
scheduled amortization, occupancy, purpose, geographic mix and
loan documentation. The review of the securitization structure
focuses on the priority of cash flows to the bond, the priority
of the bond relative to the realization of credit losses and the
level of subordination available to absorb credit losses. The
review of credit performance includes: current period as well as
cumulative realized losses; the level of severe payment
problems, which includes other real estate (ORE), foreclosures,
bankruptcy and 90 day delinquencies; and the level of less
severe payment problems, which consists of 30 and 60 day
delinquencies.
While the levels of identified payment problems increased
modestly during 2009, the amount of subordination protection
remains adequate. Nevertheless, the non-performing asset
coverage ratio (credit subordination divided by non-performing
assets) deteriorated for four structures with five bonds. This
deterioration in structure accounts for the majority of the
increase in unrealized loss late in 2009. All of these
securities are receiving principal and interest payments. Most
of these transactions are pass-through structures, receiving pro
rata principal and interest payments from a dedicated collateral
pool. The non-receipt of interest cash flows is not expected and
thus not presently considered in our discounted cash flow
methodology discussed below.
In addition to the review discussed above, certain securities,
including the one security with a rating below investment grade,
were reviewed for OTTI utilizing a cash flow projection. The
scope of review included securities that account for 97% of the
$7.8 million in unrealized losses. In our analysis,
recovery was evaluated by discounting the expected cash flows
back at the book yield. If the present value of the future cash
flows is less than amortized cost, then there would be a credit
loss. Our cash flow analysis forecasted cash flow from the
underlying loans in each transaction and then applied these cash
flows to the bonds in the securitization. The cash flows from
the underlying loans considered contractual payment terms
(scheduled amortization), prepayments, defaults and severity of
loss given default. The analysis used dynamic assumptions for
prepayments, defaults and severity. Near term prepayment
assumptions were based on recently observed prepayment rates. In
many cases, recently observed prepayment rates are depressed due
to a sharp decline in new jumbo loan issuance. This loan market
is heavily dependent upon securitization for funding, and new
securitization transactions have been minimal. Our model
projects that prepayment rates gradually revert to historical
levels. For seasoned ARM transactions normalized prepayment
rates are estimated at 15% to 25% CPR. For fixed rate
collateral, the analysis considers the spread differential
between the collateral and the current market rate for
conforming mortgages. Near term default assumptions were based
on recent default observations as well as the volume of existing
real-estate owned, pending foreclosures and severe
delinquencies. Default levels generally are projected to remain
elevated or increase for a period of time sufficient to address
the level of distressed loans in the transaction. Our model
expects defaults to then decline gradually as the housing market
and the economy stabilize, generally after 2 to 3 years.
Current severity assumptions are based on recent observations.
Loss severity is expected to decline gradually as the housing
market and the economy stabilize, generally after 2 to
3 years. Except for one below investment grade security
discussed in further detail below, our cash flow analysis
forecasts complete recovery of our cost basis for each reviewed
security.
The private label mortgage-backed security with a below
investment grade credit rating was evaluated for other than
temporary impairment (OTTI) using the cash flow
analysis discussed above. At December 31, 2009 this
security had a fair value of $3.9 million and an unrealized
loss of $4.1 million (amortized cost of $8.0 million).
The underlying loans in this transaction are 30 year fixed
rate jumbos with an average origination date FICO of 748 and an
average origination date
loan-to-value
ratio of 73%. The loans backing this transaction were originated
in 2007 and is our only security backed by 2007 vintage loans.
We believe that this vintage is a key differentiating factor
between this security and the others in our portfolio that are
rated above investment grade. The bond is a senior security that
is receiving principal and interest payments similar to
principal reductions in the underlying collateral. The cash flow
analysis described above calculated an OTTI of $4.1 million
at December 31, 2009, $0.065 million of this amount
was attributed to credit and was recognized in our consolidated
statements of operations while the balance was attributed to
other factors and reflected in our consolidated statements of
other comprehensive income (loss).
27
As management does not intend to liquidate these securities and
it is more likely than not that we will not be required to sell
these securities prior to recovery of these unrealized losses,
no other declines discussed above are deemed to be other than
temporary.
Obligations of states and political subdivisions at
December 31, 2009 we had 32 municipal securities whose fair
value is less than amortized cost. The unrealized losses are
largely attributed to a widening of market spreads and continued
illiquidity for certain issues. The majority of the securities
are not rated by a major rating agency. Approximately 75% of the
non rated securities originally had a AAA credit rating by
virtue of bond insurance. However, the insurance provider no
longer has an investment grade rating. The remaining non rated
issues are small local issues that did not receive a credit
rating due to the size of the transaction. The non-rated
securities have a periodic internal credit review according to
established procedures. As management does not intend to
liquidate these securities and it is more likely than not that
we will not be required to sell these securities prior to
recovery of these unrealized losses, no declines are deemed to
be other than temporary.
Trust preferred securities at December 31, 2009
we had six securities whose fair value is less than amortized
cost. All of our trust preferred securities are single issue
securities issued by a trust subsidiary of a bank holding
company. The pricing of trust preferred securities over the past
two years has suffered from significant credit spread widening
fueled by uncertainty regarding potential losses of financial
companies, the absence of a liquid functioning secondary market
and potential supply concerns from financial companies issuing
new debt to recapitalize themselves. Since the end of the first
quarter, although still showing signs of weakness, pricing has
improved somewhat as some uncertainty has been taken out of the
market. Two of the six securities are rated by a major rating
agency as investment grade, while two are split rated (these
securities are rated as investment grade by one major rating
agency and below investment grade by another) and the other two
are non-rated. The two non-rated issues are relatively small
banks and neither of these issues were ever rated. The issuers
on these trust preferred securities, which had a combined book
value of $2.8 million and a combined fair value of
$1.8 million as of December 31, 2009, continue to make
interest payments and have satisfactory credit metrics.
Our OTTI analysis for trust preferred securities is based on a
security level financial analysis of the issuer. This review
considers: external credit ratings, maturity date of the
instrument, the scope of the banks operations, relevant
financial metrics and recent issuer specific news. The analysis
of relevant financial metrics includes: capital adequacy, assets
quality, earnings and liquidity. We use the same OTTI review
methodology for both rated and non-rated issues. During the
first quarter of 2009 we recorded OTTI on an unrated trust
preferred security whose fair value at December 31, 2009
now exceeds its amortized cost. Specifically, this issuer has
deferred interest payments on all of its trust preferred
securities and is operating under a written agreement with the
regulatory agencies that specifically prohibit dividend
payments. The issuer is a relatively small bank with operations
centered in southeast Michigan. The issuer reported losses in
2009 and 2008 and has a high volume of nonperforming assets
relative to tangible capital. This investments amortized
cost has been written down to a price of 26.75, or
$0.07 million, compared to a par value of 100.00, or
$0.25 million.
Portfolio Loans and asset quality. In addition
to the communities served by our bank branch network, our
principal lending markets also include nearby communities and
metropolitan areas. Subject to established underwriting
criteria, we also historically participated in commercial
lending transactions with certain non-affiliated banks and also
purchased mortgage loans from third-party originators.
Currently, we are not engaging in any new commercial loan
participations with non-affiliated banks or purchasing any
mortgage loans from third party originators.
The senior management and board of directors of our bank retain
authority and responsibility for credit decisions and we have
adopted uniform underwriting standards. Our loan committee
structure and the loan review process, attempt to provide
requisite controls and promote compliance with such established
underwriting standards. There can be no assurance that the
aforementioned lending procedures and the use of uniform
underwriting standards will prevent us from the possibility of
incurring significant credit losses in our lending activities
and in fact the provision for loan losses increased during 2009
as well as in 2008 and 2007 from prior historical levels.
We generally retain loans that may be profitably funded within
established risk parameters. (See Asset/liability
management.) As a result, we may hold adjustable-rate and
balloon real estate mortgage loans as Portfolio
28
Loans, while 15- and
30-year,
fixed-rate obligations are generally sold to mitigate exposure
to changes in interest rates. (See Non-interest
income.)
LOAN
PORTFOLIO COMPOSITION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
(In thousands)
|
|
|
Real estate(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential first mortgages
|
|
|
|
|
|
$
|
684,567
|
|
|
$
|
760,201
|
|
Residential home equity and other junior mortgages
|
|
|
|
|
|
|
203,222
|
|
|
|
229,865
|
|
Construction and land development
|
|
|
|
|
|
|
69,496
|
|
|
|
127,092
|
|
Other(2)
|
|
|
|
|
|
|
585,988
|
|
|
|
666,876
|
|
Finance receivables
|
|
|
|
|
|
|
406,341
|
|
|
|
286,836
|
|
Commercial
|
|
|
|
|
|
|
187,110
|
|
|
|
207,516
|
|
Consumer
|
|
|
|
|
|
|
156,213
|
|
|
|
171,747
|
|
Agricultural
|
|
|
|
|
|
|
6,435
|
|
|
|
9,396
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans
|
|
|
|
|
|
$
|
2,299,372
|
|
|
$
|
2,459,529
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes both residential and non-residential commercial loans
secured by real estate. |
|
(2) |
|
Includes loans secured by multi-family residential and non-farm,
non-residential property. |
Future growth of overall Portfolio Loans is dependent upon a
number of competitive and economic factors. Overall loan growth
has slowed during the past two years reflecting both weak
economic conditions in Michigan as well as our desire to reduce
certain loan categories. Construction and land development loans
have been declining recently because we are seeking to shrink
this portion of our Portfolio Loans due to a very poor economic
climate for real estate development, particularly residential
real estate. Declines in Portfolio Loans or competition that
leads to lower relative pricing on new Portfolio Loans could
adversely impact our future operating results.
NON-PERFORMING
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(Dollars in thousands)
|
|
|
Non-accrual loans
|
|
$
|
105,965
|
|
|
$
|
122,639
|
|
|
$
|
72,682
|
|
Loans 90 days or more past due and still accruing interest
|
|
|
3,940
|
|
|
|
2,626
|
|
|
|
4,394
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-performing loans
|
|
|
109,905
|
|
|
|
125,265
|
|
|
|
77,076
|
|
Other real estate and repossessed assets
|
|
|
31,534
|
|
|
|
19,998
|
|
|
|
9,723
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-performing assets
|
|
$
|
141,439
|
|
|
$
|
145,263
|
|
|
$
|
86,799
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As a percent of Portfolio Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-performing loans
|
|
|
4.78
|
%
|
|
|
5.09
|
%
|
|
|
3.06
|
%
|
Allowance for loan losses
|
|
|
3.55
|
|
|
|
2.35
|
|
|
|
1.80
|
|
Non-performing assets to total assets
|
|
|
4.77
|
|
|
|
4.91
|
|
|
|
2.67
|
|
Allowance for loan losses as a percent of non-performing loans
|
|
|
74
|
|
|
|
46
|
|
|
|
59
|
|
Non-performing loans have declined by $15.4 million, or
12.3%, since year-end 2008. An increase in non-performing
mortgage loans and consumer loans was more than offset by a
decline in non-performing commercial loans. The decline in
non-performing commercial loans is primarily due to net
charge-offs and the payoff or other disposition of
non-performing credits during 2009. Non-performing commercial
loans largely reflect real estate-secured credit delinquencies
caused primarily by cash flow difficulties encountered by real
estate developers in
29
Michigan as they confront a significant decline in sales. The
elevated level of non-performing residential mortgage loans is
primarily due to a rise in delinquencies and foreclosures
reflecting both weak economic conditions and soft residential
real estate values in many parts of Michigan.
Other real estate (ORE) and repossessed assets
totaled $31.5 million at December 31, 2009, compared
to $20.0 million at December 31, 2008. This increase
is the result of the migration of non-performing loans secured
by real estate into ORE as the foreclosure process is completed
and any redemption period expires. High foreclosure rates are
evident nationwide, but Michigan has consistently had one of the
higher foreclosure rates in the U.S. during the past two
years. We believe that this high foreclosure rate is due to both
weak economic conditions (Michigan has the highest unemployment
rate in the U.S.) and declining residential real estate values
(which has eroded or eliminated the equity that many mortgagors
had in their home). Because the redemption period on
foreclosures is relatively long in Michigan (six months to one
year) and we have many non-performing loans that were in the
process of foreclosure at December 31, 2009, we anticipate
that our level of other real estate and repossessed assets will
likely remain at elevated levels for some period of time. A high
level of non-performing assets would be expected to adversely
impact our tax equivalent net interest income.
We will place a loan that is 90 days or more past due on
non-accrual, unless we believe the loan is both well secured and
in the process of collection. Accordingly, we have determined
that the collection of the accrued and unpaid interest on any
loans that are 90 days or more past due and still accruing
interest is probable.
ALLOCATION
OF THE ALLOWANCE FOR LOAN LOSSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Specific allocations
|
|
$
|
29,593
|
|
|
$
|
16,788
|
|
|
$
|
10,713
|
|
Other adversely rated loans
|
|
|
14,481
|
|
|
|
9,511
|
|
|
|
10,804
|
|
Historical loss allocations
|
|
|
22,777
|
|
|
|
20,270
|
|
|
|
14,668
|
|
Additional allocations based on subjective factors
|
|
|
14,866
|
|
|
|
11,331
|
|
|
|
9,109
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
81,717
|
|
|
$
|
57,900
|
|
|
$
|
45,294
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In determining the allowance and the related provision for
credit losses, we consider four principal elements:
(i) specific allocations based upon probable losses
identified during the review of the loan portfolio,
(ii) allocations established for other adversely rated
loans, (iii) allocations based principally on historical
loan loss experience, and (iv) additional allowances based
on subjective factors, including local and general economic
business factors and trends, portfolio concentrations and
changes in the size, mix
and/or the
general terms of the loan portfolios.
The first element reflects our estimate of probable losses based
upon our systematic review of specific loans. These estimates
are based upon a number of objective factors, such as payment
history, financial condition of the borrower, and discounted
collateral exposure.
The second element reflects the application of our loan rating
system. This rating system is similar to those employed by state
and federal banking regulators. Loans that are rated below a
certain predetermined classification are assigned a loss
allocation factor for each loan classification category that is
based upon a historical analysis of both the probability of
default and the expected loss rate (loss given
default). The lower the rating assigned to a loan or
category, the greater the allocation percentage that is applied.
For higher rated loans (non-watch credit) we again
determine a probability of default and loss given default in
order to apply an allocation percentage.
The third element is determined by assigning allocations to
homogeneous loan groups based principally upon the five-year
average of loss experience for each type of loan. Recent years
are weighted more heavily in this average. Average losses may be
further adjusted based on an analysis of delinquent loans. Loss
analyses are conducted at least annually.
The fourth element is based on factors that cannot be associated
with a specific credit or loan category and reflects our attempt
to ensure that the overall allowance for loan losses
appropriately reflects a margin for the imprecision necessarily
inherent in the estimates of expected credit losses. We consider
a number of subjective
30
factors when determining this fourth element, including local
and general economic business factors and trends, portfolio
concentrations and changes in the size, mix and the general
terms of the loan portfolios. (See Provision for credit
losses.)
Mepcos allowance for loan losses is determined in a
similar manner as discussed above and primarily takes into
account historical loss experience and other subjective factors
deemed relevant to their business as described in greater detail
below.
Losses associated with the administration of Mepcos
payment plans are included in the provision for loan losses.
Such losses totaled $0.3 million, $0.04 million and
$0.4 million in 2009, 2008 and 2007, respectively.
Mepcos allowance for loan losses totaled $0.8 million
and $0.5 million at December 31, 2009 and
December 31, 2008, respectively. Mepco has established
procedures for payment plan servicing/administration and
collections, including the timely cancellation of the vehicle
service contract, in order to protect our collateral position in
the event of payment default or voluntary cancellation by the
customer. Mepco also has established procedures to attempt to
prevent and detect fraud since the payment plan origination
activities and initial customer contact is entirely done through
unrelated third parties (vehicle service contract administrators
and sellers or automobile dealerships). There can be no
assurance that the aforementioned risk management policies and
procedures will prevent us from the possibility of incurring
significant credit or fraud related losses in this business
segment.
The allowance for loan losses increased to 3.55% of total
Portfolio Loans at December 31, 2009 from 2.35% at
December 31, 2008. This increase is primarily due to
increases in all of the components of the allowance for loan
losses outlined above. The allowance for loan losses related to
specific loans increased due to some larger reserves on some
individual credits even though total non-performing commercial
loans have declined since year end 2008. The allowance for loan
losses related to other adversely rated loans increased
primarily due to changes in the mix of commercial loan ratings.
The allowance for loan losses related to historical losses
increased due to higher loan net charge-offs (which was largely
offset by declines in loan balances). Finally, the allowance for
loan losses related to subjective factors increased primarily
due to weaker economic conditions in Michigan that have
contributed to elevated levels of non-performing loans and net
loan charge-offs.
ALLOWANCE
FOR LOSSES ON LOANS AND UNFUNDED COMMITMENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
Loan
|
|
|
Unfunded
|
|
|
Loan
|
|
|
Unfunded
|
|
|
Loan
|
|
|
Unfunded
|
|
|
|
Losses
|
|
|
Commitments
|
|
|
Losses
|
|
|
Commitments
|
|
|
Losses
|
|
|
Commitments
|
|
|
|
(In thousands)
|
|
|
Balance at beginning of year
|
|
$
|
57,900
|
|
|
$
|
2,144
|
|
|
$
|
45,294
|
|
|
$
|
1,936
|
|
|
$
|
26,879
|
|
|
$
|
1,881
|
|
Provision charged to operating expense
|
|
|
103,318
|
|
|
|
(286
|
)
|
|
|
71,113
|
|
|
|
208
|
|
|
|
43,105
|
|
|
|
55
|
|
Recoveries credited to allowance
|
|
|
2,795
|
|
|
|
|
|
|
|
3,489
|
|
|
|
|
|
|
|
2,346
|
|
|
|
|
|
Loans charged against the allowance
|
|
|
(82,296
|
)
|
|
|
|
|
|
|
(61,996
|
)
|
|
|
|
|
|
|
(27,036
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
$
|
81,717
|
|
|
$
|
1,858
|
|
|
$
|
57,900
|
|
|
$
|
2,144
|
|
|
$
|
45,294
|
|
|
$
|
1,936
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loans charged against the allowance to average Portfolio
Loans
|
|
|
3.28
|
%
|
|
|
|
|
|
|
2.30
|
%
|
|
|
|
|
|
|
0.98
|
%
|
|
|
|
|
The ratio of loan net charge-offs to average loans was 3.28% in
2009 (or $79.5 million) compared to 2.30% in 2008 (or
$58.5 million). The rise in loan net charge-offs primarily
reflects increases of $9.3 million for commercial loans and
$10.5 million for residential mortgage loans. These
increases in loan net charge-offs primarily reflect elevated
levels of non-performing loans and lower collateral liquidation
values, particularly on residential real estate or real estate
held for development. We do not believe that the elevated level
of total loan net charge-offs in 2009 is indicative of what we
will experience in the future. Loan net charge-offs have
moderated during 2009 with $48.4 million in the first six
months compared to $31.1 million in the last six months.
The majority of the loan net charge-offs in the first part of
2009 related to commercial loans and in particular several land
or land development loans (due to significant drops in real
estate values) and one large commercial credit (which defaulted
in March
31
2009). Land and land development loans now total just
$59.8 million (or 2.0% of total assets) and approximately
56% of these loans are already in non-performing or watch credit
status and the entire portfolio has been carefully evaluated and
an appropriate allowance or charge-off has been recorded.
Further, the commercial loan portfolio is thoroughly analyzed
each quarter through our credit review process and an
appropriate allowance and provision for loan losses is recorded
based on such review and in light of prevailing market
conditions.
We took a variety of steps beginning in 2007 (and which
continued throughout 2008 and 2009) to address the credit
issues identified above (elevated levels of watch credits,
non-performing loans and other real estate and repossessed
assets), including the following:
|
|
|
|
|
An enhanced quarterly watch credit review process to proactively
manage higher risk loans.
|
|
|
|
Loan risk ratings are independently assigned and structure
recommendations made upfront by our credit officers.
|
|
|
|
A Special Assets Group has been established to provide more
effective management of our most troubled loans. A select group
of law firms supports this team, providing professional advice
and systemic feedback.
|
|
|
|
An independent loan review function provides
portfolio/individual loan feedback to evaluate the effectiveness
of processes by market.
|
|
|
|
Management (incentive) objectives for each commercial lender and
senior commercial lender emphasize credit quality in addition to
profitability.
|
|
|
|
Portfolio concentrations are monitored with select loan types
encouraged and other loan types (such as residential real estate
development) requiring significantly higher approval authorities.
|
Deposits and borrowings. Our competitive
position within many of the markets served by our branch network
limits our ability to materially increase deposits without
adversely impacting the weighted-average cost of core deposits.
Accordingly, we principally compete on the basis of convenience
and personal service, while employing pricing tactics that are
intended to enhance the value of core deposits.
To attract new core deposits, we have implemented a
high-performance checking program that utilizes a combination of
direct mail solicitations, in-branch merchandising, gifts for
customers opening new checking accounts or referring business to
our bank and branch staff sales training. This program has
historically generated increases in customer relationships as
well as deposit service charges. Over the past two to three
years we have also expanded our treasury management products and
services for commercial businesses and municipalities or other
governmental units and have also increased our sales calling
efforts in order to attract additional deposit relationships
from these sectors. Despite these efforts our historic core
deposit growth has not kept pace with the historic growth of our
Portfolio Loans. We view long-term core deposit growth as a
significant challenge. Core deposits generally provide a more
stable and lower cost source of funds than alternative sources
such as short-term borrowings. As a result, the continued
funding of Portfolio Loans with alternative sources of funds (as
opposed to core deposits) may erode certain of our profitability
measures, such as return on assets, and may also adversely
impact our liquidity. (See Liquidity and capital
resources.)
During the fourth quarter of 2009 we prepaid estimated quarterly
deposit insurance premium assessments to the FDIC for periods
through the fourth quarter of 2012. These estimated quarterly
deposit insurance premium assessments were based on projected
deposit balances over the assessment periods. The prepaid
deposit insurance premium assessments totaled $22.0 million
at December 31, 2009 and will be expensed over the
assessment period (through the fourth quarter of 2012). The
actual expense over the assessment periods may be different from
this prepaid amount due to various factors including variances
in actual deposit balances and assessment rates used during each
assessment period.
We have also implemented strategies that incorporate federal
funds purchased, other borrowings and Brokered CDs to fund a
portion of any increases in interest earning assets. The use of
such alternate sources of funds supplements our core deposits
and is also an integral part of our asset/liability management
efforts.
32
ALTERNATE
SOURCES OF FUNDS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Amount
|
|
|
Maturity
|
|
|
Rate
|
|
|
Amount
|
|
|
Maturity
|
|
|
Rate
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
Brokered CDs(1)
|
|
$
|
629,150
|
|
|
|
2.2 years
|
|
|
|
2.46
|
%
|
|
$
|
182,283
|
|
|
|
1.1 years
|
|
|
|
3.63
|
%
|
Fixed-rate FHLB advances(1)
|
|
|
27,382
|
|
|
|
5.5 years
|
|
|
|
6.59
|
|
|
|
95,714
|
|
|
|
2.2 years
|
|
|
|
3.64
|
|
Variable-rate FHLB advances(1)
|
|
|
67,000
|
|
|
|
1.4 years
|
|
|
|
0.32
|
|
|
|
218,500
|
|
|
|
2.3 years
|
|
|
|
3.43
|
|
Securities sold under agreements to repurchase(1)
|
|
|
35,000
|
|
|
|
.9 years
|
|
|
|
4.42
|
|
|
|
35,000
|
|
|
|
1.9 years
|
|
|
|
4.42
|
|
FRB borrowings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
189,500
|
|
|
|
.1 years
|
|
|
|
0.54
|
|
Federal funds purchased
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
750
|
|
|
|
1 day
|
|
|
|
0.25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
758,532
|
|
|
|
2.2 years
|
|
|
|
2.51
|
%
|
|
$
|
721,747
|
|
|
|
1.4 years
|
|
|
|
2.80
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Certain of these items have had their average maturity and rate
altered through the use of derivative instruments, such as
pay-fixed interest-rate swaps. |
Other borrowings, principally advances from the Federal Home
Loan Bank (the FHLB), borrowings from the Federal
Reserve Bank (the FRB) and securities sold under
agreements to repurchase (Repurchase Agreements),
totaled $131.2 million at December 31, 2009, compared
to $542.0 million at December 31, 2008. The
$410.8 million decrease in other borrowed funds principally
reflects the payoff of borrowings from the FRB and FHLB with
funds from new Brokered CDs or from the growth in other
deposits. The increase in Brokered CDs and use of these funds to
payoff borrowings from the FRB and FHLB is designed to improve
our liquidity profile. The Brokered CDs that we are issuing do
not require any collateral and have longer maturity dates
(generally two to five years). By paying off FRB and FHLB
borrowings (which do require collateral), we increase our
secured borrowing capacity.
As described above, we rely on wholesale funding, including FRB
and FHLB borrowings and Brokered CDs to augment our core
deposits to fund our business. As of December 31, 2009, our
use of such wholesale funding sources amounted to approximately
$760.3 million. Because wholesale funding sources are
affected by general market conditions, the availability of
funding from wholesale lenders may be dependent on the
confidence these investors have in our financial condition and
operations. The continued availability to us of these funding
sources is uncertain, and Brokered CDs may be difficult for us
to retain or replace at attractive rates as they mature. Our
liquidity will be constrained if we are unable to renew our
wholesale funding sources or if adequate financing is not
available in the future at acceptable rates of interest or at
all. We may not have sufficient liquidity to continue to fund
new loans, and we may need to liquidate loans or other assets
unexpectedly, in order to repay obligations as they mature.
In addition, if we fail to remain well-capitalized
under federal regulatory standards, which is likely if we are
unable to successfully raise additional capital as outlined
below, we will be prohibited from accepting or renewing Brokered
CDs without the prior consent of the FDIC. As of
December 31, 2009, we had Brokered CDs of approximately
$629.2 million. Of this amount $185.5 million mature
during 2010. As a result, any such restrictions on our ability
to access Brokered CDs is likely to have a material adverse
impact on our business and financial condition.
Moreover, we cannot be sure that we will be able to maintain our
current level of core deposits. Our deposit customers could move
their deposits in reaction to media reports about bank failures
in general (as discussed in Liquidity and capital
resources below) or in reaction to negative publicity we
may receive as a result of the pursuit of our capital raising
initiatives or, particularly, if we are unable to successfully
complete such initiatives. In particular, those deposits that
are currently uninsured or those deposits in the FDIC
Transaction Account Guarantee Program (TAGP), which
is set to expire on June 30, 2010, may be particularly
susceptible to outflow. At December 31, 2009 we had
$65.4 million of uninsured deposits and an additional
$188.3 million of deposits in the
33
TAGP. A reduction in core deposits would increase our need to
rely on wholesale funding sources, at a time when our ability to
do so may be more restricted, as described above.
Our financial performance will be materially affected if we are
unable to maintain our access to funding or if we are required
to rely more heavily on more expensive funding sources. In such
case, our net interest income and results of operations would be
adversely affected.
Prior to April 2008, we had an unsecured revolving credit
facility and term loan (that had a remaining balance of
$2.5 million). The lender elected to not renew the
$10.0 million unsecured revolving credit facility (which
matured in April 2008) and required repayment of the term
loan because we were out of compliance with certain financial
covenants contained within the loan documents. The
$2.5 million term loan was repaid in full in April 2008 (it
would have otherwise been repaid in full in accordance with the
original terms in May 2009).
We employ derivative financial instruments to manage our
exposure to changes in interest rates. At December 31,
2009, we employed interest-rate swaps with an aggregate notional
amount of $160.0 million and interest rate caps with an
aggregate notional amount of $95.0 million.
Liquidity and capital resources. Liquidity
risk is the risk of being unable to timely meet obligations as
they come due at a reasonable funding cost or without incurring
unacceptable losses. Our liquidity management involves the
measurement and monitoring of a variety of sources and uses of
funds. Our consolidated statements of cash flows categorize
these sources and uses into operating, investing and financing
activities. We primarily focus our liquidity management on
developing access to a variety of borrowing sources to
supplement our deposit gathering activities and provide funds
for growing our investment and loan portfolios as well as to be
able to respond to unforeseen liquidity needs.
Our sources of funds include our deposit base, secured advances
from the FHLB, secured borrowings from the FRB, a federal funds
purchased borrowing facility with another commercial bank, and
access to the capital markets (for Brokered CDs).
At December 31, 2009 we had $512.4 million of time
deposits that mature in the next twelve months. Historically, a
majority of these maturing time deposits are renewed by our
customers or are Brokered CDs that we expect to replace.
Additionally $1.394 billion of our deposits at
December 31, 2009 were in account types from which the
customer could withdraw the funds on demand. Changes in the
balances of deposits that can be withdrawn upon demand are
usually predictable and the total balances of these accounts
have generally grown or have been stable over time as a result
of our marketing and promotional activities. There can be no
assurance that historical patterns of renewing time deposits or
overall growth in deposits will continue in the future.
In particular, media reports about bank failures have created
concerns among depositors at banks throughout the country,
including certain of our customers, particularly those with
deposit balances in excess of deposit insurance limits. In
response, the FDIC announced several programs during 2008
including increasing the deposit insurance limit from $100,000
to $250,000 at least until December 31, 2013 and providing
unlimited deposit insurance for balances in non-interest bearing
demand deposit and certain low-interest (an interest rate of
0.50% or less) transaction accounts until June 30, 2010. We
have proactively sought to provide appropriate information to
our deposit customers about our organization in order to retain
our business and deposit relationships. Despite these moves by
the FDIC and our proactive communications efforts, the potential
outflow of deposits remains as a significant liquidity risk,
particularly since our recent losses and our elevated level of
non-performing assets have reduced some of the financial ratings
of our bank that are followed by our larger deposit customers,
such as municipalities. The outflow of significant amounts of
deposits could have an adverse impact on our liquidity and
results of operations.
We have developed contingency funding plans that stress tests
our liquidity needs that may arise from certain events such as
an adverse credit event or a disaster recovery situation. Our
liquidity management also includes periodic monitoring that
segregates assets between liquid and illiquid and classifies
liabilities as core and non-core. This analysis compares our
total level of illiquid assets to our core funding. It is our
goal to have core funding sufficient to finance illiquid assets.
34
As a result of the liquidity risks described above and in
Deposits and borrowings we have increased our level
of overnight cash balances in interest-bearing accounts to
$223.5 million at December 31, 2009 from
$0.2 million at December 31, 2008. We have also issued
longer-term (two to five years) callable Brokered CDs and paid
down secured borrowings to increase available funding sources.
We believe these actions will assist us in meeting our liquidity
needs during 2010.
In the normal course of business, we enter into certain
contractual obligations. Such obligations include requirements
to make future payments on debt and lease arrangements,
contractual commitments for capital expenditures, and service
contracts. The table below summarizes our significant
contractual obligations at December 31, 2009.
CONTRACTUAL
COMMITMENTS(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
After
|
|
|
|
|
|
|
1 Year or Less
|
|
|
1-3 Years
|
|
|
3-5 Years
|
|
|
5 Years
|
|
|
Total
|
|
|
|
(In thousands)
|
|
|
Time deposit maturities
|
|
$
|
512,415
|
|
|
$
|
399,255
|
|
|
$
|
257,483
|
|
|
$
|
2,167
|
|
|
$
|
1,171,320
|
|
Other borrowings
|
|
|
109,800
|
|
|
|
2,634
|
|
|
|
4,240
|
|
|
|
14,508
|
|
|
|
131,182
|
|
Subordinated debentures
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
92,888
|
|
|
|
92,888
|
|
Operating lease obligations
|
|
|
1,179
|
|
|
|
1,979
|
|
|
|
1,658
|
|
|
|
4,813
|
|
|
|
9,629
|
|
Purchase obligations(2)
|
|
|
1,469
|
|
|
|
1,958
|
|
|
|
|
|
|
|
|
|
|
|
3,427
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
624,863
|
|
|
$
|
405,826
|
|
|
$
|
263,381
|
|
|
$
|
114,376
|
|
|
$
|
1,408,446
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Excludes approximately $0.9 million of accrued tax and
interest relative to uncertain tax benefits due to the high
degree of uncertainty as to when, or if, those amounts would be
paid. |
|
(2) |
|
Includes contracts with a minimum annual payment of
$1.0 million and are not cancellable within one year. |
Effective management of capital resources is critical to our
mission to create value for our shareholders. The cost of
capital is an important factor in creating shareholder value
and, accordingly, our capital structure includes cumulative
trust preferred securities and cumulative preferred stock.
CAPITALIZATION
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Subordinated debentures
|
|
$
|
92,888
|
|
|
$
|
92,888
|
|
Amount not qualifying as regulatory capital
|
|
|
(2,788
|
)
|
|
|
(2,788
|
)
|
|
|
|
|
|
|
|
|
|
Amount qualifying as regulatory capital
|
|
|
90,100
|
|
|
|
90,100
|
|
|
|
|
|
|
|
|
|
|
Shareholders equity
|
|
|
|
|
|
|
|
|
Preferred stock
|
|
|
69,157
|
|
|
|
68,456
|
|
Common stock
|
|
|
23,863
|
|
|
|
22,791
|
|
Capital surplus
|
|
|
201,618
|
|
|
|
200,687
|
|
Accumulated deficit
|
|
|
(169,098
|
)
|
|
|
(73,849
|
)
|
Accumulated other comprehensive loss
|
|
|
(15,679
|
)
|
|
|
(23,208
|
)
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
109,861
|
|
|
|
194,877
|
|
|
|
|
|
|
|
|
|
|
Total capitalization
|
|
$
|
199,961
|
|
|
$
|
284,977
|
|
|
|
|
|
|
|
|
|
|
We have four special purpose entities that have issued
$90.1 million of cumulative trust preferred securities
outside of IBC. Currently, at IBC, $41.9 million of these
securities qualify as Tier 1 capital and the balance
qualify as Tier 2 capital. These entities have also issued
common securities and capital to IBC, that, in turn, issued
subordinated debentures to these special purpose entities equal
to the trust preferred securities, common securities
35
and capital issued. The subordinated debentures represent the
sole asset of the special purpose entities. The common
securities, capital and subordinated debentures are included in
our consolidated statements of financial condition at
December 31, 2009 and 2008.
The Federal Reserve Board has issued rules regarding trust
preferred securities as a component of the Tier 1 capital
of bank holding companies. The aggregate amount of trust
preferred securities and certain other capital elements is
limited to 25 percent of Tier 1 capital elements, net
of goodwill (net of any associated deferred tax liability). The
amount of trust preferred securities and certain other elements
in excess of the limit could be included in the Tier 2
capital, subject to restrictions.
In December 2008, we issued 72,000 shares of Series A,
no par value, $1,000 liquidation preference, fixed rate
cumulative perpetual preferred stock (Preferred
Stock) and a warrant to purchase 3,461,538 shares (at
$3.12 per share) of our common stock (Warrant) to
the UST in return for $72.0 million under the TARP CPP. Of
the total proceeds, $68.4 million was originally allocated
to the Preferred Stock and $3.6 million was allocated to
the Warrant (included in capital surplus) based on the relative
fair value of each. The $3.6 million discount on the
Preferred Stock is being accreted using an effective yield
method over five years. The accretion is being recorded as part
of the Preferred Stock dividend.
The Preferred Stock pays a quarterly, cumulative cash dividend
at a rate of 5% per annum on the $1,000 liquidation preference
to, but excluding February 15, 2014 and at a rate of 9% per
annum thereafter. We are subject to various regulatory policies
and requirements relating to the payment of dividends, including
requirements to maintain adequate capital above regulatory
minimums. Prior to December 12, 2011, even if we are
current on the payment of dividends on the Preferred Stock, we
may not do either of the following without the prior written
consent of the UST: (a) pay cash dividends on our common
stock to shareholders of more than $0.01 per share per quarter,
as adjusted for any stock split, stock dividend, reverse stock
split, reclassification or similar transaction; or
(b) repurchase any of our common stock or redeem any of our
trust preferred securities, other than certain excepted
redemptions of common stock in connection with the
administration of employee benefit plans in the ordinary course
of business and consistent with past practice. These
restrictions described in the preceding sentence expire in the
event we redeem all shares of Preferred Stock or in the event
the UST transfers all of its shares of Preferred Stock to an
unaffiliated transferee. Holders of shares of the Preferred
Stock have no right to exchange or convert such shares into any
other securities of IBC.
The annual 5% dividend on the Preferred Stock together with the
amortization of the discount will reduce net income (or increase
the net loss) applicable to common stock by approximately
$4.3 million annually. The exercise price on the Warrant of
$3.12 per share is presently above both our book value per share
and our tangible book value per share. If our market value per
share exceeds the Warrant price, our diluted earnings per share
will be reduced. However, the exercise of the Warrant would not
presently be dilutive to our current book value per share.
In the fourth quarter of 2009, we took certain actions to
improve our regulatory capital ratios and preserve capital and
liquidity. Beginning in November of 2009, we eliminated the
$0.01 per share quarterly cash dividend on our common stock. In
addition, we suspended payment of quarterly dividends on our
Preferred Stock held by the UST. The cash dividends payable to
the UST amount to $3.6 million per year until December of
2013, at which time they will increase to $6.5 million per
year. Also beginning in December of 2009, we exercised our right
to defer all quarterly interest payments on the subordinated
debentures we issued to our trust subsidiaries. As a result, all
quarterly dividends on the related trust preferred securities
(which are the trust preferred securities solicited for exchange
in the exchange offers described herein) were also deferred.
Based on current dividend rates, the cash dividends on all
outstanding trust preferred securities amount to approximately
$5.4 million per year. These actions will preserve cash at
IBC as we do not expect Independent Bank, our bank subsidiary,
to be able to pay any cash dividends in the near term. Dividends
from the bank are restricted by federal and state law and are
further restricted by the Board resolutions adopted in December
2009, and described herein.
We do not have any current plans to resume dividend payments on
our outstanding trust preferred securities or the outstanding
shares of our Preferred Stock. We do not know if or when any
such payments will resume.
The terms of the Debentures and trust indentures (the
Indentures) allow us to defer payment of interest on
the Debt Securities at any time or from time to time for up to
20 consecutive quarters provided no event of default (as
36
defined in the Indentures) has occurred and is continuing. We
are not in default with respect to the Indentures, and the
deferral of interest does not constitute an event of default
under the Indentures. While we defer the payment of interest, we
will continue to accrue the interest expense owed at the
applicable interest rate. Upon the expiration of the deferral,
all accrued and unpaid interest is due and payable.
So long as any shares of Preferred Stock remain outstanding,
unless all accrued and unpaid dividends for all prior dividend
periods have been paid or are contemporaneously declared and
paid in full, (a) no dividend whatsoever may be paid or
declared on our common stock or other junior stock, other than a
dividend payable solely in common stock and other than certain
dividends or distributions of rights in connection with a
shareholders rights plan; and (b) neither we nor any
of our subsidiaries may purchase, redeem or otherwise acquire
for consideration any shares of our common stock or other junior
stock unless we have paid in full all accrued dividends on the
Preferred Stock for all prior dividend periods, other than
purchases, redemptions or other acquisitions of our common stock
or other junior stock in connection with the administration of
employee benefit plans in the ordinary course of business and
consistent with past practice; pursuant to a publicly announced
repurchase plan up to the increase in diluted shares outstanding
resulting from the grant, vesting or exercise of equity-based
compensation; any dividends or distributions of rights or junior
stock in connection with any shareholders rights plan,
redemptions or repurchases of rights pursuant to any
shareholders rights plan; acquisition of record ownership
of common stock or other junior stock or parity stock for the
beneficial ownership of any other person who is not us or one of
our subsidiaries, including as trustee or custodian; and the
exchange or conversion of common stock or other junior stock for
or into other junior stock or of parity stock for or into other
parity stock or junior stock but only to the extent that such
acquisition is required pursuant to binding contractual
agreements entered into before December 12, 2008 or any
subsequent agreement for the accelerated exercise, settlement or
exchange thereof for common stock.
During the deferral period on the Debentures and Preferred
Stock, we may not declare or pay any dividends or distributions
on, or redeem, purchase, acquire or make a liquidation payment
with respect to, any of our capital stock. Suspension of the
common stock dividend will conserve an additional
$1.0 million on an annualized basis.
In December 2009, we made a proposal to the UST to exchange all
of the shares of the Preferred Stock for shares of our common
stock with a value (based on market prices at the time of the
exchange) equal to 75% of the aggregate liquidation value of the
preferred stock surrendered in the exchange. The aggregate
liquidation value of the Preferred Stock is $72.0 million.
As a result, if our proposal is accepted by the UST, it would
result in us issuing the UST shares of our common stock with a
value of $54.0 million.
We continue to hold discussions with the UST regarding our
proposal and continue to provide them with additional
information for them to evaluate our proposal. However, we do
not know at this time whether the UST will accept our proposal,
whether they will make a counterproposal, or, if they agree to
any form of an exchange, what conditions might be imposed on
their participation. We also do not know the timing of when the
UST will make its decision or whether, if the UST agrees to
participate in an exchange, what the timing of that exchange may
be.
In January 2010, we filed a registration statement with the
SEC related to the exchange of our common stock for our
outstanding issues of trust preferred securities. We expect to
initiate the exchange offer once the registration statement is
declared effective by the SEC. Our timetable for initiating this
exchange is late first quarter or early second quarter of 2010.
To supplement our balance sheet and capital management
activities, we historically would repurchase our common stock.
The level of share repurchases in a given time period generally
reflected changes in our need for capital associated with our
balance sheet growth and our level of earnings. The only share
repurchases currently being executed are for our deferred
compensation and stock purchase plan for non-employee directors.
Such repurchases are funded by the director deferring a portion
of his or her fees.
Shareholders equity applicable to common stock declined to
$40.7 million at December 31, 2009 from
$126.4 million at December 31, 2008. Our tangible
common equity (TCE) totaled $30.4 million and
$97.5 million, respectively, at those same dates. Our ratio
of TCE to tangible assets was 1.03% at December 31, 2009
compared to 3.33% at December 31, 2008. We are exploring
various alternatives in order to increase our TCE and regulatory
capital ratios as described below. Although our regulatory
capital ratios remain at levels above well
37
capitalized standards, because of: (a) the losses
that we have incurred in recent quarters; (b) our elevated
levels of non-performing loans and other real estate; and
(c) the ongoing economic stress in Michigan, we have taken
or may take the following actions to improve our regulatory
capital ratios and preserve liquidity at our holding company
level:
|
|
|
|
|
Eliminated our cash dividend on our common stock;
|
|
|
|
Deferred the dividends on our Preferred Stock;
|
|
|
|
Deferred the dividends on our Debentures;
|
|
|
|
Seek to convert some or all of our Preferred Stock
and/or trust
preferred securities into common equity; and
|
|
|
|
Attempt to raise additional capital, including the possibility
of a significant and large issuance of common stock, which could
be highly dilutive to our existing shareholders.
|
The actions taken with respect to the payment of dividends on
our capital instruments as described above will preserve cash at
our bank holding company as we do not expect our bank subsidiary
to be able to pay any cash dividends in the near term. Although
there are no specific regulations restricting dividend payments
by bank holding companies (other than State corporate laws) the
FRB (our primary federal regulator) has issued a policy
statement on cash dividend payments. The FRBs view is
that: an organization experiencing earnings weaknesses or
other financial pressures should not maintain a level of cash
dividends that exceeds its net income, that is inconsistent with
the organizations capital position, or that can only be
funded in ways that may weaken the organizations financial
health.
In December 2009, the Board of Directors of IBC adopted
resolutions that impose the following restrictions:
|
|
|
|
|
We will not pay dividends on our outstanding common stock or the
outstanding preferred stock held by the UST and we will not pay
distributions on our outstanding trust preferred securities
without, in each case, the prior written approval of the FRB and
the Michigan Office of Financial and Insurance Regulation
(OFIR);
|
|
|
|
We will not incur or guarantee any additional indebtedness
without the prior approval of the FRB;
|
|
|
|
We will not repurchase or redeem any of our common stock without
the prior approval of the FRB; and
|
|
|
|
We will not rescind or materially modify any of these
limitations without notice to the FRB and the Michigan OFIR.
|
In December 2009, the Board of Directors of Independent Bank,
our subsidiary bank, adopted resolutions designed to enhance
certain aspects of the banks performance and, most
importantly, to improve the banks capital position. These
resolutions require the following:
|
|
|
|
|
The adoption by the bank of a capital restoration plan as
described below;
|
|
|
|
The enhancement of the banks documentation of the
rationale for discounts applied to collateral valuations on
impaired loans and improved support for the identification,
tracking, and reporting of loans classified as troubled debt
restructurings;
|
|
|
|
The adoption of certain changes and enhancements to our
liquidity monitoring and contingency planning and our interest
rate risk management practices;
|
|
|
|
Additional reporting to the bank Board of Directors regarding
initiatives and plans pursued by management to improve the
banks risk management practices;
|
|
|
|
Prior approval of the FRB and OFIR for any dividends or
distributions to be paid by the bank to Independent Bank
Corporation; and
|
|
|
|
Notice to the FRB and the OFIR of any rescission of or material
modification to any of these resolutions.
|
The substance of all of the resolutions described above was
developed in conjunction with discussions held with the FRB and
the OFIR in response to the FRBs most recent examination
report of Independent Bank, which was completed in October 2009.
Based on those discussions, we acted proactively to adopt the
resolutions described
38
above to address those areas of the Banks condition and
operations that were highlighted in the examination report and
that we believe most require our focus at this time. It is very
possible that if we had not adopted these resolutions, the FRB
and the OFIR may have imposed similar requirements on us through
a memorandum of understanding or similar undertaking. We are not
currently subject to any such regulatory agreement or
enforcement action. However, we believe that if we are unable to
substantially comply with the resolutions set forth above and if
our financial condition and performance do not otherwise
materially improve, we may face additional regulatory scrutiny
and restrictions in the form of a memorandum of understanding or
similar undertaking imposed by the regulators.
Subsequent to the adoption of the resolutions described above,
the bank adopted the capital restoration plan required by the
resolutions. This capital plan is described in more detail
below. Other than fully implementing such capital plan and
achieving the minimum capital ratios set forth in the
resolutions, we believe we have already taken appropriate
actions to fully comply with these Board resolutions.
In January 2010, we adopted a Capital Restoration Plan (the
Capital Plan), as required by the Board resolutions
adopted in December 2009, and described above, and submitted
such Capital Plan to the FRB and the OFIR.
The primary objective of our Capital Plan is to achieve and
thereafter maintain the minimum capital ratios required by the
Board resolutions adopted in December 2009. As of
December 31, 2009, our bank continued to meet the
requirements to be considered well-capitalized under
federal regulatory standards. However, the minimum capital
ratios established by our Board are higher than the ratios
required in order to be considered well-capitalized
under federal standards. The Board imposed these higher ratios
in order to ensure that we have sufficient capital to withstand
potential continuing losses based on our elevated level of
non-performing assets and given certain other risks and
uncertainties we face. Set forth below are the actual capital
ratios of our subsidiary bank as of December 31, 2009, the
minimum capital ratios imposed by the Board resolutions, and the
minimum ratios necessary to be considered
well-capitalized under federal regulatory standards:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Independent Bank
|
|
Minimum Ratios
|
|
|
|
|
Actual as of
|
|
Established by
|
|
Required to be
|
|
|
12/31/09
|
|
Our Board
|
|
Well-Capitalized
|
|
Total Capital to Risk-Weighted Assets
|
|
|
10.36
|
%
|
|
|
11.0
|
%
|
|
|
10.0
|
%
|
Tier 1 Capital to Average Total Assets
|
|
|
6.72
|
%
|
|
|
8.0
|
%
|
|
|
5.0
|
%
|
The Capital Plan sets forth an objective of achieving these
minimum capital ratios as soon as practicable, but no later than
April 30, 2010, and maintaining such capital ratios though
at least the end of 2012.
The Capital Plan includes projections prepared by the
banks management that reflect forecasted financial data
through 2012. Those projections anticipate a need for a minimum
of $60 million of additional capital in order for us to
achieve and maintain the minimum ratios established by our
Board. The projections take into account the various risks and
uncertainties we face. However, because the projections are
based on assumptions regarding such risks and uncertainties,
which assumptions may not prove to be true, the Capital Plan
contains a target of $100 million to $125 million of
additional capital to be raised by IBC.
The Capital Plan sets forth certain initiatives to be pursued in
order to raise additional capital and meet the objectives of the
Capital Plan. Based on discussions with the investment bankers
we have retained to assist us in raising capital, our Capital
Plan concludes that our best option for raising additional
capital is through the sale of additional shares of our common
stock in a public offering. We anticipate that all or
substantially all of the proceeds of such an offering would be
contributed to the capital of our bank.
In anticipation of the capital raising initiatives described in
the Capital Plan, we engaged an independent third party to
perform a due diligence review (a stress test) on
our commercial loan portfolio and a separate independent third
party to perform a similar review of our retail loan portfolio.
These independent stress tests were concluded in January 2010.
Each analysis included different scenarios based on expectations
of future economic conditions. We engaged these independent
reviews in order to ensure that the similar analyses we had
performed internally in 2009, on which we based our projections
for future expected loan losses and our need for additional
capital, were reasonable and did not materially understate our
projected loan losses. Based on the
39
conclusions of these third party reviews, we determined that we
did not need to modify our projections used for purposes of the
Capital Plan.
In addition to contemplating a public offering of our common
stock for cash, the Capital Plan contemplates two other primary
capital raising initiatives: (1) an offer to exchange
shares of our common stock for any or all of our outstanding
trust preferred securities, and (2) an offer to exchange
shares of our common stock for any or all of the shares of our
preferred stock held by the UST. These two initiatives are
designed to do the following:
|
|
|
|
|
improve our holding companys ratio of tangible common
equity (TCE) to tangible assets;
|
|
|
|
reduce required annual interest and dividend payments by
reducing the aggregate principal amount of outstanding trust
preferred securities and outstanding shares of preferred
stock; and
|
|
|
|
improve our ability to successfully raise additional capital
through a public offering of our common stock.
|
Our Capital Plan also outlines various contingency plans in case
we do not succeed in raising all additional capital needed.
These contingency plans include a possible further reduction in
our assets (such as through a sale of branches, loans,
and/or other
operating divisions or subsidiaries), more significant expense
reductions than those that have already been implemented and
those that are currently being considered, and a sale of the
bank. Because of current market conditions and based on
discussions with our investment bankers and informal discussions
we have held in the past with potential buyers for certain of
our assets, we believe we are more likely to meet the minimum
capital ratios set forth in the Capital Plan through raising new
equity capital than we are through pursuing any of these
contingency plans. However, the contingency plans were
considered and included within the Capital Plan in recognition
of the possibility that market conditions for these transactions
may improve and that such transactions may be necessary or
required by our regulators if we are unable to raise sufficient
equity capital through the capital raising initiatives described
above.
The Capital Plan concludes with a recognition that our strategy
and focus for the near term will be to improve our asset quality
and pursue the capital raising initiatives described above in
order to strengthen our capital position.
Our bank holding company and our bank subsidiary both remain
well capitalized (as defined by banking regulations)
at December 31, 2009.
BANK
CAPITAL RATIOS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum
|
|
Minimum
|
|
|
|
|
|
|
Ratio for
|
|
Ratio for
|
|
|
|
|
|
|
Adequately
|
|
Well
|
|
|
December 31,
|
|
Capitalized
|
|
Capitalized
|
|
|
2009
|
|
2008
|
|
Institutions
|
|
Institutions
|
|
Tier 1 capital to average assets
|
|
|
6.72
|
%
|
|
|
8.25
|
%
|
|
|
4.00
|
%
|
|
|
5.00
|
%
|
Tier 1 risk-based capital
|
|
|
9.08
|
|
|
|
10.62
|
|
|
|
4.00
|
|
|
|
6.00
|
|
Total risk-based capital
|
|
|
10.36
|
|
|
|
11.91
|
|
|
|
8.00
|
|
|
|
10.00
|
|
Shareholders equity totaled $109.9 million at
December 31, 2009. The decrease from $194.9 million at
December 31, 2008 primarily reflects the loss that we
incurred in 2009 that was partially offset by a decline in the
accumulated other comprehensive loss. Shareholders equity
was equal to 3.70% of total assets at December 31, 2009,
compared to 6.59% a year earlier.
Asset/liability management. Interest-rate risk
is created by differences in the cash flow characteristics of
our assets and liabilities. Options embedded in certain
financial instruments, including caps on adjustable-rate loans
as well as borrowers rights to prepay fixed-rate loans
also create interest-rate risk.
Our asset/liability management efforts identify and evaluate
opportunities to structure the balance sheet in a manner that is
consistent with our mission to maintain profitable financial
leverage within established risk parameters. We evaluate various
opportunities and alternate balance-sheet strategies carefully
and consider the likely impact on our risk profile as well as
the anticipated contribution to earnings. The marginal cost of
funds is a principal consideration in the implementation of our
balance-sheet management strategies, but such evaluations
40
further consider interest-rate and liquidity risk as well as
other pertinent factors. We have established parameters for
interest-rate risk. We regularly monitor our interest-rate risk
and report at least quarterly to our board of directors.
We employ simulation analyses to monitor our interest-rate risk
profile and evaluate potential changes in our net interest
income and market value of portfolio equity that result from
changes in interest rates. The purpose of these simulations is
to identify sources of interest-rate risk inherent in our
balance sheet. The simulations do not anticipate any actions
that we might initiate in response to changes in interest rates
and, accordingly, the simulations do not provide a reliable
forecast of anticipated results. The simulations are predicated
on immediate, permanent and parallel shifts in interest rates
and generally assume that current loan and deposit pricing
relationships remain constant. The simulations further
incorporate assumptions relating to changes in customer
behavior, including changes in prepayment rates on certain
assets and liabilities.
CHANGES
IN MARKET VALUE OF PORTFOLIO EQUITY AND TAX EQUIVALENT NET
INTEREST INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Market Value of
|
|
Percent
|
|
Tax Equivalent
|
|
Percent
|
Change in Interest Rates
|
|
Portfolio Equity(1)
|
|
Change
|
|
Net Interest Income(2)
|
|
Change
|
|
|
(Dollars in thousands)
|
|
December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
200 basis point rise
|
|
$
|
160,500
|
|
|
|
16.14
|
%
|
|
$
|
136,900
|
|
|
|
2.55
|
%
|
100 basis point rise
|
|
|
150,400
|
|
|
|
8.83
|
|
|
|
134,100
|
|
|
|
0.45
|
|
Base-rate scenario
|
|
|
138,200
|
|
|
|
|
|
|
|
133,500
|
|
|
|
|
|
100 basis point decline
|
|
|
128,100
|
|
|
|
(7.31
|
)
|
|
|
132,600
|
|
|
|
(0.67
|
)
|
200 basis point decline
|
|
|
126,300
|
|
|
|
(8.61
|
)
|
|
|
131,500
|
|
|
|
(1.50
|
)
|
December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
200 basis point rise
|
|
$
|
202,900
|
|
|
|
(2.50
|
)%
|
|
$
|
129,700
|
|
|
|
(4.56
|
)%
|
100 basis point rise
|
|
|
206,500
|
|
|
|
(0.77
|
)
|
|
|
132,500
|
|
|
|
(2.50
|
)
|
Base-rate scenario
|
|
|
208,100
|
|
|
|
|
|
|
|
135,900
|
|
|
|
|
|
100 basis point decline
|
|
|
204,600
|
|
|
|
(1.68
|
)
|
|
|
137,900
|
|
|
|
1.47
|
|
200 basis point decline
|
|
|
192,400
|
|
|
|
(7.54
|
)
|
|
|
134,400
|
|
|
|
(1.10
|
)
|
|
|
|
(1) |
|
Simulation analyses calculate the change in the net present
value of our assets and liabilities, including debt and related
financial derivative instruments, under parallel shifts in
interest rates by discounting the estimated future cash flows
using a market-based discount rate. Cash flow estimates
incorporate anticipated changes in prepayment speeds and other
embedded options. |
|
(2) |
|
Simulation analyses calculate the change in net interest income
under immediate parallel shifts in interest rates over the next
twelve months, based upon a static balance sheet, which includes
debt and related financial derivative instruments, and do not
consider loan fees. |
Management plans and expectations. As
described earlier, we have adopted the Capital Plan which
includes a series of actions designed to increase our common
equity capital, decrease our expenses and enable us to withstand
and better respond to current market conditions and the
potential for worsening market conditions. However, based on our
current forecasts, even absent additional capital, our bank
subsidiary is expected to remain adequately capitalized
throughout 2010 and our holding company would have sufficient
cash on hand to meet expected obligations during 2010. These
forecasts are based upon certain assumptions, including future
levels of our provision for loan losses, vehicle service
contract counterparty contingencies, the level of our risk based
assets and other factors, and differences between our actual
results and these assumptions will impact our actual capital
levels.
FAIR
VALUATION OF FINANCIAL INSTRUMENTS
Financial Accounting Standards Board (FASB)
Accounting Standards Codification (ASC) topic
820 Fair Value Measurements and
Disclosures (FASB ASC topic 820) defines fair
value as the exchange price that
41
would be received for an asset or paid to transfer a liability
(an exit price) in the principal or most advantageous market for
the asset or liability in an orderly transaction between market
participants on the measurement date.
We utilize fair value measurements to record fair value
adjustments to certain financial instruments and to determine
fair value disclosures. FASB ASC topic 820 differentiates
between those assets and liabilities required to be carried at
fair value at every reporting period (recurring) and
those assets and liabilities that are only required to be
adjusted to fair value under certain circumstances
(nonrecurring). Trading securities, securities
available-for-sale,
loans held for sale, and derivatives are financial instruments
recorded at fair value on a recurring basis. Additionally, from
time to time, we may be required to record at fair value other
financial assets on a nonrecurring basis, such as loans held for
investment, capitalized mortgage loan servicing rights and
certain other assets. These nonrecurring fair value adjustments
typically involve application of lower of cost or market
accounting or write-downs of individual assets. Further, the
notes to the consolidated financial statements include
information about the extent to which fair value is used to
measure assets and liabilities and the valuation methodologies
used.
FASB ASC topic 820 established a three-level hierarchy for
disclosure of assets and liabilities recorded at fair value. The
classification of assets and liabilities within the hierarchy is
based on whether the inputs to the valuation methodology used
for measurement are observable or unobservable. Observable
inputs reflect market-derived or market-based information
obtained from independent sources, while unobservable inputs
reflect managements estimates about market data.
|
|
Level 1
|
Valuation is based upon quoted prices for identical instruments
traded in active markets. Level 1 instruments include
securities traded on active exchange markets, such as the New
York Stock Exchange, as well as U.S. Treasury securities
that are traded by dealers or brokers in active
over-the-counter
markets.
|
|
Level 2
|
Valuation is based upon quoted prices for similar instruments in
active markets, quoted prices for identical or similar
instruments in markets that are not active, and model-based
valuation techniques for which all significant assumptions are
observable in the market. Level 2 instruments include
securities traded in less active dealer or broker markets.
|
|
Level 3
|
Valuation is generated from model-based techniques that use at
least one significant assumption not observable in the market.
These unobservable assumptions reflect estimates of assumptions
that market participants would use in pricing the asset or
liability. Valuation techniques include use of option pricing
models, discounted cash flow models and similar techniques.
|
For assets and liabilities recorded at fair value, it is our
policy to maximize the use of observable inputs and minimize the
use of unobservable inputs when developing fair value
measurements, in accordance with the fair value hierarchy in
FASB ASC topic 820. When available, we utilize quoted market
prices to measure fair value. If market prices are not
available, fair value measurement is based upon models that use
primarily market-based or independently sourced market
parameters, including interest rate yield curves, prepayment
speeds, and option volatilities. Substantially all of our
financial instruments use either of the foregoing methodologies,
collectively Level 1 and Level 2 measurements, to
determine fair value adjustments recorded in our financial
statements. However, in certain cases, when market observable
inputs for model-based valuation techniques may not be readily
available, we are required to make judgments about assumptions
market participants would use in estimating the fair value of
the financial instrument. The models we use to determine fair
value adjustments are periodically evaluated by management for
relevance under current facts and circumstances.
The degree of management judgment involved in determining the
fair value of a financial instrument is dependent upon the
availability of quoted market prices or observable market
parameters. For financial instruments that trade actively and
have quoted market prices or observable market parameters, there
is minimal subjectivity involved in measuring fair value. When
observable market prices and parameters are not fully available,
management judgment is necessary to estimate fair value. In
addition, changes in market conditions may reduce the
availability of quoted prices or observable data. For example,
reduced liquidity in the capital markets or changes in the
secondary market activities could result in observable market
inputs becoming unavailable. Therefore, when market data is not
available, we would use valuation techniques requiring more
management judgment to estimate the appropriate fair value
measurement.
42
At December 31, 2009 and 2008, $199.4 million (or 6.7%
of total assets) and $246.0 million (or 8.3% of total
assets), respectively, consisted of financial instruments
recorded at fair value on a recurring basis. At
December 31, 2009, $36.5 million of financial
instruments (all private label residential mortgage-backed or
other asset-backed securities) used Level 3 valuation
measurements. All of the other financial instruments used
valuation methodologies involving market-based or market-derived
information, collectively Level 1 and 2 measurements, to
measure fair value. At December 31, 2009 and 2008,
$4.3 million (or 0.1% of total liabilities) and
$6.5 million (or 0.2% of total liabilities), respectively,
consisted of financial instruments (all derivative financial
instruments) recorded at fair value on a recurring basis.
At December 31, 2009 and 2008, $88.7 million (or 3.0%
of total assets) and $69.8 million (or 2.4% of total
assets), respectively, consisted of financial instruments
recorded at fair value on a nonrecurring basis. All of these
financial instruments (comprised of impaired loans and
capitalized mortgage loan servicing rights in both 2009 and 2008
as well as other real estate in 2009) used Level 2 and
Level 3 measurement valuation methodologies involving
market-based or market-derived information to measure fair
value. At December 31, 2009 and 2008, no liabilities were
measured at fair value on a nonrecurring basis.
In addition to FASB ASC topic 820, on January 1, 2008 we
also adopted FASB ASC topic 825 Financial
Instruments (FASB ASC topic 825) for certain
financial assets. We adopted FASB ASC topic 825 for loans held
for sale (that prior to January 1, 2008 were recorded at
the lower of cost or market) to correspond to the accounting for
the related commitments to sell these loans. We also adopted
FASB ASC topic 825 for certain preferred stock investments and
utilize a quoted market price (Level 1) or significant
other observable inputs (Level 2).
See Note 22 to the consolidated financial statements for a
complete discussion on our use of fair valuation of financial
instruments and the related measurement techniques.
LITIGATION
MATTERS
We are involved in various litigation matters in the ordinary
course of business and at the present time, we do not believe
that any of these matters will have a significant impact on our
financial condition or results of operation.
CRITICAL
ACCOUNTING POLICIES
Our accounting and reporting policies are in accordance with
accounting principles generally accepted in the United States of
America and conform to general practices within the banking
industry. Accounting and reporting policies for other than
temporary impairment of investment securities, the allowance for
loan losses, originated mortgage loan servicing rights,
derivative financial instruments, vehicle service contract
counterparty contingencies, income taxes and goodwill are deemed
critical since they involve the use of estimates and require
significant management judgments. Application of assumptions
different than those that we have used could result in material
changes in our financial position or results of operations.
We are required to assess our investment securities for
other than temporary impairment on a periodic basis.
The determination of other than temporary impairment for an
investment security requires judgment as to the cause of the
impairment, the likelihood of recovery and the projected timing
of the recovery. The topic of other than temporary impairment
has been at the forefront of discussions within the accounting
profession during 2008 and 2009 because of the dislocation of
the credit markets that has occurred. On January 12, 2009
the FASB issued ASC
325-40-65-1
(formerly Staff Position
No. EITF 99-20-1
Amendments to the Impairment Guidance of EITF Issue
No. 99-20.)
This standard has been applicable to our financial statements
since December 31, 2008. In particular, this standard
strikes the language that required the use of market participant
assumptions about future cash flows from previous guidance. This
change now permits the use of reasonable management judgment
about whether it is probable that all previously projected cash
flows will not be collected in determining other than temporary
impairment. Our assessment process resulted in recording other
than temporary impairment charges of $0.1 million,
$0.2 million, and $1.0 million in 2009, 2008, and
2007, respectively, in our consolidated statements of
operations. Further, we did elect (effective January 1,
2008) fair value accounting pursuant to FASB ASC topic 825
for certain of our preferred stock investments. We believe that
our assumptions and judgments in assessing other than temporary
impairment for our investment securities are reasonable and
conform to general industry practices. Prices for investment
securities are largely
43
provided by a pricing service. These prices consider benchmark
yields, reported trades, broker / dealer quotes and
issuer spreads. Furthermore, prices for mortgage securities
consider: TBA prices, monthly payment information and collateral
performance. As of December 31, 2009, the pricing service
did not provide fair values for securities with a fair value of
$36.5 million. Management estimated the fair value of these
securities using similar techniques including: observed prices,
benchmark yields, dealer bids and TBA pricing. These estimates
are subject to change and the resulting level 3 valued
securities may be volatile as a result. At December 31,
2009 the cost basis of our investment securities classified as
available for sale exceeded their estimated fair value at that
same date by $6.9 million (compared to $16.3 million
at December 31, 2008). This amount is included in the
accumulated other comprehensive loss section of
shareholders equity.
Our methodology for determining the allowance and related
provision for loan losses is described above in Portfolio
Loans and asset quality. In particular, this area of
accounting requires a significant amount of judgment because a
multitude of factors can influence the ultimate collection of a
loan or other type of credit. It is extremely difficult to
precisely measure the amount of losses that are probable in our
loan portfolio. We use a rigorous process to attempt to
accurately quantify the necessary allowance and related
provision for loan losses, but there can be no assurance that
our modeling process will successfully identify all of the
losses that are probable in our loan portfolio. As a result, we
could record future provisions for loan losses that may be
significantly different than the levels that we recorded in 2009.
At December 31, 2009 we had approximately
$15.3 million of mortgage loan servicing rights capitalized
on our balance sheet. There are several critical assumptions
involved in establishing the value of this asset including
estimated future prepayment speeds on the underlying mortgage
loans, the interest rate used to discount the net cash flows
from the mortgage loan servicing, the estimated amount of
ancillary income that will be received in the future (such as
late fees) and the estimated cost to service the mortgage loans.
We believe the assumptions that we utilize in our valuation are
reasonable based upon accepted industry practices for valuing
mortgage loan servicing rights and represent neither the most
conservative or aggressive assumptions. We recorded a decrease
in the valuation allowance on capitalized mortgage loan
servicing rights of $2.3 million in 2009 (compared to an
increase in such valuation allowance of $4.3 million in
2008). Nearly all of our mortgage loans serviced for others at
December 31, 2009 are for either Fannie Mae or Freddie Mac.
Because of our current financial condition, if our bank were to
fall below well capitalized (as defined by banking
regulations) it is possible that Fannie Mae and Freddie Mac
could require us to very quickly sell or transfer such servicing
rights to a third party or unilaterally strip us of such
servicing rights if we cannot complete an approved transfer.
Depending on the terms of any such transaction, this forced sale
or transfer of such mortgage loan servicing rights could have a
material adverse impact on our financial condition and results
of operations.
We use a variety of derivative instruments to manage our
interest rate risk. These derivative instruments may include
interest rate swaps, collars, floors and caps and mandatory
forward commitments to sell mortgage loans. Under FASB ASC topic
815 Derivatives and Hedging the accounting for
increases or decreases in the value of derivatives depends upon
the use of the derivatives and whether the derivatives qualify
for hedge accounting. At December 31, 2009 we had
approximately $160.0 million in notional amount of
derivative financial instruments that qualified for hedge
accounting under this standard. As a result, generally, changes
in the fair market value of those derivative financial
instruments qualifying as cash flow hedges are recorded in other
comprehensive income. The changes in the fair value of those
derivative financial instruments qualifying as fair value hedges
are recorded in earnings and, generally, are offset by the
change in the fair value of the hedged item which is also
recorded in earnings (we currently do not have any fair value
hedges). The fair value of derivative financial instruments
qualifying for hedge accounting was a negative $2.3 million
at December 31, 2009.
Mepco purchases payment plans, on a full recourse basis, from
companies (which we refer to as Mepcos
counterparties) that provide vehicle service
contracts and similar products to consumers. The payment plans
(which are classified as finance receivables in our consolidated
statements of financial condition) permit a consumer to purchase
a service contract by making installment payments, generally for
a term of 12 to 24 months, to the sellers of those
contracts (one of the counterparties). Mepco does
not evaluate the creditworthiness of the individual customer but
instead primarily relies on the payment plan collateral (the
unearned vehicle service contract and unearned sales commission)
in the event of default. When consumers stop making payments or
exercise their right to voluntarily cancel the contract, the
remaining unpaid balance of the payment plan is normally
recouped by Mepco from the
44
counterparties that sold the contract and provided the coverage.
The refund obligations of these counterparties are not fully
secured. We record losses, included in non-interest expenses,
for estimated defaults by these counterparties in their recourse
obligations to Mepco. These losses (which totaled
$31.2 million, $1.0 million, and zero, in 2009, 2008,
and 2007, respectively) are titled vehicle service
contract counterparty contingencies in our consolidated
statements of operations. This area of accounting requires a
significant amount of judgment because a number of factors can
influence the amount of loss that we may ultimately incur. These
factors include our estimate of future cancellations of vehicle
service contracts, our evaluation of collateral that may be
available to recover funds due from our counterparties, and the
amount collected from counterparties in connection with their
contractual recourse obligations. We apply a rigorous process,
based upon observable contract activity and past experience, to
estimate probable losses and quantify the necessary reserves for
our vehicle service contract counterparty contingencies, but
there can be no assurance that our modeling process will
successfully identify all such losses. As a result, we could
record future losses associated with vehicle service contract
counterparty contingencies that may be significantly different
than the levels that we recorded in 2009.
Our accounting for income taxes involves the valuation of
deferred tax assets and liabilities primarily associated with
differences in the timing of the recognition of revenues and
expenses for financial reporting and tax purposes. At
December 31, 2009 we had gross deferred tax assets of
$67.3 million, gross deferred tax liabilities of
$6.5 million and a valuation allowance of
$60.2 million ($24.0 million of such valuation
allowance was established in 2009 and $36.2 million of
which was established in 2008) resulting in a net deferred
tax asset of $0.7 million. This valuation allowance
represents our entire net deferred tax asset except for certain
deferred tax assets at Mepco that relate to state income taxes
and that can be recovered based on Mepcos individual
earnings. We are required to assess whether a valuation
allowance should be established against their deferred tax
assets based on the consideration of all available evidence
using a more likely than not standard. In accordance
with this standard, we reviewed our deferred tax assets and
determined that based upon a number of factors including our
declining operating performance since 2005 and our net loss in
2009 and 2008, overall negative trends in the banking industry
and our expectation that our operating results will continue to
be negatively affected by the overall economic environment, we
should establish a valuation allowance for our deferred tax
assets. In the last quarter of 2008, we recorded a
$36.2 million valuation allowance, which consisted of
$27.6 million recognized as income tax expense and
$8.6 million recognized through the accumulated other
comprehensive loss component of shareholders equity and in
2009 we recorded an additional $24.0 million valuation
allowance (which is net of a $4.1 million allocation of
deferred taxes on the accumulated other comprehensive loss
component of shareholders equity). We had recorded no
valuation allowance on our net deferred tax asset in prior years
because we believed that the tax benefits associated with this
asset would more likely than not, be realized. Changes in tax
laws, changes in tax rates and our future level of earnings can
impact the ultimate realization of our net deferred tax asset as
well as the valuation allowance that we have established.
At December 31, 2009 we had no remaining goodwill. We test
our goodwill for impairment utilizing the methodology and
guidelines established in this standard. This methodology
involves assumptions regarding the valuation of the business
segments that contain the acquired entities. We believe that the
assumptions we utilize are reasonable. During 2009, we recorded
a $16.7 million goodwill impairment charge at our Mepco
segment. In the fourth quarter of 2009 we updated our goodwill
impairment testing (interim tests had also been performed in
each of the first three quarters of 2009). The results of the
year end goodwill impairment testing showed that the estimated
fair value of our Mepco reporting unit was now less than the
carrying value of equity. The fair value of Mepco is principally
based on estimated future earnings utilizing a discounted cash
flow methodology. As described above in Non-interest
expense and in Business segments, Mepco
recorded a loss in the fourth quarter of 2009. Further,
Mepcos largest business counterparty, who accounted for
nearly one-half of Mepcos payment plan business, defaulted
in its obligations to Mepco and this counterparty is expected to
cease its operations in 2010. These factors adversely impacted
the level of Mepcos expected future earnings and hence its
fair value. A step 2 analysis and valuation was performed. Based
on the step 2 analysis (which involved determining the fair
value of Mepcos assets, liabilities and identifiable
intangibles), we concluded that goodwill was now impaired,
resulting in this $16.7 million charge. During 2008, we
recorded a $50.0 million goodwill impairment charge. In the
fourth quarter of 2008, we updated our goodwill impairment
testing (interim tests had also been performed in the second and
third quarters of 2008). Our common stock price dropped even
further in the fourth quarter of 2008, resulting in a wider
difference between our market capitalization and book value. The
results of the year end goodwill impairment testing showed
45
that the estimated fair value of our bank reporting unit was
less than the carrying value of equity. This necessitated a step
2 analysis and valuation. Based on the step 2 analysis (which
involved determining the fair value of our banks assets,
liabilities and identifiable intangibles) we concluded that
goodwill was now impaired, resulting in this $50.0 million
charge.
46
MANAGEMENTS
ANNUAL REPORT ON INTERNAL CONTROL
OVER FINANCIAL REPORTING
The management of Independent Bank Corporation is responsible
for establishing and maintaining adequate internal control over
financial reporting. Our internal control system was designed to
provide reasonable assurance to us and the board of directors
regarding the preparation and fair presentation of published
financial statements.
All internal control systems, no matter how well designed, have
inherent limitations. Therefore, even those systems determined
to be effective can provide only reasonable assurance with
respect to financial statement preparation and presentation.
We assessed the effectiveness of our internal control over
financial reporting as of December 31, 2009. In making this
assessment, we used the criteria set forth by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO) in
Internal Control Integrated Framework. Based
on our assessment, management has concluded that as of
December 31, 2009, the Companys internal control over
financial reporting was effective to provide reasonable
assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles.
Our independent auditors have issued an audit report on the
Companys internal control over financial reporting. Their
report immediately follows our report.
|
|
|
|
|
|
Michael M. Magee, Jr.
President and Chief
Executive Officer
|
|
Robert N. Shuster
Executive Vice President
and Chief Financial Officer
|
Independent Bank Corporation
February 26, 2010
47
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
Independent Bank Corporation
Ionia, Michigan
We have audited the accompanying consolidated statements of
financial condition of Independent Bank Corporation as of
December 31, 2009 and 2008, and the related consolidated
statements of operations, shareholders equity,
comprehensive income, and cash flows for each of the years in
the three-year period ended December 31, 2009. We also have
audited Independent Bank Corporations internal control
over financial reporting as of December 31, 2009, based on
criteria established in Internal Control Integrated
Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission (COSO). Independent Bank
Corporations management is responsible for these financial
statements, for maintaining effective internal control over
financial reporting, and for its assessment of the effectiveness
of internal control over financial reporting, included in the
accompanying Managements Annual Report on Internal Control
Over Financial Reporting. Our responsibility is to express an
opinion on these financial statements and an opinion on the
companys internal control over financial reporting based
on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are
free of material misstatement and whether effective internal
control over financial reporting was maintained in all material
respects. Our audits of the financial statements included
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. Our audit of internal control over financial
reporting included obtaining an understanding of internal
control over financial reporting, assessing the risk that a
material weakness exists, and testing and evaluating the design
and operating effectiveness of internal control based on the
assessed risk. Our audits also included performing such other
procedures as we considered necessary in the circumstances. We
believe that our audits provide a reasonable basis for our
opinions.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position
of Independent Bank Corporation as of December 31, 2009 and
2008, and the results of its operations and its cash flows for
each of the years in the three-year period ended
December 31, 2009 in conformity with accounting principles
generally accepted in the United States of America. Also in our
opinion, Independent Bank Corporation maintained, in all
material respects, effective internal control over financial
reporting as of December 31, 2009, based on criteria
established in Internal Control Integrated Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO).
Grand Rapids, Michigan
February 26, 2010
48
CONSOLIDATED
STATEMENTS OF FINANCIAL CONDITION
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands, except share amounts)
|
|
|
ASSETS
|
Cash and due from banks
|
|
$
|
65,214
|
|
|
$
|
57,463
|
|
Interest bearing deposits
|
|
|
223,522
|
|
|
|
242
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
288,736
|
|
|
|
57,705
|
|
Trading securities
|
|
|
54
|
|
|
|
1,929
|
|
Securities available for sale
|
|
|
164,151
|
|
|
|
215,412
|
|
Federal Home Loan Bank and Federal Reserve Bank stock, at cost
|
|
|
27,854
|
|
|
|
28,063
|
|
Loans held for sale, carried at fair value
|
|
|
34,234
|
|
|
|
27,603
|
|
Loans
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
840,367
|
|
|
|
976,391
|
|
Mortgage
|
|
|
749,298
|
|
|
|
839,496
|
|
Installment
|
|
|
303,366
|
|
|
|
356,806
|
|
Finance receivables
|
|
|
406,341
|
|
|
|
286,836
|
|
|
|
|
|
|
|
|
|
|
Total Loans
|
|
|
2,299,372
|
|
|
|
2,459,529
|
|
Allowance for loan losses
|
|
|
(81,717
|
)
|
|
|
(57,900
|
)
|
|
|
|
|
|
|
|
|
|
Net Loans
|
|
|
2,217,655
|
|
|
|
2,401,629
|
|
Other real estate and repossessed assets
|
|
|
31,534
|
|
|
|
19,998
|
|
Property and equipment, net
|
|
|
72,616
|
|
|
|
73,318
|
|
Bank owned life insurance
|
|
|
46,514
|
|
|
|
44,896
|
|
Goodwill
|
|
|
|
|
|
|
16,734
|
|
Other intangibles
|
|
|
10,260
|
|
|
|
12,190
|
|
Capitalized mortgage loan servicing rights
|
|
|
15,273
|
|
|
|
11,966
|
|
Prepaid FDIC deposit insurance assessment
|
|
|
22,047
|
|
|
|
|
|
Accrued income and other assets
|
|
|
34,436
|
|
|
|
44,802
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
2,965,364
|
|
|
$
|
2,956,245
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY
|
Deposits
|
|
|
|
|
|
|
|
|
Non-interest bearing
|
|
$
|
334,608
|
|
|
$
|
308,041
|
|
Savings and NOW
|
|
|
1,059,840
|
|
|
|
907,187
|
|
Retail time
|
|
|
542,170
|
|
|
|
668,968
|
|
Brokered time
|
|
|
629,150
|
|
|
|
182,283
|
|
|
|
|
|
|
|
|
|
|
Total Deposits
|
|
|
2,565,768
|
|
|
|
2,066,479
|
|
Federal funds purchased
|
|
|
|
|
|
|
750
|
|
Other borrowings
|
|
|
131,182
|
|
|
|
541,986
|
|
Subordinated debentures
|
|
|
92,888
|
|
|
|
92,888
|
|
Financed premiums payable
|
|
|
21,309
|
|
|
|
26,636
|
|
Accrued expenses and other liabilities
|
|
|
44,356
|
|
|
|
32,629
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
2,855,503
|
|
|
|
2,761,368
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingent liabilities
|
|
|
|
|
|
|
|
|
Shareholders Equity
|
|
|
|
|
|
|
|
|
Preferred stock, Series A, no par value, $1,000 liquidation
preference per
|
|
|
|
|
|
|
|
|
share 200,000 shares authorized;
72,000 shares issued and outstanding
|
|
|
|
|
|
|
|
|
at December 31, 2009 and 2008
|
|
|
69,157
|
|
|
|
68,456
|
|
Common stock, $1.00 par value
60,000,000 shares authorized; issued and outstanding;
24,028,505 shares at December 31, 2009 and
23,013,980 shares at December 31, 2008
|
|
|
23,863
|
|
|
|
22,791
|
|
Capital surplus
|
|
|
201,618
|
|
|
|
200,687
|
|
Accumulated deficit
|
|
|
(169,098
|
)
|
|
|
(73,849
|
)
|
Accumulated other comprehensive loss
|
|
|
(15,679
|
)
|
|
|
(23,208
|
)
|
|
|
|
|
|
|
|
|
|
Total Shareholders Equity
|
|
|
109,861
|
|
|
|
194,877
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Shareholders Equity
|
|
$
|
2,965,364
|
|
|
$
|
2,956,245
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements
49
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands, except per share amounts)
|
|
|
INTEREST INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and fees on loans
|
|
$
|
177,948
|
|
|
$
|
186,747
|
|
|
$
|
202,361
|
|
Interest on securities
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
6,333
|
|
|
|
8,467
|
|
|
|
9,635
|
|
Tax-exempt
|
|
|
3,669
|
|
|
|
7,238
|
|
|
|
9,920
|
|
Other investments
|
|
|
1,106
|
|
|
|
1,284
|
|
|
|
1,338
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Interest Income
|
|
|
189,056
|
|
|
|
203,736
|
|
|
|
223,254
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INTEREST EXPENSE
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
35,405
|
|
|
|
46,697
|
|
|
|
89,060
|
|
Other borrowings
|
|
|
15,128
|
|
|
|
26,890
|
|
|
|
13,603
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Interest Expense
|
|
|
50,533
|
|
|
|
73,587
|
|
|
|
102,663
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Interest Income
|
|
|
138,523
|
|
|
|
130,149
|
|
|
|
120,591
|
|
Provision for loan losses
|
|
|
103,032
|
|
|
|
71,321
|
|
|
|
43,160
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Interest Income After Provision for Loan Losses
|
|
|
35,491
|
|
|
|
58,828
|
|
|
|
77,431
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NON-INTEREST INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
Service charges on deposit accounts
|
|
|
24,370
|
|
|
|
24,223
|
|
|
|
24,251
|
|
Net gains (losses) on assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage loans
|
|
|
10,860
|
|
|
|
5,181
|
|
|
|
4,317
|
|
Securities
|
|
|
3,826
|
|
|
|
(14,795
|
)
|
|
|
295
|
|
Other than temporary loss on securities available for sale
|
|
|
|
|
|
|
|
|
|
|
|
|
Total impairment loss
|
|
|
(4,073
|
)
|
|
|
(166
|
)
|
|
|
(1,000
|
)
|
Loss recognized in other comprehensive loss
|
|
|
3,991
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net impairment loss recognized in earnings
|
|
|
(82
|
)
|
|
|
(166
|
)
|
|
|
(1,000
|
)
|
VISA check card interchange income
|
|
|
5,922
|
|
|
|
5,728
|
|
|
|
4,905
|
|
Mortgage loan servicing
|
|
|
2,252
|
|
|
|
(2,071
|
)
|
|
|
2,236
|
|
Title insurance fees
|
|
|
2,272
|
|
|
|
1,388
|
|
|
|
1,551
|
|
Other income
|
|
|
9,239
|
|
|
|
10,233
|
|
|
|
10,590
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Non-interest Income
|
|
|
58,659
|
|
|
|
29,721
|
|
|
|
47,145
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NON-INTEREST EXPENSE
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and employee benefits
|
|
|
53,003
|
|
|
|
55,179
|
|
|
|
55,811
|
|
Vehicle service contract counterparty contingencies
|
|
|
31,234
|
|
|
|
966
|
|
|
|
|
|
Loan and collection
|
|
|
14,727
|
|
|
|
9,431
|
|
|
|
4,949
|
|
Occupancy, net
|
|
|
11,092
|
|
|
|
11,852
|
|
|
|
10,624
|
|
Loss on other real estate and repossessed assets
|
|
|
8,554
|
|
|
|
4,349
|
|
|
|
276
|
|
Data processing
|
|
|
8,386
|
|
|
|
7,148
|
|
|
|
6,957
|
|
Deposit insurance
|
|
|
7,328
|
|
|
|
1,988
|
|
|
|
628
|
|
Furniture, fixtures and equipment
|
|
|
7,159
|
|
|
|
7,074
|
|
|
|
7,633
|
|
Credit card and bank service fees
|
|
|
6,608
|
|
|
|
4,818
|
|
|
|
3,913
|
|
Advertising
|
|
|
5,696
|
|
|
|
5,534
|
|
|
|
5,514
|
|
Goodwill impairment
|
|
|
16,734
|
|
|
|
50,020
|
|
|
|
343
|
|
Other expenses
|
|
|
17,066
|
|
|
|
18,791
|
|
|
|
19,076
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Non-interest Expense
|
|
|
187,587
|
|
|
|
177,150
|
|
|
|
115,724
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) From Continuing Operations Before Income Tax
|
|
|
(93,437
|
)
|
|
|
(88,601
|
)
|
|
|
8,852
|
|
Income tax expense (benefit)
|
|
|
(3,210
|
)
|
|
|
3,063
|
|
|
|
(1,103
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) From Continuing Operations
|
|
|
(90,227
|
)
|
|
|
(91,664
|
)
|
|
|
9,955
|
|
Discontinued operations, net of tax
|
|
|
|
|
|
|
|
|
|
|
402
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss)
|
|
$
|
(90,227
|
)
|
|
$
|
(91,664
|
)
|
|
$
|
10,357
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred dividends
|
|
|
4,301
|
|
|
|
215
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss) Applicable to Common Stock
|
|
$
|
(94,528
|
)
|
|
$
|
(91,879
|
)
|
|
$
|
10,357
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) per common share from continuing operations
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(3.96
|
)
|
|
$
|
(4.00
|
)
|
|
$
|
0.44
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
(3.96
|
)
|
|
$
|
(4.00
|
)
|
|
$
|
0.44
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(3.96
|
)
|
|
$
|
(4.00
|
)
|
|
$
|
0.46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
(3.96
|
)
|
|
$
|
(4.00
|
)
|
|
$
|
0.45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends declared per common share
|
|
$
|
0.03
|
|
|
$
|
0.14
|
|
|
$
|
0.84
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements
50
CONSOLIDATED
STATEMENTS OF SHAREHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
|
|
|
Other
|
|
|
Total
|
|
|
|
Preferred
|
|
|
Common
|
|
|
Capital
|
|
|
(Accumulated
|
|
|
Comprehensive
|
|
|
Shareholders
|
|
|
|
Stock
|
|
|
Stock
|
|
|
Surplus
|
|
|
Deficit)
|
|
|
Income (Loss)
|
|
|
Equity
|
|
|
|
(In thousands)
|
|
|
Balances at December 31, 2006
|
|
$
|
|
|
|
$
|
22,865
|
|
|
$
|
200,241
|
|
|
$
|
31,420
|
|
|
$
|
3,641
|
|
|
$
|
258,167
|
|
Net income for 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,357
|
|
|
|
|
|
|
|
10,357
|
|
Cash dividends declared, $.84 per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(19,007
|
)
|
|
|
|
|
|
|
(19,007
|
)
|
Issuance of 46,056 shares of common stock
|
|
|
|
|
|
|
46
|
|
|
|
433
|
|
|
|
|
|
|
|
|
|
|
|
479
|
|
Share based compensation
|
|
|
|
|
|
|
4
|
|
|
|
303
|
|
|
|
|
|
|
|
|
|
|
|
307
|
|
Repurchase and retirement of 313,728 shares of common stock
|
|
|
|
|
|
|
(314
|
)
|
|
|
(5,675
|
)
|
|
|
|
|
|
|
|
|
|
|
(5,989
|
)
|
Net change in accumulated other comprehensive income (loss), net
of $2.1 million related tax effect
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,812
|
)
|
|
|
(3,812
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2007
|
|
|
|
|
|
|
22,601
|
|
|
|
195,302
|
|
|
|
22,770
|
|
|
|
(171
|
)
|
|
|
240,502
|
|
Net loss for 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(91,664
|
)
|
|
|
|
|
|
|
(91,664
|
)
|
Cash dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common, declared $.14 per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,222
|
)
|
|
|
|
|
|
|
(3,222
|
)
|
Preferred, 5%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(180
|
)
|
|
|
|
|
|
|
(180
|
)
|
Issuance of preferred stock
|
|
|
68,421
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
68,421
|
|
Issuance of common stock warrants
|
|
|
|
|
|
|
|
|
|
|
3,579
|
|
|
|
|
|
|
|
|
|
|
|
3,579
|
|
Issuance of 171,977 shares of common stock
|
|
|
|
|
|
|
172
|
|
|
|
1,236
|
|
|
|
|
|
|
|
|
|
|
|
1,408
|
|
Share based compensation
|
|
|
|
|
|
|
35
|
|
|
|
553
|
|
|
|
|
|
|
|
|
|
|
|
588
|
|
Repurchase and retirement of 17,287 shares of common stock
|
|
|
|
|
|
|
(17
|
)
|
|
|
17
|
|
|
|
|
|
|
|
|
|
|
|
0
|
|
Accretion of preferred stock discount
|
|
|
35
|
|
|
|
|
|
|
|
|
|
|
|
(35
|
)
|
|
|
|
|
|
|
0
|
|
Reclassification adjustment upon adoption of the fair value
option
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,518
|
)
|
|
|
1,518
|
|
|
|
0
|
|
Net change in accumulated other comprehensive income (loss), net
of no related tax effect
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(24,555
|
)
|
|
|
(24,555
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2008
|
|
|
68,456
|
|
|
|
22,791
|
|
|
|
200,687
|
|
|
|
(73,849
|
)
|
|
|
(23,208
|
)
|
|
|
194,877
|
|
Net loss for 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(90,227
|
)
|
|
|
|
|
|
|
(90,227
|
)
|
Cash dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common, declared $.03 per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(721
|
)
|
|
|
|
|
|
|
(721
|
)
|
Preferred, 5%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,600
|
)
|
|
|
|
|
|
|
(3,600
|
)
|
Issuance of 1,032,105 shares of common stock
|
|
|
|
|
|
|
1,032
|
|
|
|
162
|
|
|
|
|
|
|
|
|
|
|
|
1,194
|
|
Share based compensation
|
|
|
|
|
|
|
58
|
|
|
|
751
|
|
|
|
|
|
|
|
|
|
|
|
809
|
|
Repurchase and retirement of 17,586 shares of common stock
|
|
|
|
|
|
|
(18
|
)
|
|
|
18
|
|
|
|
|
|
|
|
|
|
|
|
0
|
|
Accretion of preferred stock discount
|
|
|
701
|
|
|
|
|
|
|
|
|
|
|
|
(701
|
)
|
|
|
|
|
|
|
0
|
|
Net change in accumulated other comprehensive income (loss), net
of $4.1 million related tax effect
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,529
|
|
|
|
7,529
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2009
|
|
$
|
69,157
|
|
|
$
|
23,863
|
|
|
$
|
201,618
|
|
|
$
|
(169,098
|
)
|
|
$
|
(15,679
|
)
|
|
$
|
109,861
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements
51
CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(90,227
|
)
|
|
$
|
(91,664
|
)
|
|
$
|
10,357
|
|
Other comprehensive income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in unrealized gain (loss) on securities available for
sale, including reclassification adjustments
|
|
|
8,721
|
|
|
|
(19,626
|
)
|
|
|
(2,318
|
)
|
Change in unrealized losses on securities available for sale for
which a portion of other than temporary impairment has been
recognized in earnings
|
|
|
(2,594
|
)
|
|
|
|
|
|
|
|
|
Net change in unrealized gain (loss) on derivative instruments
|
|
|
1,402
|
|
|
|
(4,929
|
)
|
|
|
(1,332
|
)
|
Reclassification adjustment for accretion on settled derivative
instruments
|
|
|
|
|
|
|
|
|
|
|
(162
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive Income (Loss)
|
|
$
|
(82,698
|
)
|
|
$
|
(116,219
|
)
|
|
$
|
6,545
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements
52
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Net Income (Loss)
|
|
$
|
(90,227
|
)
|
|
$
|
(91,664
|
)
|
|
$
|
10,357
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO NET CASH
|
|
|
|
|
|
|
|
|
|
|
|
|
FROM (USED IN) OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from the sale of trading securities
|
|
|
2,827
|
|
|
|
2,688
|
|
|
|
|
|
Proceeds from sales of loans held for sale
|
|
|
551,977
|
|
|
|
271,715
|
|
|
|
293,143
|
|
Disbursements for loans held for sale
|
|
|
(545,548
|
)
|
|
|
(260,177
|
)
|
|
|
(290,940
|
)
|
Provision for loan losses
|
|
|
103,032
|
|
|
|
71,321
|
|
|
|
43,168
|
|
Deferred federal income tax expense (benefit)
|
|
|
2,146
|
|
|
|
10,936
|
|
|
|
(6,347
|
)
|
Deferred loan fees
|
|
|
(439
|
)
|
|
|
(649
|
)
|
|
|
(1,068
|
)
|
Depreciation, amortization of intangible assets and premiums and
|
|
|
|
|
|
|
|
|
|
|
|
|
accretion of discounts on securities and loans
|
|
|
(43,337
|
)
|
|
|
(22,778
|
)
|
|
|
(12,555
|
)
|
Net gains on sales of mortgage loans
|
|
|
(10,860
|
)
|
|
|
(5,181
|
)
|
|
|
(4,317
|
)
|
Net (gains) losses on securities
|
|
|
(3,826
|
)
|
|
|
14,795
|
|
|
|
(295
|
)
|
Securities impairment recognized in earnings
|
|
|
82
|
|
|
|
166
|
|
|
|
1,000
|
|
Goodwill impairment
|
|
|
16,734
|
|
|
|
50,020
|
|
|
|
343
|
|
Share based compensation
|
|
|
809
|
|
|
|
588
|
|
|
|
307
|
|
Increase in accrued income and other assets
|
|
|
(46,796
|
)
|
|
|
(17,857
|
)
|
|
|
(12,304
|
)
|
Increase (decrease) in accrued expenses and other liabilities
|
|
|
14,258
|
|
|
|
(3,162
|
)
|
|
|
(7,290
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Adjustments
|
|
|
41,059
|
|
|
|
112,425
|
|
|
|
2,845
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Cash (Used in) From Operating Activities
|
|
|
(49,168
|
)
|
|
|
20,761
|
|
|
|
13,202
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOW FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from the sale of securities available for sale
|
|
|
43,525
|
|
|
|
80,348
|
|
|
|
61,520
|
|
Proceeds from the maturity of securities available for sale
|
|
|
8,345
|
|
|
|
29,979
|
|
|
|
38,509
|
|
Principal payments received on securities available for sale
|
|
|
27,326
|
|
|
|
21,775
|
|
|
|
30,752
|
|
Purchases of securities available for sale
|
|
|
(15,806
|
)
|
|
|
(22,826
|
)
|
|
|
(65,366
|
)
|
Purchase of Federal Home Loan Bank Stock
|
|
|
|
|
|
|
(6,224
|
)
|
|
|
|
|
Purchase of Federal Reserve Bank Stock
|
|
|
|
|
|
|
|
|
|
|
(7,514
|
)
|
Redemption of Federal Reserve Bank Stock
|
|
|
209
|
|
|
|
|
|
|
|
|
|
Proceeds from sale of non-performing and other loans of concern
|
|
|
|
|
|
|
|
|
|
|
4,315
|
|
Portfolio loans originated, net of principal payments
|
|
|
133,235
|
|
|
|
35,252
|
|
|
|
(62,107
|
)
|
Acquisition of business offices, less cash paid
|
|
|
|
|
|
|
|
|
|
|
210,053
|
|
Proceeds from sale of insurance premium finance business
|
|
|
|
|
|
|
|
|
|
|
175,901
|
|
Proceeds from the sale of other real estate
|
|
|
12,336
|
|
|
|
5,987
|
|
|
|
4,445
|
|
Capital expenditures
|
|
|
(7,995
|
)
|
|
|
(8,128
|
)
|
|
|
(10,342
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Cash From Investing Activities
|
|
|
201,175
|
|
|
|
136,163
|
|
|
|
380,166
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOW FROM (USED IN) FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in total deposits
|
|
|
499,289
|
|
|
|
(438,826
|
)
|
|
|
(508,797
|
)
|
Net increase (decrease) in other borrowings and federal funds
purchased
|
|
|
(191,722
|
)
|
|
|
135,039
|
|
|
|
(89,008
|
)
|
Proceeds from Federal Home Loan Bank advances
|
|
|
242,524
|
|
|
|
824,101
|
|
|
|
331,500
|
|
Payments of Federal Home Loan Bank advances
|
|
|
(462,356
|
)
|
|
|
(770,395
|
)
|
|
|
(131,263
|
)
|
Repayment of long-term debt
|
|
|
|
|
|
|
(3,000
|
)
|
|
|
(2,000
|
)
|
Net change in financed premiums payable
|
|
|
(5,327
|
)
|
|
|
10,291
|
|
|
|
8,196
|
|
Dividends paid
|
|
|
(3,384
|
)
|
|
|
(7,769
|
)
|
|
|
(18,874
|
)
|
Repurchase of common stock
|
|
|
|
|
|
|
|
|
|
|
(5,989
|
)
|
Proceeds from issuance of preferred stock
|
|
|
|
|
|
|
68,421
|
|
|
|
|
|
Proceeds from issuance of common stock warrants
|
|
|
|
|
|
|
3,579
|
|
|
|
|
|
Proceeds from issuance of subordinated debt
|
|
|
|
|
|
|
|
|
|
|
32,991
|
|
Redemption of subordinated debt
|
|
|
|
|
|
|
|
|
|
|
(4,300
|
)
|
Proceeds from issuance of common stock
|
|
|
|
|
|
|
51
|
|
|
|
156
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Cash From (Used in) Financing Activities
|
|
|
79,024
|
|
|
|
(178,508
|
)
|
|
|
(387,388
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Increase (Decrease) in Cash and Cash Equivalents
|
|
|
231,031
|
|
|
|
(21,584
|
)
|
|
|
5,980
|
|
Change in cash and cash equivalents of discontinued operations
|
|
|
|
|
|
|
|
|
|
|
167
|
|
Cash and Cash Equivalents at Beginning of Year
|
|
|
57,705
|
|
|
|
79,289
|
|
|
|
73,142
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents at End of Year
|
|
$
|
288,736
|
|
|
$
|
57,705
|
|
|
$
|
79,289
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the year for
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
50,420
|
|
|
$
|
79,714
|
|
|
$
|
107,797
|
|
Income taxes
|
|
|
335
|
|
|
|
877
|
|
|
|
7,409
|
|
Transfer of loans to other real estate
|
|
|
35,252
|
|
|
|
20,609
|
|
|
|
11,244
|
|
Transfer of loans to held for sale
|
|
|
2,200
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements
53
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
|
|
NOTE 1
|
ACCOUNTING
POLICIES
|
The accounting and reporting policies and practices of
Independent Bank Corporation and subsidiaries conform with
accounting principles generally accepted in the United States of
America and prevailing practices within the banking industry.
Our critical accounting policies include the assessment for
other than temporary impairment on investment securities, the
determination of the allowance for loan losses, the
determination of vehicle service contract counterparty
contingencies, the valuation of derivative financial
instruments, the valuation of originated mortgage servicing
rights, the valuation of deferred tax assets and the valuation
of goodwill. We are required to make material estimates and
assumptions that are particularly susceptible to changes in the
near term as we prepare the consolidated financial statements
and report amounts for each of these items. Actual results may
vary from these estimates.
Our bank subsidiary transacts business in the single industry of
commercial banking. Our banks activities cover traditional
phases of commercial banking, including checking and savings
accounts, commercial lending, direct and indirect consumer
financing and mortgage lending. Our principal markets are the
rural and suburban communities across lower Michigan that are
served by our banks branches and loan production offices.
We also purchase payment plans, on a full recourse basis, from
companies (which we refer to as counterparties) that
provide vehicle service contracts and similar products to
consumers, through our wholly owned subsidiary, Mepco Finance
Corporation (Mepco). Subject to established
underwriting criteria, our bank subsidiary also used to
participate in commercial lending transactions with certain
non-affiliated banks and used to purchase real estate mortgage
loans from third-party originators. At December 31, 2009,
67% of our banks loan portfolio was secured by real estate.
On January 15, 2007 we sold substantially all of the assets
of Mepcos insurance premium finance business to Premium
Financing Specialists, Inc. See note #26.
PRINCIPLES OF CONSOLIDATION The consolidated
financial statements include the accounts of Independent Bank
Corporation and its subsidiaries. The income, expenses, assets
and liabilities of the subsidiaries are included in the
respective accounts of the consolidated financial statements,
after elimination of all material intercompany accounts and
transactions.
STATEMENTS OF CASH FLOWS For purposes of
reporting cash flows, cash and cash equivalents include cash on
hand, amounts due from banks, interest bearing deposits and
federal funds sold. Generally, federal funds are sold for
one-day
periods. We report net cash flows for customer loan and deposit
transactions, for short-term borrowings and for financed
premiums payable.
INTEREST BEARING DEPOSITS Interest bearing
deposits consist of overnight deposits with the Federal Reserve
Bank.
LOANS HELD FOR SALE Loans held for sale are
carried at fair value at December 31, 2009 and 2008. Fair
value adjustments as well as realized gains and losses, are
recorded in current earnings. We recognize as separate assets
the rights to service mortgage loans for others. The fair value
of originated mortgage loan servicing rights has been determined
based upon fair value indications for similar servicing. The
mortgage loan servicing rights are amortized in proportion to
and over the period of estimated net loan servicing income. We
assess mortgage loan servicing rights for impairment based on
the fair value of those rights. For purposes of measuring
impairment, the primary characteristics used include interest
rate, term and type. Amortization of and changes in the
impairment reserve on servicing rights are included in mortgage
loan servicing in the consolidated statements of operations.
TRANSFERS OF FINANCIAL ASSETS Transfers of
financial assets are accounted for as sales, when control over
the assets has been relinquished. Control over transferred
assets is deemed to be surrendered when the assets have been
isolated from us, the transferee obtains the right (free of
conditions that constrain it from taking advantage of that
right) to pledge or exchange the transferred assets, and we do
not maintain effective control over the transferred assets
through an agreement to repurchase them before their maturity.
SECURITIES We classify our securities as
trading, held to maturity or available for sale. Trading
securities are bought and held principally for the purpose of
selling them in the near term and are reported at fair value
with realized and unrealized gains and losses included in
earnings. Securities held to maturity represent those securities
for which we
54
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
have the positive intent and ability to hold until maturity and
are reported at cost, adjusted for amortization of premiums and
accretion of discounts computed on the level-yield method. We
did not have any securities held to maturity at
December 31, 2009 and 2008. Securities available for sale
represent those securities not classified as trading or held to
maturity and are reported at fair value with unrealized gains
and losses, net of applicable income taxes reported in
comprehensive income. We evaluate securities for
other-than-temporary
impairment (OTTI) at least on a quarterly basis and
more frequently when economic or market conditions warrant such
an evaluation. Gains and losses realized on the sale of
securities available for sale are determined using the specific
identification method and are recognized on a trade-date basis.
Premiums and discounts are recognized in interest income
computed on the level-yield method.
LOAN REVENUE RECOGNITION Interest on loans is
accrued based on the principal amounts outstanding. The accrual
of interest income is discontinued when a loan becomes
90 days past due and the borrowers capacity to repay
the loan and collateral values appear insufficient. All interest
accrued but not received for loans placed on non-accrual is
reversed from interest income. Payments on such loans are
generally applied to the principal balance until qualifying to
be returned to accrual status. A non-accrual loan may be
restored to accrual status when interest and principal payments
are current and the loan appears otherwise collectible.
Delinquency status is based on contractual terms of the loan
agreement.
Certain loan fees and direct loan origination costs are deferred
and recognized as an adjustment of yield generally over the
contractual life of the related loan. Fees received in
connection with loan commitments are deferred until the loan is
advanced and are then recognized generally over the contractual
life of the loan as an adjustment of yield. Fees on commitments
that expire unused are recognized at expiration. Fees received
for letters of credit are recognized as revenue over the life of
the commitment.
FINANCE RECEIVABLE REVENUE RECOGNITION
Payment plans (which are classified as finance receivables
in our consolidated statements of financial condition) are
acquired by our Mepco segment at a discount and reported net of
this discount in the consolidated statements of financial
condition. This discount is accreted into interest and fees on
loans over the life of the receivable computed on a level-yield
method.
ALLOWANCE FOR LOAN LOSSES Some loans will not
be repaid in full. Therefore, an allowance for loan losses is
maintained at a level which represents our best estimate of
losses incurred. In determining the allowance and the related
provision for loan losses, we consider four principal elements:
(i) specific allocations based upon probable losses
identified during the review of the loan portfolio,
(ii) allocations established for other adversely rated
loans, (iii) allocations based principally on historical
loan loss experience, and (iv) additional allowances based
on subjective factors, including local and general economic
business factors and trends, portfolio concentrations and
changes in the size
and/or the
general terms of the loan portfolios. Increases in the allowance
are recorded by a provision for loan losses charged to expense.
Although we periodically allocate portions of the allowance to
specific loans and loan portfolios, the entire allowance is
available for incurred losses. We generally charge-off
homogenous residential mortgage, installment and finance
receivable loans when they are deemed uncollectible or reach a
predetermined number of days past due based on loan product,
industry practice and other factors. Collection efforts may
continue and recoveries may occur after a loan is charged
against the allowance.
While we use relevant information to recognize losses on loans,
additional provisions for related losses may be necessary based
on changes in economic conditions, customer circumstances and
other credit risk factors.
A loan is impaired when full payment under the loan terms is not
expected. Generally, those commercial loans that are rated
substandard, classified as non-performing or were classified as
non-performing in the preceding quarter are evaluated for
impairment. Generally, those mortgage loans whose terms have
been modified and considered a troubled debt restructuring are
also evaluated for impairment. We measure our investment in an
impaired loan based on one of three methods: the loans
observable market price, the fair value of the collateral or the
present value of expected future cash flows discounted at the
loans effective interest rate. Large groups of smaller
balance homogeneous loans, such as installment and mortgage
loans and finance receivables are collectively evaluated for
impairment, and accordingly, they are not separately identified
for impairment disclosures. Troubled debt restructurings are
measured at the present value of estimated future cash flows
using the loans effective interest rate at inception of
the loan.
55
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The allowance for loan losses on unfunded commitments is
determined in a similar manner to the allowance for loan losses
and is recorded in accrued expenses and other liabilities.
PROPERTY AND EQUIPMENT Property and equipment
is stated at cost less accumulated depreciation and
amortization. Depreciation and amortization is computed using
both straight-line and accelerated methods over the estimated
useful lives of the related assets. Buildings are generally
depreciated over a period not exceeding 39 years and
equipment is generally depreciated over periods not exceeding
7 years. Leasehold improvements are depreciated over the
shorter of their estimated useful life or lease period.
BANK OWNED LIFE INSURANCE We have purchased a
group flexible premium non-participating variable life insurance
contract on approximately 270 salaried employees in order to
recover the cost of providing certain employee benefits. Bank
owned life insurance is recorded at its cash surrender value or
the amount that can be currently realized.
OTHER REAL ESTATE AND REPOSSESSED ASSETS
Other real estate at the time of acquisition is recorded at
fair value, less estimated costs to sell, which becomes the
propertys new basis. Fair value is typically determined by
a third party appraisal of the property. Any write-downs at date
of acquisition are charged to the allowance for loan losses.
Expense incurred in maintaining assets and subsequent
write-downs to reflect declines in value and gains or losses on
the sale of other real estate are recorded in the consolidated
statements of operations. Non-real estate repossessed assets are
treated in a similar manner.
GOODWILL AND OTHER INTANGIBLE ASSETS Goodwill
results from business acquisitions and represents the excess of
the purchase price over the fair value of acquired tangible
assets and liabilities and identifiable intangible assets.
Goodwill is assessed at least annually for impairment and any
such impairment will be recognized in the period identified.
Other intangible assets consist of core deposit, customer
relationship intangible assets and covenants not to compete.
They are initially measured at fair value and then are amortized
on both straight-line and accelerated methods over their
estimated useful lives, which range from 5 to 15 years.
INCOME TAXES We employ the asset and
liability method of accounting for income taxes. This method
establishes deferred tax assets and liabilities for the
temporary differences between the financial reporting basis and
the tax basis of our assets and liabilities at tax rates
expected to be in effect when such amounts are realized or
settled. Under this method, the effect of a change in tax rates
is recognized in the period that includes the enactment date.
The deferred tax asset is subject to a valuation allowance for
that portion of the asset for which it is more likely than not
that it will not be realized.
We adopted guidance issued by the Financial Accounting Standards
Board (FASB) with respect to accounting for
uncertainty in income taxes as of January 1, 2007. A tax
position is recognized as a benefit only if it is more
likely than not that the tax position would be sustained
in a tax examination, with a tax examination being presumed to
occur. The amount recognized is the largest amount of tax
benefit that is greater than 50% likely of being realized on
examination. The adoption of this guidance did not have an
impact on our financial statements.
We recognize interest
and/or
penalties related to income tax matters in income tax expense.
We file a consolidated federal income tax return. Intercompany
tax liabilities are settled as if each subsidiary filed a
separate return.
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Securities sold under agreements to repurchase are treated
as debt and are reflected as a liability in the consolidated
statements of financial condition. The securities pledged to
secure the repurchase agreements remains in the securities
portfolio.
FINANCED PREMIUMS PAYABLE Financed premiums
payable represent amounts owed to insurance companies or other
counterparties for vehicle service contract payment plans
provided by us for our customers. The financed premiums payable
becomes due in accordance with the terms of the specific
contract between Mepco and
56
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
the counterparty. Typically these terms require payment after
Mepco has received one or two payments from the consumer on the
payment plan.
DERIVATIVE FINANCIAL INSTRUMENTS We record
derivatives on the balance sheet as assets and liabilities
measured at their fair value. The accounting for increases and
decreases in the value of derivatives depends upon the use of
derivatives and whether the derivatives qualify for hedge
accounting.
We record the fair value of cash-flow hedging instruments
(Cash Flow Hedges) in accrued income and other
assets and accrued expenses and other liabilities. On an ongoing
basis, we adjust the balance sheet to reflect the then current
fair value of the Cash Flow Hedges. The related gains or losses
are reported in other comprehensive income and are subsequently
reclassified into earnings, as a yield adjustment in the same
period in which the related interest on the hedged items
(primarily variable-rate debt obligations) affect earnings. To
the extent that the Cash Flow Hedges are not effective, the
ineffective portion of the Cash Flow Hedges are immediately
recognized as interest expense.
We also record fair-value hedging instruments (Fair Value
Hedges) at fair value in accrued income and other assets
and accrued expenses and other liabilities. The hedged items
(primarily fixed-rate debt obligations) are also recorded at
fair value through the statement of operations, which offsets
the adjustment to the Fair Value Hedges. On an ongoing basis, we
adjust the balance sheet to reflect the then current fair value
of both the Fair Value Hedges. and the respective hedged items.
To the extent that the change in value of the Fair Value Hedges
do not offset the change in the value of the hedged items, the
ineffective portion is immediately recognized as interest
expense.
Certain derivative financial instruments are not designated as
hedges. The fair value of these derivative financial instruments
have been recorded on our balance sheet and are adjusted on an
ongoing basis to reflect their then current fair value. The
changes in the fair value of derivative financial instruments
not designated as hedges, are recognized currently in earnings.
When hedge accounting is discontinued because it is determined
that a derivative financial instrument no longer qualifies as a
fair-value hedge, we continue to carry the derivative financial
instrument on the balance sheet at its fair value, and no longer
adjust the hedged item for changes in fair value. The adjustment
of the carrying amount of the previously hedged item is
accounted for in the same manner as other components of similar
instruments. When hedge accounting is discontinued because it is
probable that a forecasted transaction will not occur, we
continue to carry the derivative financial instrument on the
balance sheet at its fair value, and gains and losses that were
included in accumulated other comprehensive income are
recognized immediately in earnings. In all other situations in
which hedge accounting is discontinued, we continue to carry the
derivative financial instrument at its fair value on the balance
sheet and recognize any subsequent changes in its fair value in
earnings.
When a derivative financial instrument that qualified for hedge
accounting is settled and the hedged item remains, the gain or
loss on the derivative financial instrument is accreted or
amortized over the life that remained on the settled derivative
financial instrument.
COMPREHENSIVE INCOME Comprehensive Income
consists of unrealized gains and losses on securities available
for sale and derivative instruments classified as cash flow
hedges. The net change in unrealized loss on securities
available for sale reflects net gains reclassified into earnings
of $2.8 million and $0.7 million in 2009 and 2007,
respectively and reflects net losses reclassified into earnings
of $4.6 million in 2008. The reclassification of these
amounts from comprehensive income resulted in an income tax
expense of $1.0 million and $0.2 million in 2009 and
2007, respectively, and resulted in an income tax benefit of
$1.6 million in 2008.
EARNINGS PER COMMON SHARE Basic earnings per
common share is computed by dividing net income applicable to
common stock by the weighted average number of common shares
outstanding during the period and participating share awards.
All outstanding unvested share-based payment awards that contain
rights to nonforfeitable dividends are considered participating
securities for this calculation. For diluted earnings per common
share net income applicable to common stock is divided by the
weighted average number of common shares outstanding during the
period plus amounts representing the dilutive effect of stock
options outstanding and stock units for deferred compensation
plan for non-employee directors. For any period in which a loss
is recorded, the
57
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
assumed exercise of stock options, unvested restricted stock and
stock units for deferred compensation plan for non-employee
directors would have an anti-dilutive impact on the loss per
share and thus are ignored in the diluted per share calculation.
STOCK BASED COMPENSATION Compensation cost is
recognized for stock options and non-vested share awards issued
to employees, based on the fair value of these awards at the
date of grant. A Black-Scholes model is utilized to estimate the
fair value of stock options, while the market price of our
common stock at the date of grant is used for non-vested share
awards. Compensation cost is recognized over the required
service period, generally defined as the vesting period.
COMMON STOCK At December 31, 2009,
0.5 million shares of common stock were reserved for
issuance under the dividend reinvestment plan and
1.6 million shares of common stock were reserved for
issuance under our long-term incentive plans.
RECLASSIFICATION Certain amounts in the 2008
and 2007 consolidated financial statements have been
reclassified to conform with the 2009 presentation.
ADOPTION OF NEW ACCOUNTING STANDARDS In July
2009, the FASB issued Accounting Standards Codification
(ASC) topic 105 Generally Accepted Accounting
Principals (formerly Statement of Financial Accounting
Standards (SFAS) No. 168, The FASB
Accounting Standards Codification and the Hierarchy of Generally
Accepted Accounting Principles, a replacement of FASB Statement
No. 162). ASC 105 establishes the FASB Accounting
Standards Codification as the source of authoritative accounting
principles recognized by the FASB to be applied by
nongovernmental entities in the preparation of financial
statements in conformity with Generally Accepted Accounting
Principles (GAAP). Rules and interpretive releases
of the Securities and Exchange Commission (SEC)
under authority of federal securities laws are also sources of
authoritative GAAP for SEC registrants. This statement is
effective for financial statements issued for interim and annual
periods ending after September 15, 2009. The adoption of
this standard did not have an effect on our consolidated
financial statements.
In June 2009, the FASB issued FASB ASC topic 860 Transfers
and Servicing (formerly SFAS No. 166
Accounting for Transfers of Financial Assets
an amendment of FASB Statement No. 140). This
standard removes the concept of a qualifying special-purpose
entity and limits the circumstances in which a financial asset,
or portion of a financial asset, should be derecognized when the
transferor has not transferred the entire financial asset to an
entity that is not consolidated with the transferor in the
financial statements being presented
and/or when
the transferor has continuing involvement with the transferred
financial asset. The effective date of this standard is
January 1, 2010. The adoption of this standard is not
expected to have a material impact on our consolidated financial
statements.
In June 2009, the FASB issued FASB ASC
810-10,
Consolidation (formerly SFAS No. 167
Amendments to FASB Interpretation No. 46(R)).
The standard amends tests for variable interest entities to
determine whether a variable interest entity must be
consolidated. FASB ASC
810-10
requires an entity to perform an analysis to determine whether
an entitys variable interest or interests give it a
controlling financial interest in a variable interest entity.
This standard requires ongoing reassessments of whether an
entity is the primary beneficiary of a variable interest entity
and enhanced disclosures that provide more transparent
information about an entitys involvement with a variable
interest entity. The effective date of this standard is
January 1, 2010. The adoption of this standard is not
expected to have a material impact on our consolidated financial
statements.
In August 2009, the FASB issued Accounting Standards Update
ASU
2009-5
Measuring Liabilities at Fair Value. This ASU
provides amendments to ASC
820-10
Fair Value Measurements and Disclosures to address
concerns regarding the determination of the fair value of
liabilities. Because liabilities are often not
traded, due to restrictions placed on their
transferability, there is typically a very limited amount of
trades (if any) from which to draw market participant data. As
such, many entities have had to determine the fair value of a
liability through the use of a hypothetical transaction. This
ASU clarifies the valuation techniques that must be used when
the liability subject to the fair value determination is not
traded as an asset in an active market. The effective date is
the first
58
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
reporting period beginning after issuance. The adoption of this
ASU did not have a material effect on our consolidated financial
statements.
In April 2009, the FASB issued ASC
320-10-65-1
(formerly FASB Staff Position (FSP)
No. 115-2
and
No. 124-2,
Recognition and Presentation of
Other-Than-Temporary
Impairments). This standard amends existing guidance for
determining whether impairment is
other-than-temporary
for debt securities and requires an entity to assess whether it
intends to sell, or it is more likely than not that it will be
required to sell a security in an unrealized loss position
before recovery of its amortized cost basis. If either of these
criteria is met, the entire difference between amortized cost
and fair value is recognized in earnings. For securities that do
not meet the aforementioned criteria, the amount of impairment
recognized in earnings is limited to the amount related to
credit losses, while impairment related to other factors is
recognized in other comprehensive income. Additionally, this
standard expands and increases the frequency of existing
disclosures about
other-than-temporary
impairments for debt and equity securities. This standard is
effective for interim and annual reporting periods ending after
June 15, 2009, with early adoption permitted for periods
ending after March 15, 2009. The adoption of this standard
resulted in $4.0 million of OTTI relating to other factors
being recognized in other comprehensive income during 2009.
In April 2009, the FASB issued ASC
820-10-65-4
(formerly FSP
No. 157-4,
Determining Fair Value When the Volume and Level of
Activity for the Asset and Liability Have Significantly
Decreased and Identifying Transactions That Are Not
Orderly). This standard emphasizes that even if there has
been a significant decrease in the volume and level of activity,
the objective of a fair value measurement remains the same. Fair
value is the price that would be received to sell an asset or
paid to transfer a liability in an orderly transaction (that is,
not a forced liquidation or distressed sale) between market
participants. This standard provides a number of factors to
consider when evaluating whether there has been a significant
decrease in the volume and level of activity for an asset or
liability in relation to normal market activity. In addition,
when transactions or quoted prices are not considered orderly,
adjustments to those prices based on the weight of available
information may be needed to determine the appropriate fair
value. This standard is effective for interim and annual
reporting periods ending after June 15, 2009, and shall be
applied prospectively. Early adoption is permitted for periods
ending after March 15, 2009. The adoption of this standard
did not have a material effect on our consolidated financial
statements.
In May 2009, the FASB issued ASC topic 855 Subsequent
Events (formerly SFAS No. 165, Subsequent
Events). This standard establishes general standards of
accounting for and disclosure of events that occur after the
balance sheet date but before financial statements are issued or
are available to be issued. This standard is effective for
financial statements issued for interim or annual periods ending
after June 15, 2009. We adopted this statement during the
second quarter of 2009. We have evaluated subsequent events
through February 26, 2010 which represents the date our
financial statements included in our December 31, 2009
Form 10-K
were filed with the Securities and Exchange Commission
(financial statement issue date). We have not evaluated
subsequent events relating to these financial statements after
that date.
In February 2008, the FASB issued ASC
820-10-65-1
(formerly
FSP 157-2,
Effective Date of FASB Statement No. 157). This
standard delays the effective date of SFAS #157, Fair
Value measure for all non-financial assets and non-financial
liabilities, except those that are recognized or disclosed at
fair value on a recurring basis (at least annually) to fiscal
years beginning after November 15, 2008, and interim
periods within those fiscal years. The adoption of this standard
on January 1, 2009 did not have a material impact on our
consolidated financial statements.
In March 2008, the FASB issued ASC
815-10-65-1
(formerly SFAS No. 161, Disclosures about
Derivative Instruments and Hedging Activities, an amendment of
SFAS No. 133). This standard amends and expands
the disclosure requirements of FASB ASC topic 815
Derivatives and Hedging (previously
SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities) and requires
qualitative disclosure about objectives and strategies for using
derivative and hedging instruments, quantitative disclosures
about fair value amounts of the instruments and gains and losses
on such instruments, as well as disclosures about credit-risk
features in derivative agreements. This standard is effective
for financial statements issued for fiscal years and interim
periods beginning after November 15, 2008, with early
application encouraged. We adopted this standard on
January 1, 2009.
59
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In June 2008, the FASB amended certain provisions of ASC
260-10-45
(formerly FASB Staff Position
EITF 03-6-1,
Determining Whether Instruments Granted in Share-Based
Payment Transactions are Participating Securities). These
provisions address whether instruments granted in share-based
payment transactions are participating securities prior to
vesting and, therefore need to be included in the earnings
allocation in computing earnings per share under the two class
method. These provisions are effective for fiscal years
beginning after December 15, 2008, and interim periods
within those years. All prior-period earnings per share data
presented shall be adjusted retrospectively. The adoption of
these provisions on January 1, 2009 had the effect of
treating our unvested share payment awards as participating in
the earnings allocation when computing our basic earnings per
share. Prior period earnings per share data has been adjusted to
treat unvested share awards as participating.
In December 2007, the FASB issued ASC topic 805 Business
Combinations (formerly SFAS No. 141(R),
Business Combination). This standard establishes
principles and requirements for how an acquirer recognizes and
measures in its financial statements the identifiable assets
acquired, the liabilities assumed, and any non-controlling
interest in an acquiree, including the recognition and
measurement of goodwill acquired in a business combination. This
standard is effective for fiscal years beginning on or after
December 15, 2008. Earlier adoption is prohibited. The
adoption of this standard on January 1, 2009 did not have a
material effect on our consolidated financial statements.
|
|
NOTE 2
|
RESTRICTIONS
ON CASH AND DUE FROM BANKS
|
Our bank is required to maintain reserve balances in the form of
vault cash and non-interest earning balances with the Federal
Reserve Bank. The average reserve balances to be maintained
during 2009 and 2008 were $25.5 million and
$16.9 million respectively. We do not maintain compensating
balances with correspondent banks. We are also required to
maintain reserve balances related to our visa debit card
operations and merchant payment processing operations. These
balances are held at unrelated financial institutions and
totaled $7.6 million and $0.5 million at
December 31, 2009 and 2008, respectively.
Securities available for sale consist of the following at
December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
|
|
(In thousands)
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. agency residential mortgage-backed
|
|
$
|
46,108
|
|
|
$
|
1,500
|
|
|
$
|
86
|
|
|
$
|
47,522
|
|
Private label residential mortgage-backed
|
|
|
38,531
|
|
|
|
97
|
|
|
|
7,653
|
|
|
|
30,975
|
|
Other asset-backed
|
|
|
5,699
|
|
|
|
|
|
|
|
194
|
|
|
|
5,505
|
|
Obligations of states and political subdivisions
|
|
|
66,439
|
|
|
|
1,096
|
|
|
|
403
|
|
|
|
67,132
|
|
Trust preferred
|
|
|
14,272
|
|
|
|
456
|
|
|
|
1,711
|
|
|
|
13,017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
171,049
|
|
|
$
|
3,149
|
|
|
$
|
10,047
|
|
|
$
|
164,151
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. agency residential mortgage-backed
|
|
$
|
47,376
|
|
|
$
|
715
|
|
|
$
|
62
|
|
|
$
|
48,029
|
|
Private label residential mortgage-backed
|
|
|
48,921
|
|
|
|
|
|
|
|
12,034
|
|
|
|
36,887
|
|
Other asset-backed
|
|
|
8,276
|
|
|
|
338
|
|
|
|
1,193
|
|
|
|
7,421
|
|
Obligations of states and political subdivisions
|
|
|
105,499
|
|
|
|
1,638
|
|
|
|
1,584
|
|
|
|
105,553
|
|
Trust preferred
|
|
|
17,874
|
|
|
|
|
|
|
|
5,168
|
|
|
|
12,706
|
|
Preferred stock
|
|
|
3,800
|
|
|
|
1,016
|
|
|
|
|
|
|
|
4,816
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
231,746
|
|
|
$
|
3,707
|
|
|
$
|
20,041
|
|
|
$
|
215,412
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Our investments gross unrealized losses and fair values
aggregated by investment type and length of time that individual
securities have been at a continuous unrealized loss position,
at December 31 follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less Than Twelve Months
|
|
|
Twelve Months or More
|
|
|
Total
|
|
|
|
|
|
|
Unrealized
|
|
|
|
|
|
Unrealized
|
|
|
|
|
|
Unrealized
|
|
|
|
Fair Value
|
|
|
Losses
|
|
|
Fair Value
|
|
|
Losses
|
|
|
Fair Value
|
|
|
Losses
|
|
|
|
(In thousands)
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. agency residential mortgage-backed
|
|
$
|
7,310
|
|
|
$
|
86
|
|
|
|
|
|
|
|
|
|
|
$
|
7,310
|
|
|
$
|
86
|
|
Private label residential mortgage-backed
|
|
|
4,343
|
|
|
|
112
|
|
|
$
|
18,126
|
|
|
$
|
7,541
|
|
|
|
22,469
|
|
|
|
7,653
|
|
Other asset backed
|
|
|
783
|
|
|
|
3
|
|
|
|
4,722
|
|
|
|
191
|
|
|
|
5,505
|
|
|
|
194
|
|
Obligations of states and political subdivisions
|
|
|
4,236
|
|
|
|
124
|
|
|
|
3,960
|
|
|
|
279
|
|
|
|
8,196
|
|
|
|
403
|
|
Trust preferred
|
|
|
|
|
|
|
|
|
|
|
7,715
|
|
|
|
1,711
|
|
|
|
7,715
|
|
|
|
1,711
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
16,672
|
|
|
$
|
325
|
|
|
$
|
34,523
|
|
|
$
|
9,722
|
|
|
$
|
51,195
|
|
|
$
|
10,047
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. agency residential mortgage-backed
|
|
$
|
4,827
|
|
|
$
|
62
|
|
|
|
|
|
|
|
|
|
|
$
|
4,827
|
|
|
$
|
62
|
|
Private label residential mortgage-backed
|
|
|
23,297
|
|
|
|
5,224
|
|
|
$
|
13,590
|
|
|
$
|
6,810
|
|
|
|
36,887
|
|
|
|
12,034
|
|
Other asset backed
|
|
|
5,838
|
|
|
|
1,193
|
|
|
|
|
|
|
|
|
|
|
|
5,838
|
|
|
|
1,193
|
|
Obligations of states and political subdivisions
|
|
|
31,273
|
|
|
|
1,507
|
|
|
|
1,258
|
|
|
|
77
|
|
|
|
32,531
|
|
|
|
1,584
|
|
Trust preferred
|
|
|
9,490
|
|
|
|
2,409
|
|
|
|
3,132
|
|
|
|
2,759
|
|
|
|
12,622
|
|
|
|
5,168
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
74,725
|
|
|
$
|
10,395
|
|
|
$
|
17,980
|
|
|
$
|
9,646
|
|
|
$
|
92,705
|
|
|
$
|
20,041
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We evaluate securities for
other-than-temporary
impairment at least quarterly and more frequently when economic
or market concerns warrant such evaluation. In performing this
review management considers (1) the length of time and
extent that fair value has been less than cost, (2) the
financial condition and near term prospects of the issuer,
(3) the impact of changes in market interest rates on the
fair value of the security and (4) an assessment of whether
we intend to sell, or it is more likely than not that we will be
required to sell a security in an unrealized loss position
before recovery of its amortized cost basis. If either of these
criteria is met, the entire difference between amortized cost
and fair value is recognized in earnings.
For securities that do not meet the aforementioned criteria, the
amount of impairment recognized in earnings is limited to the
amount related to credit losses, while impairment related to
other factors is recognized in other comprehensive income.
U.S. Agency residential mortgage-backed
securities at December 31, 2009 we had 5
securities whose fair market value is less than amortized cost.
The unrealized losses are largely attributed to rising interest
rates. As management does not intend to liquidate these
securities and it is more likely than not that we will not be
required to sell these securities prior to recovery of these
unrealized losses, no declines are deemed to be other than
temporary.
Private label residential mortgage and other asset-backed
securities at December 31, 2009 we had 23
securities whose fair value is less than amortized cost. 22 of
the issues are rated by a major rating agency as investment
grade while 1 is below investment grade. Pricing conditions in
the private label residential mortgage and asset-backed security
markets are characterized by sporadic secondary market flow,
significant implied liquidity risk premiums, a wide
bid / ask spread and an absence of new issuances of
similar securities.
61
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The unrealized losses are largely attributable to credit spread
widening on these securities. The underlying loans within these
securities include Jumbo (60%), Alt A (25%) and manufactured
housing (15%).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2009
|
|
2008
|
|
|
|
|
Net
|
|
|
|
Net
|
|
|
Fair
|
|
Unrealized
|
|
Fair
|
|
Unrealized
|
|
|
Value
|
|
Gain (Loss)
|
|
Value
|
|
Gain (Loss)
|
|
|
|
|
(In thousands)
|
|
|
|
Private label residential mortgage-backed
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jumbo
|
|
$
|
21,718
|
|
|
$
|
(5,749
|
)
|
|
$
|
26,139
|
|
|
$
|
(9,349
|
)
|
Alt-A
|
|
|
9,257
|
|
|
|
(1,807
|
)
|
|
|
10,748
|
|
|
|
(2,685
|
)
|
Other asset-backed Manufactured housing
|
|
|
5,505
|
|
|
|
(194
|
)
|
|
|
7,421
|
|
|
|
(855
|
)
|
All of the private label mortgage-backed transactions have
geographic concentrations in California, ranging from 29% to 59%
of the collateral pool. Typical exposure levels to California
(median exposure is 43%) are consistent with overall market
collateral characteristics. Six transactions have modest
exposure to Florida, ranging from 5% to 11%, and one transaction
has modest exposure to Arizona (5%). The underlying collateral
pools do not have meaningful exposure to Nevada, Michigan or
Ohio. None of the issues involve subprime mortgage collateral.
Thus the impact of this market segment is only indirect, in that
it has impacted liquidity and pricing in general for private
label mortgage-backed securities. The majority of transactions
are backed by fully amortizing loans. However, eight
transactions have concentrations in interest only loans ranging
from 31% to 94%. The structure of the mortgage and asset-backed
securities portfolio provides protection to credit losses. The
portfolio primarily consists of senior securities as
demonstrated by the following: super senior (7%), senior (73%),
senior support (12%) and mezzanine (8%). The mezzanine classes
are from seasoned transactions (65 to 95 months) with
significant levels of subordination (8% to 23%). Except for the
additional discussion below relating to other than temporary
impairment, each private label mortgage and asset-backed
security has sufficient credit enhancement via subordination to
reasonably assure full realization of book value. This assertion
is based on a transaction level review of the portfolio.
Individual security reviews include: external credit ratings,
forecasted weighted average life, recent prepayment speeds,
underwriting characteristics of the underlying collateral, the
structure of the securitization and the credit performance of
the underlying collateral. The review of underwriting
characteristics considers: average loan size, type of loan
(fixed or ARM), vintage, rate, FICO,
loan-to-value,
scheduled amortization, occupancy, purpose, geographic mix and
loan documentation. The review of the securitization structure
focuses on the priority of cash flows to the bond, the priority
of the bond relative to the realization of credit losses and the
level of subordination available to absorb credit losses. The
review of credit performance includes: current period as well as
cumulative realized losses; the level of severe payment
problems, which includes other real estate (ORE), foreclosures,
bankruptcy and 90 day delinquencies; and the level of less
severe payment problems, which consists of 30 and 60 day
delinquencies.
All of these securities are receiving principal and interest
payments. Most of these transactions are pass-through
structures, receiving pro rata principal and interest payments
from a dedicated collateral pool. The non-receipt of interest
cash flows is not expected and thus not presently considered in
our discounted cash flow methodology discussed below.
In addition to the review discussed above, certain securities,
including the one security with a rating below investment grade,
were reviewed for OTTI utilizing a cash flow projection. The
scope of review included securities that account for 97% of the
$7.8 million in unrealized losses. In our analysis,
recovery was evaluated by discounting the expected cash flows
back at the book yield. If the present value of the future cash
flows is less than amortized cost, then there would be a credit
loss. Our cash flow analysis forecasted cash flow from the
underlying loans in each transaction and then applied these cash
flows to the bonds in the securitization. The cash flows from
the underlying loans considered contractual payment terms
(scheduled amortization), prepayments, defaults and severity of
loss given default. The analysis used dynamic assumptions for
prepayments, defaults and severity. Near term prepayment
assumptions were based on recently observed prepayment rates. In
many cases, recently observed prepayment
62
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
rates are depressed due to a sharp decline in new jumbo loan
issuance. This loan market is heavily dependent upon
securitization for funding, and new securitization transactions
have been minimal. Our model projects that prepayment rates
gradually revert to historical levels. For seasoned ARM
transactions normalized prepayment rates are estimated at 15% to
25% CPR. For fixed rate collateral, the analysis considers the
spread differential between the collateral and the current
market rate for conforming mortgages. Near term default
assumptions were based on recent default observations as well as
the volume of existing real-estate owned, pending foreclosures
and severe delinquencies. Default levels generally are projected
to remain elevated or increase for a period of time sufficient
to address the level of distressed loans in the transaction. Our
model expects defaults to then decline gradually as the housing
market and the economy stabilize, generally after 2 to
3 years. Current severity assumptions are based on recent
observations. Loss severity is expected to decline gradually as
the housing market and the economy stabilize, generally after 2
to 3 years. Except for one below investment grade security
discussed in further detail below, our cash flow analysis
forecasts complete recovery of our cost basis for each reviewed
security.
The private label mortgage-backed security with a below
investment grade credit rating was evaluated for OTTI using the
cash flow analysis discussed above. At December 31, 2009
this security had a fair value of $3.9 million and an
unrealized loss of $4.1 million (amortized cost of
$8.0 million). The underlying loans in this transaction are
30 year fixed rate jumbos with an average origination date
FICO of 748 and an average origination date
loan-to-value
ratio of 73%. The loans backing this transaction were originated
in 2007 and is our only security backed by 2007 vintage loans.
We believe that this vintage is a key differentiating factor
between this security and the others in our portfolio that are
rated above investment grade. The bond is a senior security that
is receiving principal and interest payments similar to
principal reductions in the underlying collateral. The cash flow
analysis described above calculated an OTTI of $4.1 million
at December 31, 2009, $0.065 million of this amount
was attributed to credit and was recognized in our consolidated
statements of operations while the balance was attributed to
other factors and reflected in our consolidated statements of
other comprehensive income (loss).
As management does not intend to liquidate these securities and
it is more likely than not that we will not be required to sell
these securities prior to recovery of these unrealized losses,
no other declines discussed above are deemed to be other than
temporary.
Obligations of states and political subdivisions at
December 31, 2009 we had 32 municipal securities whose fair
value is less than amortized cost. The unrealized losses are
largely attributed to a widening of market spreads and continued
illiquidity for certain issues. The majority of the securities
are not rated by a major rating agency. Approximately 75% of the
non rated securities originally had a AAA credit rating by
virtue of bond insurance. However, the insurance provider no
longer has an investment grade rating. The remaining non rated
issues are small local issues that did not receive a credit
rating due to the size of the transaction. The non rated
securities have a periodic internal credit review according to
established procedures. As management does not intend to
liquidate these securities and it is more likely than not that
we will not be required to sell these securities prior to
recovery of these unrealized losses, no declines are deemed to
be other than temporary.
Trust preferred securities at
December 31, 2009 we had six securities whose fair value is
less than amortized cost. All of our trust preferred securities
are single issue securities issued by a trust subsidiary of a
bank holding company. The pricing of trust preferred securities
over the past two years has suffered from significant credit
spread widening fueled by uncertainty regarding potential losses
of financial companies, the absence of a liquid functioning
secondary market and potential supply concerns from financial
companies issuing new debt to recapitalize themselves. Since the
end of the first quarter, although still showing signs of
weakness, pricing has improved somewhat as some uncertainty has
been taken out of the market. Two of the six securities are
rated by a major rating agency as investment grade, while two
are split rated (these securities are rated as investment grade
by one major rating agency and below investment grade by
another) and the other two are non-rated. The two non-rated
issues are relatively small banks and neither of these issues
were ever rated. The issuers on these trust preferred
securities, which had a combined book value of $2.8 million
and a combined fair value of $1.8 million as of
December 31, 2009, continue to make interest payments and
have satisfactory credit metrics.
63
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Our OTTI analysis for trust preferred securities is based on a
security level financial analysis of the issuer. This review
considers: external credit ratings, maturity date of the
instrument, the scope of the banks operations, relevant
financial metrics and recent issuer specific news. The analysis
of relevant financial metrics includes: capital adequacy, assets
quality, earnings and liquidity. We use the same OTTI review
methodology for both rated and non-rated issues. During the
first quarter of 2009 we recorded OTTI on an unrated trust
preferred security whose fair value at December 31, 2009
now exceeds its amortized cost. Specifically, this issuer has
deferred interest payments on all of its trust preferred
securities and is operating under a written agreement with the
regulatory agencies that specifically prohibits dividend
payments. The issuer is a relatively small bank with operations
centered in southeast Michigan. The issuer reported losses in
2008 and 2009 and has a high volume of nonperforming assets
relative to tangible capital. This investments amortized
cost has been written down to a price of 26.75, or
$0.07 million, compared to a par value of 100.00, or
$0.25 million.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2009
|
|
2008
|
|
|
|
|
Net
|
|
|
|
Net
|
|
|
Fair
|
|
Unrealized
|
|
Fair
|
|
Unrealized
|
|
|
Value
|
|
Gain (Loss)
|
|
Value
|
|
Gain (Loss)
|
|
|
|
|
(In thousands)
|
|
|
|
Trust preferred securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rated issues
|
|
$
|
11,188
|
|
|
$
|
(212
|
)
|
|
$
|
11,114
|
|
|
$
|
(3,874
|
)
|
Unrated issues no OTTI
|
|
|
1,761
|
|
|
|
(1,044
|
)
|
|
|
1,508
|
|
|
|
(1,294
|
)
|
Unrated issues with OTTI
|
|
|
68
|
|
|
|
1
|
|
|
|
84
|
|
|
|
|
|
As management does not intend to liquidate these securities and
it is more likely than not that we will not be required to sell
these securities prior to recovery of these unrealized losses,
no declines are deemed to be other than temporary.
During 2009, 2008 and 2007 we recorded OTTI charges on
securities available for sale of $0.1 million,
$0.2 million and $1.0 million respectively.
The amortized cost and fair value of securities available for
sale at December 31, 2009, by contractual maturity, follow.
The actual maturity may differ from the contractual maturity
because issuers may have the right to call or prepay obligations
with or without call or prepayment penalties.
|
|
|
|
|
|
|
|
|
|
|
Amortized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Value
|
|
|
|
(In thousands)
|
|
|
Maturing within one year
|
|
$
|
2,700
|
|
|
$
|
2,742
|
|
Maturing after one year but within five years
|
|
|
12,957
|
|
|
|
13,320
|
|
Maturing after five years but within ten years
|
|
|
25,260
|
|
|
|
25,478
|
|
Maturing after ten years
|
|
|
39,794
|
|
|
|
38,609
|
|
|
|
|
|
|
|
|
|
|
|
|
|
80,711
|
|
|
|
80,149
|
|
U.S. agency residential mortgage-backed
|
|
|
46,108
|
|
|
|
47,522
|
|
Private label residential mortgage-backed
|
|
|
38,531
|
|
|
|
30,975
|
|
Other asset-backed
|
|
|
5,699
|
|
|
|
5,505
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
171,049
|
|
|
$
|
164,151
|
|
|
|
|
|
|
|
|
|
|
64
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
A summary of proceeds from the sale of securities available for
sale and gains and losses follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized
|
|
|
|
|
|
|
Proceeds
|
|
|
Gains
|
|
|
Losses(1)
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
2009
|
|
$
|
43,525
|
|
|
$
|
3,003
|
|
|
$
|
130
|
|
2008
|
|
|
80,348
|
|
|
|
1,903
|
|
|
|
112
|
|
2007
|
|
|
61,520
|
|
|
|
327
|
|
|
|
32
|
|
|
|
|
(1) |
|
Losses in 2009 exclude $0.1 million of other than temporary
impairment; losses in 2008 exclude a $6.2 million
write-down related to the dissolution of a money-market auction
rate security and the distribution of the underlying preferred
stock and $0.2 million of other than temporary impairment;
and losses in 2007 exclude $1.0 million of other than
temporary impairment charges on preferred stock. |
During 2009 and 2008 our trading securities consisted of various
preferred stocks. During 2009 and 2008 we recognized gains
(losses) on trading securities of $1.0 million and
$(10.4) million, respectively, that are included in net
gains (losses) on securities in the consolidated statements of
operations. Of these amounts, $0.04 million and
$(2.8) million relates to gains (losses) recognized on
trading securities still held at December 31, 2009 and
2008, respectively.
Securities with a book value of $82.6 million and
$94.2 million at December 31, 2009 and 2008,
respectively, were pledged to secure borrowings, public deposits
and for other purposes as required by law. There were no
investment obligations of state and political subdivisions that
were payable from or secured by the same source of revenue or
taxing authority that exceeded 10% of consolidated
shareholders equity at December 31, 2009 or 2008.
Our loan portfolios at December 31 follow:
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Real estate(1)
|
|
|
|
|
|
|
|
|
Residential first mortgages
|
|
$
|
684,567
|
|
|
$
|
760,201
|
|
Residential home equity and other junior mortgages
|
|
|
203,222
|
|
|
|
229,865
|
|
Construction and land development
|
|
|
69,496
|
|
|
|
127,092
|
|
Other(2)
|
|
|
585,988
|
|
|
|
666,876
|
|
Finance receivables
|
|
|
406,341
|
|
|
|
286,836
|
|
Commercial
|
|
|
187,110
|
|
|
|
207,516
|
|
Consumer
|
|
|
156,213
|
|
|
|
171,747
|
|
Agricultural
|
|
|
6,435
|
|
|
|
9,396
|
|
|
|
|
|
|
|
|
|
|
Total loans
|
|
$
|
2,299,372
|
|
|
$
|
2,459,529
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes both residential and non-residential commercial loans
secured by real estate. |
|
(2) |
|
Includes loans secured by multi-family residential and non-farm,
non-residential property. |
Loans are presented net of deferred loan fees of
$0.2 million at December 31, 2009 and
$0.6 million at December 31, 2008. Finance receivables
totaling $436.4 million and $307.4 million at
December 31, 2009 and 2008, respectively, are presented net
of unamortized discount of $30.8 million and
$21.2 million at December 31, 2009 and 2008,
respectively. These finance receivables had effective yields at
December 31, 2009 and 2008 of 13.0% and 14.0%,
respectively. These receivables have various due dates through
January, 2012.
65
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
An analysis of the allowance for loan losses for the years ended
December 31 follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
Loan
|
|
|
Unfunded
|
|
|
Loan
|
|
|
Unfunded
|
|
|
Loan
|
|
|
Unfunded
|
|
|
|
Losses
|
|
|
Commitments
|
|
|
Losses
|
|
|
Commitments
|
|
|
Losses
|
|
|
Commitments
|
|
|
|
(In thousands)
|
|
|
Balance at beginning of year
|
|
$
|
57,900
|
|
|
$
|
2,144
|
|
|
$
|
45,294
|
|
|
$
|
1,936
|
|
|
$
|
26,879
|
|
|
$
|
1,881
|
|
Provision charged to operating expense
|
|
|
103,318
|
|
|
|
(286
|
)
|
|
|
71,113
|
|
|
|
208
|
|
|
|
43,105
|
|
|
|
55
|
|
Recoveries credited to allowance
|
|
|
2,795
|
|
|
|
|
|
|
|
3,489
|
|
|
|
|
|
|
|
2,346
|
|
|
|
|
|
Loans charged against the allowance
|
|
|
(82,296
|
)
|
|
|
|
|
|
|
(61,996
|
)
|
|
|
|
|
|
|
(27,036
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
$
|
81,717
|
|
|
$
|
1,858
|
|
|
$
|
57,900
|
|
|
$
|
2,144
|
|
|
$
|
45,294
|
|
|
$
|
1,936
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-performing loans at December 31 follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(Dollars in thousands)
|
|
|
Non-accrual loans
|
|
$
|
105,965
|
|
|
$
|
122,639
|
|
|
$
|
72,682
|
|
Loans 90 days or more past due and still accruing interest
|
|
|
3,940
|
|
|
|
2,626
|
|
|
|
4,394
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-performing loans
|
|
$
|
109,905
|
|
|
$
|
125,265
|
|
|
$
|
77,076
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non performing loans includes both smaller balance homogeneous
loans that are collectively evaluated for impairment and
individually classified impaired loans. If these loans had
continued to accrue interest in accordance with their original
terms, approximately $7.3 million, $7.2 million, and
$4.7 million of interest income would have been recognized
in 2009, 2008 and 2007, respectively. Interest income recorded
on these loans was approximately $0.2 million,
$0.4 million and $0.6 million in 2009, 2008 and 2007,
respectively.
Impaired loans at December 31, follows :
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars in thousands)
|
|
|
Impaired loans with no allocated allowance
|
|
$
|
12,054
|
|
|
$
|
14,228
|
|
Impaired loans with an allocated allowance
|
|
|
145,871
|
|
|
|
76,960
|
|
|
|
|
|
|
|
|
|
|
Total impaired loans
|
|
$
|
157,925
|
|
|
$
|
91,188
|
|
|
|
|
|
|
|
|
|
|
Amount of allowance for loan losses allocated
|
|
$
|
29,593
|
|
|
$
|
16,788
|
|
|
|
|
|
|
|
|
|
|
Our average investment in impaired loans was approximately
$111.2 million, $84.2 million and $40.3 million
in 2009, 2008 and 2007, respectively. Cash receipts on impaired
loans on non-accrual status are generally applied to the
principal balance. Interest income recognized on impaired loans
was approximately $1.6 million, $0.6 million and
$0.5 million in 2009, 2008 and 2007, respectively of which
the majority of these amounts were received in cash.
The increase in impaired loans relative to the decrease in
non-performing loans during 2009 reflects a $62.8 million
increase in trouble debt restructured (TDR) loans
that remain performing at December 31, 2009. The increase
in TDR loans is primarily attributed to the restructuring of
repayment terms of residential mortgage loans. Restructured
loans not already included in non-performing loans above totaled
$72.0 million, $9.2 million and $0.2 million at
December 31, 2009, 2008 and 2007 respectively.
66
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Mortgage loans serviced for others are not reported as assets.
The principal balances of these loans at year end are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Mortgage loans serviced for :
|
|
|
|
|
|
|
|
|
|
|
|
|
Fannie Mae
|
|
$
|
1,021,982
|
|
|
$
|
931,904
|
|
|
$
|
933,353
|
|
Freddie Mac
|
|
|
708,054
|
|
|
|
721,777
|
|
|
|
699,297
|
|
Other
|
|
|
291
|
|
|
|
433
|
|
|
|
598
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,730,327
|
|
|
$
|
1,654,114
|
|
|
$
|
1,633,248
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
An analysis of capitalized mortgage loan servicing rights for
the years ended December 31 follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Balance at beginning of year
|
|
$
|
11,966
|
|
|
$
|
15,780
|
|
|
$
|
14,782
|
|
Originated servicing rights capitalized
|
|
|
5,213
|
|
|
|
2,405
|
|
|
|
2,873
|
|
Amortization
|
|
|
(4,255
|
)
|
|
|
(1,887
|
)
|
|
|
(1,624
|
)
|
Change in valuation allowance
|
|
|
2,349
|
|
|
|
(4,332
|
)
|
|
|
(251
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
$
|
15,273
|
|
|
$
|
11,966
|
|
|
$
|
15,780
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation allowance
|
|
$
|
2,302
|
|
|
$
|
4,651
|
|
|
$
|
319
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans sold and serviced that have had servicing rights
capitalized
|
|
$
|
1,725,278
|
|
|
$
|
1,647,664
|
|
|
$
|
1,623,797
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The fair value of capitalized mortgage loan servicing rights was
$16.3 million and $12.2 million at December 31,
2009 and 2008, respectively. Fair value was determined using an
average coupon rate of 5.73%, average servicing fee of 0.257%,
average discount rate of 10.08% and an average PSA rate of 210
for December 31, 2009; and an average coupon rate of 6.06%,
average servicing fee of 0.258%, average discount rate of 9.82%
and an average PSA rate of 360 for December 31, 2008.
|
|
NOTE 5
|
OTHER
REAL ESTATE OWNED
|
During 2009 and 2008 we foreclosed on certain loans secured by
real estate and transferred approximately $35.3 million and
$20.6 million to other real estate in each of those years,
respectively. At the time of acquisition amounts were
charged-off against the allowance for loan losses to bring the
carrying amount of these properties to their estimated fair
values, less estimated costs to sell. During 2009 and 2008 we
sold other real estate with book balances of approximately
$16.7 million and $7.2 million, respectively. Gains or
losses on the sale of other real estate are included in
non-interest expense on the income statement.
We periodically review our real estate owned properties and
establish valuation allowances on these properties if values
have declined since the date of acquisition. An analysis of our
valuation allowance for other real estate owned follows:
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Balance at beginning of year
|
|
$
|
2,363
|
|
|
$
|
|
|
Additions charged to expense
|
|
|
7,108
|
|
|
|
3,130
|
|
Direct write-downs
|
|
|
2,973
|
|
|
|
767
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
$
|
6,498
|
|
|
$
|
2,363
|
|
|
|
|
|
|
|
|
|
|
We had no valuation allowance at December 31, 2007.
67
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Other real estate and repossessed assets totaling
$31.5 million and $20.0 million at December 31,
2009 and 2008, respectively are presented net of valuation
allowance.
|
|
NOTE 6
|
PROPERTY
AND EQUIPMENT
|
A summary of property and equipment at December 31 follows:
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Land
|
|
$
|
19,403
|
|
|
$
|
19,298
|
|
Buildings
|
|
|
69,286
|
|
|
|
68,433
|
|
Equipment
|
|
|
73,122
|
|
|
|
66,171
|
|
|
|
|
|
|
|
|
|
|
|
|
|
161,811
|
|
|
|
153,902
|
|
Accumulated depreciation and amortization
|
|
|
(89,195
|
)
|
|
|
(80,584
|
)
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
$
|
72,616
|
|
|
$
|
73,318
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense was $8.7 million, $8.3 million
and $8.5 million in 2009, 2008 and 2007, respectively.
|
|
NOTE 7
|
INTANGIBLE
ASSETS
|
Intangible assets, net of amortization, at December 31 follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
Gross
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
Amortization
|
|
|
|
(In thousands)
|
|
|
Amortized intangible assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Core deposit
|
|
$
|
31,326
|
|
|
$
|
21,066
|
|
|
$
|
31,326
|
|
|
$
|
19,381
|
|
Customer relationship
|
|
|
1,302
|
|
|
|
1,302
|
|
|
|
1,302
|
|
|
|
1,165
|
|
Covenants not to compete
|
|
|
1,520
|
|
|
|
1,520
|
|
|
|
1,520
|
|
|
|
1,412
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
34,148
|
|
|
$
|
23,888
|
|
|
$
|
34,148
|
|
|
$
|
21,958
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unamortized intangible assets Goodwill
|
|
|
|
|
|
|
|
|
|
$
|
16,734
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible amortization expense was $1.9 million,
$3.1 million and $3.4 million in 2009, 2008 and 2007,
respectively.
A summary of estimated intangible amortization, primarily
amortization of core deposit and customer relationship
intangibles, at December 31, 2009, follows:
|
|
|
|
|
|
|
(In thousands)
|
|
|
2010
|
|
|
1,280
|
|
2011
|
|
|
1,371
|
|
2012
|
|
|
1,088
|
|
2013
|
|
|
1,078
|
|
2014
|
|
|
801
|
|
2015 and thereafter
|
|
|
4,642
|
|
|
|
|
|
|
Total
|
|
$
|
10,260
|
|
|
|
|
|
|
68
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Changes in the carrying amount of goodwill by reporting segment
for the years ended December 31, 2009 and 2008, follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
IB
|
|
|
Mepco
|
|
|
Other(1)
|
|
|
Total
|
|
|
|
(In thousands)
|
|
|
Balance at January 1, 2008
|
|
$
|
49,677
|
|
|
$
|
16,734
|
|
|
$
|
343
|
|
|
$
|
66,754
|
|
Acquired during the year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0
|
|
Impairment
|
|
|
(49,677
|
)
|
|
|
|
|
|
|
(343
|
)
|
|
|
(50,020
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2008
|
|
|
0
|
|
|
|
16,734
|
|
|
|
0
|
|
|
|
16,734
|
|
Acquired during the year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0
|
|
Impairment
|
|
|
|
|
|
|
(16,734
|
)
|
|
|
|
|
|
|
(16,734
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2009
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes items relating to our parent company. |
During 2009 we recorded a $16.7 million goodwill impairment
charge at our Mepco segment. In the fourth quarter of 2009 we
updated our goodwill impairment testing (interim tests had also
been performed in the prior quarters of 2009). The results of
the year end goodwill impairment testing showed that the
estimated fair value of our Mepco reporting unit was less than
the carrying value of 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 of 2009. Further, Mepcos largest business
counterparty, who accounted for nearly one-half of Mepcos
payment plan business, defaulted in its obligations to Mepco and
this counterparty is expected to cease operations in 2010. These
factors adversely impacted the level of Mepcos expected
future earnings and hence its fair value. This necessitated a
step 2 analysis and valuation. Based on the step 2 analysis
(which involved determining the fair value of Mepcos
assets, liabilities and identifiable intangibles) we concluded
that goodwill was now impaired, resulting in this
$16.7 million charge. In addition, we accelerated the
amortization of a customer relationship intangible at Mepco in
the amount of $0.1 million. This customer relationship
intangible had a zero balance at December 31, 2009.
During 2008 we recorded a $50.0 million goodwill impairment
charge. In the fourth quarter of 2008 we updated our goodwill
impairment testing (interim tests had also been performed in the
second and third quarters of 2008). Our common stock price
dropped even further in the fourth quarter resulting in a wider
difference between our market capitalization and book value. The
results of the year end goodwill impairment testing showed that
the estimated fair value of our bank reporting unit was less
than the carrying value of equity. This necessitated a step 2
analysis and valuation. Based on the step 2 analysis (which
involved determining the fair value of our banks assets,
liabilities and identifiable intangibles) we concluded that
goodwill was now impaired, resulting in this $50.0 million
charge. A portion of the $50.0 goodwill impairment charge was
tax deductible and a $6.3 million tax benefit was recorded
related to this charge.
During 2007 we recorded a goodwill impairment charge of
$0.3 million at First Home Financial (FHF) which was
acquired in 1998. Based on the fair value of FHF the goodwill
associated with FHF was written down to zero. Goodwill was
previously written down in 2006 from $1.5 million to
$0.3 million. FHF was a loan origination company based in
Grand Rapids, Michigan that specialized in the financing of
manufactured homes located in mobile home parks or communities
and was a subsidiary of our IB segment above. Revenues and
profits had declined at FHF over the last few years and had
continued to decline through the second quarter of 2007. As a
result of these declines, the operations of FHF ceased effective
June 15, 2007 and this entity was dissolved on
June 30, 2007.
69
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
A summary of interest expense on deposits for the years ended
December 31 follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Savings and NOW
|
|
$
|
5,751
|
|
|
$
|
10,262
|
|
|
$
|
18,768
|
|
Time deposits under $100,000
|
|
|
25,202
|
|
|
|
28,572
|
|
|
|
61,664
|
|
Time deposits of $100,000 or more
|
|
|
4,452
|
|
|
|
7,863
|
|
|
|
8,628
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
35,405
|
|
|
$
|
46,697
|
|
|
$
|
89,060
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate time deposits in denominations of $100,000 or more
amounted to $167.7 million and $191.2 million at
December 31, 2009 and 2008, respectively.
A summary of the maturity of time deposits at December 31,
2009, follows:
|
|
|
|
|
|
|
(In thousands)
|
|
|
2010
|
|
$
|
512,415
|
|
2011
|
|
|
243,158
|
|
2012
|
|
|
156,097
|
|
2013
|
|
|
131,938
|
|
2014
|
|
|
125,545
|
|
2015 and thereafter
|
|
|
2,167
|
|
|
|
|
|
|
Total
|
|
$
|
1,171,320
|
|
|
|
|
|
|
Time deposits acquired through broker relationships totaled
$629.2 million and $182.3 million at December 31,
2009 and 2008, respectively.
|
|
NOTE 9
|
OTHER
BORROWINGS
|
A summary of other borrowings at December 31 follows:
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Advances from the Federal Home Loan Bank
|
|
$
|
94,382
|
|
|
$
|
314,214
|
|
Repurchase agreements
|
|
|
35,000
|
|
|
|
35,000
|
|
U.S. Treasury demand notes
|
|
|
1,796
|
|
|
|
3,270
|
|
Federal Reserve Bank borrowings
|
|
|
|
|
|
|
189,500
|
|
Other
|
|
|
4
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
131,182
|
|
|
$
|
541,986
|
|
|
|
|
|
|
|
|
|
|
Advances from the Federal Home Loan Bank (FHLB) are
secured by unencumbered qualifying mortgage and home equity
loans equal to at least 130% and 200%, respectively of
outstanding advances, as well as certain agency and private
label mortgage backed securities. Advances are also secured by
FHLB stock that we own. As of December 31, 2009, we had
unused borrowing capacity with the FHLB (subject to the
FHLBs credit requirements and policies) of
$211.9 million. Interest expense on advances amounted to
$4.5 million, $12.6 million and $4.6 million for
the years ended December 31, 2009, 2008 and 2007,
respectively. During 2009 and 2008 FHLB advances totaling
$151.5 million and $0.5 million were terminated with
no realized gain or loss. No FHLB advances were prepaid during
2007.
70
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
As a member of the FHLB, we must own FHLB stock equal to the
greater of 1.0% of the unpaid principal balance of residential
mortgage loans or 5.0% of our outstanding advances. At
December 31, 2009, we were in compliance with the FHLB
stock ownership requirements.
The maturity dates and weighted average interest rates of FHLB
advances at December 31 follow:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
Amount
|
|
|
Rate
|
|
|
Amount
|
|
|
Rate
|
|
|
|
(Dollars in thousands)
|
|
|
Fixed-rate advances
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
$
|
68,000
|
|
|
|
2.44
|
%
|
2010
|
|
$
|
6,000
|
|
|
|
7.46
|
%
|
|
|
6,000
|
|
|
|
7.46
|
|
2011
|
|
|
2,250
|
|
|
|
5.89
|
|
|
|
2,250
|
|
|
|
5.89
|
|
2012
|
|
|
384
|
|
|
|
6.90
|
|
|
|
384
|
|
|
|
6.90
|
|
2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2014
|
|
|
4,240
|
|
|
|
5.73
|
|
|
|
4,240
|
|
|
|
5.73
|
|
2015 and thereafter
|
|
|
14,508
|
|
|
|
6.58
|
|
|
|
14,840
|
|
|
|
6.58
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed-rate advances
|
|
|
27,382
|
|
|
|
6.59
|
|
|
|
95,714
|
|
|
|
3.64
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable-rate advances 2011
|
|
|
67,000
|
|
|
|
0.32
|
|
|
|
218,500
|
|
|
|
3.43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total advances
|
|
$
|
94,382
|
|
|
|
2.14
|
%
|
|
$
|
314,214
|
|
|
|
3.50
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A summary of repayments of FHLB Advances at December 31,
2009, follows:
|
|
|
|
|
|
|
(In thousands)
|
|
|
2010
|
|
$
|
6,359
|
|
2011
|
|
|
2,638
|
|
2012
|
|
|
762
|
|
2013
|
|
|
441
|
|
2014
|
|
|
4,717
|
|
2015 and thereafter
|
|
|
12,465
|
|
|
|
|
|
|
Total
|
|
$
|
27,382
|
|
|
|
|
|
|
Repurchase agreements are secured by mortgage-backed securities
with a carrying value of approximately $38.4 million and
$39.0 million at December 31, 2009 and 2008
respectively. These securities are being held by the
counterparty to the repurchase agreement. The cost of funds on
repurchase agreements at December 31, 2009 and 2008
approximated 4.42%.
Repurchase agreements averaged $35.0 million,
$35.0 million and $11.5 million during 2009, 2008 and
2007, respectively. The maximum amounts outstanding at any month
end during 2009, 2008 and 2007 was $35.0 million in each
year, respectively. Interest expense on repurchase agreements
totaled $1.6 million, $1.6 million and
$0.6 million, for the years ended 2009, 2008 and 2007,
respectively. The $35.0 million of repurchase agreements at
December 31, 2009 all mature in 2010. No repurchase
agreements were prepaid during 2009 or 2008.
We had no borrowings outstanding to the Federal Reserve Bank
(FRB) at December 31, 2009. We had unused
borrowing capacity with the FRB (subject to the FRBs
credit requirements and policies) of $502.5 million at
December 31, 2009. Collateral for FRB borrowings are
qualifying commercial, mortgage and consumer loans as well as
certain securities available for sale. Interest expense on these
borrowings amounted to $0.2 million and $3.7 million
for the years ended December 31, 2009 and 2008,
respectively. No interest expense was incurred on FRB borrowings
during 2007. FRB borrowings averaged $59.8 million and
$182.9 million during 2009 and 2008,
71
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
respectively. The maximum amount outstanding at any month end
during 2009 and 2008 were $206.0 million and
$331.0 million, respectively. We had no FRB borrowings
outstanding during 2007.
Interest expense on Federal funds purchased was zero,
$0.3 million and $1.4 million for the years ended
December 31, 2009, 2008 and in 2007, respectively.
We had established an unsecured credit facility at the parent
company comprised of a term loan and a revolving credit
agreement. During 2008 the term loan was paid off and the
revolving credit agreement was not renewed. Interest expense on
the term loan totaled $0.1 million and $0.3 million
during 2008 and 2007 respectively. Interest expense on the
revolving credit agreement totaled $0.3 million 2007. No
interest expense was incurred on the revolving credit agreement
during 2008.
Assets, including securities available for sale and loans,
pledged to secure other borrowings totaled $1.489 billion at
December 31, 2009.
|
|
NOTE 10
|
SUBORDINATED
DEBENTURES
|
We have formed various special purpose entities (the
trusts) for the purpose of issuing trust preferred
securities in either public or pooled offerings or in private
placements. Independent Bank Corporation owns all of the common
stock of each trust and has issued subordinated debentures to
each trust in exchange for all of the proceeds from the issuance
of the common stock and the trust preferred securities. Trust
preferred securities totaling $41.9 million and
$72.8 million at December 31, 2009 and 2008,
respectively, qualified as Tier 1 regulatory capital and
the remaining amount qualified as Tier 2 regulatory capital.
These trusts are not consolidated with Independent Bank
Corporation and accordingly, we report the common securities of
the trusts held by us in other assets and the subordinated
debentures that we have issued to the trusts in the liability
section of our consolidated statements of financial condition.
Summary information regarding subordinated debentures as of
December 31 follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 and 2008
|
|
|
|
|
|
|
|
|
Trust
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
|
|
|
Common
|
|
|
|
Issue
|
|
Subordinated
|
|
|
Securities
|
|
|
Stock
|
|
Entity Name
|
|
Date
|
|
Debentures
|
|
|
Issued
|
|
|
Issued
|
|
|
IBC Capital Finance II
|
|
March 2003
|
|
$
|
52,165
|
|
|
$
|
50,600
|
|
|
$
|
1,565
|
|
IBC Capital Finance III
|
|
May 2007
|
|
|
12,372
|
|
|
|
12,000
|
|
|
|
372
|
|
IBC Capital Finance IV
|
|
September 2007
|
|
|
20,619
|
|
|
|
20,000
|
|
|
|
619
|
|
Midwest Guaranty Trust I
|
|
November 2002
|
|
|
7,732
|
|
|
|
7,500
|
|
|
|
232
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
92,888
|
|
|
$
|
90,100
|
|
|
$
|
2,788
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other key terms for the subordinated debentures and trust
preferred securities that were outstanding at December 31,
2009 follow:
|
|
|
|
|
|
|
|
|
Maturity
|
|
|
|
First Permitted
|
Entity Name
|
|
Date
|
|
Interest Rate
|
|
Redemption Date
|
|
IBC Capital Finance II
|
|
March 31, 2033
|
|
8.25% fixed
|
|
March 31, 2008
|
IBC Capital Finance III
|
|
July 30, 2037
|
|
3 month LIBOR
plus 1.60%
|
|
July 30, 2012
|
IBC Capital Finance IV
|
|
September 15, 2037
|
|
3 month LIBOR
plus 2.85%
|
|
September 15, 2012
|
Midwest Guaranty Trust I
|
|
November 7, 2032
|
|
3 month LIBOR
plus 3.45%
|
|
November 7, 2007
|
In the fourth quarter of 2009 we elected to defer distributions
(payment of interest) on each of the subordinated debentures and
trust preferred securities. The subordinated debentures and
trust preferred securities are cumulative
72
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
and have a feature that permits us to defer distributions
(payment of interest) from time to time for a period not to
exceed 20 consecutive quarters. While we defer the payment of
interest, we will continue to accrue the interest expense owed
at the applicable interest rate. Upon the expiration of the
deferral, all accrued and unpaid interest is due and payable. At
December 31, 2009 we had $1.2 million of accrued and
unpaid interest. We have the right to redeem the subordinated
debentures and trust preferred securities (at par) in whole or
in part from time to time on or after the first permitted
redemption date specified above or upon the occurrence of
specific events defined within the trust indenture agreements.
Issuance costs have been capitalized and are being amortized on
a straight- line basis over a period not exceeding 30 years
and are included in interest expense in the consolidated
statements of operations. Distributions (payment of interest) on
the trust preferred securities are also included in interest
expense in the consolidated statements of operations.
We have announced our intention to pursue an offer to our trust
preferred securities holders to convert the securities they hold
into shares of our common stock. In January 2009, we filed a
preliminary registration statement with the SEC to register the
common shares needed for this exchange offer. Additionally, in
January 2009, our shareholders approved, at a special meeting,
the issuance of common stock in exchange for our trust preferred
securities. There is no assurance that our efforts related to
the above described exchange offer will be successful.
|
|
NOTE 11
|
COMMITMENTS
AND CONTINGENT LIABILITIES
|
In the normal course of business, we enter into financial
instruments with off-balance sheet risk to meet the financing
needs of customers or to reduce exposure to fluctuations in
interest rates. These financial instruments may include
commitments to extend credit and standby letters of credit.
Financial instruments involve varying degrees of credit and
interest-rate risk in excess of amounts reflected in the
consolidated statements of financial condition. Exposure to
credit risk in the event of non-performance by the
counterparties to the financial instruments for loan commitments
to extend credit and letters of credit is represented by the
contractual amounts of those instruments. We do not, however,
anticipate material losses as a result of these financial
instruments.
A summary of financial instruments with off-balance sheet risk
at December 31 follows:
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
2008
|
|
|
(In thousands)
|
|
Financial instruments whose risk is represented by contract
amounts
|
|
|
|
|
|
|
|
|
Commitments to extend credit
|
|
$
|
136,862
|
|
|
$
|
159,883
|
|
Standby letters of credit
|
|
|
13,824
|
|
|
|
15,900
|
|
Commitments to extend credit are agreements to lend to a
customer as long as there is no violation of any condition
established in the contract. Commitments generally have fixed
expiration dates or other termination clauses and generally
require payment of a fee. Since commitments may expire without
being drawn upon, the commitment amounts do not represent future
cash requirements. Commitments are issued subject to similar
underwriting standards, including collateral requirements, as
are generally involved in the extension of credit facilities.
Standby letters of credit are written conditional commitments
issued to guarantee the performance of a customer to a third
party. The credit risk involved in such transactions is
essentially the same as that involved in extending loan
facilities and, accordingly, standby letters of credit are
issued subject to similar underwriting standards, including
collateral requirements, as are generally involved in the
extension of credit facilities. The majority of the letters of
credit are to corporations, have variable rates that range from
2.5% to 8.5% and mature through 2013.
Our Mepco segment conducts its payment plan business activities
across the United States and also entered Canada in early 2009.
The payment plans 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. Mepco generally
does not evaluate the creditworthiness of the individual
customer but
73
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
instead primarily relies on the payment plan collateral (the
unearned vehicle service contract and unearned sales commission)
in the event of default. 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. The
sudden failure of one of Mepcos major counterparties (an
insurance company, administrator, or seller/dealer) could expose
us to significant losses.
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 vigorously pursues collection
(including commencing legal action) of funds due to it under its
various contracts with counterparties. During the third quarter
of 2009, we identified a counterparty that is experiencing
particularly severe financial difficulties and have accrued for
estimated potential losses related to that relationship. 2009
and 2008 non-interest expenses include $31.2 million and
$1.0 million, respectively, charge related to estimated
losses for vehicle service contract counterparty contingencies.
These charges are being classified in non-interest expense
because they are associated with a default or potential default
of a contractual obligation under our counterparty contracts as
opposed to loss on the administration of the payment plan itself.
An analysis of our counterparty contingency accrual follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Balance at beginning of year
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Additions charged to expense
|
|
|
31,234
|
|
|
|
966
|
|
|
|
|
|
Charge-offs
|
|
|
(18,990
|
)
|
|
|
(966
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
$
|
12,244
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Several marketers and sellers of the vehicle service contracts,
including companies from which Mepco has purchased payment
plans, have been sued or are under investigation for alleged
violations of telemarketing laws and other consumer protection
laws. The actions have been brought primarily by state attorneys
general and the Federal Trade Commission (FTC) but there have
also been class action and other private lawsuits filed. In some
cases, the companies have been placed into receivership or have
discontinued business. In addition, the allegations,
particularly those relating to blatantly abusive telemarketing
practices by a relatively small number of marketers, have
resulted in a significant amount of negative publicity that has
affected the industry. It is possible these events could also
cause federal or state lawmakers to enact legislation to further
regulate the industry.
We are also involved in various other litigation matters in the
ordinary course of business and at the present time, we do not
believe that any of these matters will have a significant impact
on our financial condition or results of operation.
|
|
NOTE 12
|
SHAREHOLDERS
EQUITY AND EARNINGS PER COMMON SHARE
|
In December 2008, we issued 72,000 shares of Series A,
no par value, $1,000 liquidation preference, fixed rate
cumulative perpetual preferred stock (Preferred
Stock) and a warrant to purchase 3,461,538 shares of
our common stock (Warrants) to the
U.S. Department of Treasury (UST) in return for
$72.0 million under the CPP. Of the total proceeds,
$68.4 million was allocated to the Preferred Stock and
$3.6 million was allocated to the Warrants (included in
capital surplus) based on the relative fair value of each. The
$3.6 million discount on the Preferred Stock is being
accreted using an effective yield method over five years. The
accretion is being recorded as part of the Preferred Stock
dividend.
The Preferred Stock requires a quarterly cumulative cash
dividend at a rate of 5% per annum on the $1,000 liquidation
preference to, but excluding February 15, 2014 and a rate
of 9% per annum thereafter. We accrue dividends based on this
rate, liquidation preference and time since last quarterly
dividend payment was made. In the
74
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
fourth quarter of 2009, we elected, beginning with the payment
that was due on November 16, 2009, to defer regularly
scheduled quarterly dividend payments on the Preferred Stock. We
will continue to accrue for these dividends during the deferral
period. At December 31, 2009 we had cumulative Preferred
Stock dividends in arrears of $0.9 million.
So long as any shares of Preferred Stock remain outstanding,
unless all accrued and unpaid dividends for all prior dividend
periods have been paid or are contemporaneously declared and
paid in full, (a) no dividend whatsoever may be paid or
declared on the Companys common stock or other junior
stock, other than a dividend payable solely in common stock and
other than certain dividends or distributions of rights in
connection with a shareholders rights plan; and
(b) neither the Company nor its subsidiaries may purchase,
redeem or otherwise acquire for consideration any shares of its
common stock or other junior stock unless the Company has paid
in full all accrued dividends on the Preferred Stock for all
prior dividend periods, other than purchases, redemptions or
other acquisitions of the Companys common stock or other
junior stock in connection with the administration of its
employee benefit plans in the ordinary course of business and
consistent with past practice; pursuant to a publicly announced
repurchase plan up to the increase in diluted shares outstanding
resulting from the grant, vesting or exercise of equity-based
compensation; any dividends or distributions of rights or junior
stock in connection with any shareholders rights plan,
redemptions or repurchases of rights pursuant to any
shareholders rights plan; acquisition of record ownership
of common stock or other junior stock or parity stock for the
beneficial ownership of any other person who is not the Company
or one of its subsidiaries, including as trustee or custodian;
and the exchange or conversion of common stock or other junior
stock for or into other junior stock or of parity stock for or
into other parity stock or junior stock but only to the extent
that such acquisition is required pursuant to binding
contractual agreements entered into before December 12,
2008 or any subsequent agreement for the accelerated exercise,
settlement or exchange thereof for common stock.
The Preferred Stock may be redeemed at any time, in whole or in
part, subject to the USTs prior consultation with the
Federal Reserve Board. Prior to the recent enactment of the
American Recovery and Reinvestment Act of 2009, there were
certain restrictions on our ability to redeem the Preferred
Stock. In any redemption, the redemption price is an amount
equal to the per share liquidation amount plus accrued and
unpaid dividends to but excluding the date of redemption. The
Preferred Stock will not be subject to any mandatory redemption,
sinking fund or similar provisions. Holders of shares of
Preferred Stock have no right to require the redemption or
repurchase of the Preferred Stock. Our Board of Directors, or a
duly authorized committee of the Board of Directors, has full
power and authority to prescribe the terms and conditions upon
which the Preferred Stock will be redeemed from time to time,
subject to the provisions of the Certificate of Designation
(including the limitations described in this paragraph). If
fewer than all of the outstanding shares of Preferred Stock are
to be redeemed, the shares to be redeemed will be selected
either pro rata from the holders of record of shares of
Preferred Stock in proportion to the number of shares held by
those holders or in such other manner as our Board of Directors
or a committee thereof may determine to be fair and equitable.
The Warrant is initially exercisable for 3,461,538 shares
of our common stock. The initial exercise price applicable to
the Warrant is $3.12 per share of common stock for which the
Warrant may be exercised. The number of shares of common stock
underlying the Warrant and the exercise price applicable to the
Warrant are both subject to adjustment for certain dilutive
actions we may take, including stock dividends, stock splits,
and similar transactions. The Warrant may be exercised at any
time on or before December 12, 2018 by surrender of the
Warrant and a completed notice of exercise attached as an annex
to the Warrant and the payment of the exercise price for the
shares of common stock for which the Warrant is being exercised.
In December 2009, we made a proposal to the UST to exchange all
of the shares of the Preferred Stock for shares of our common
stock with a value (based on market prices at the time of the
exchange) equal to 75% of the aggregate liquidation value of the
preferred stock surrendered in the exchange. The aggregate
liquidation value of the Preferred Stock is $72.0 million.
As a result, if our proposal is accepted by the UST, it would
result in us issuing the UST shares of our common stock with a
value of $54.0 million.
75
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
We continue to hold discussions with the UST regarding our
proposal and continue to provide them with additional
information for them to evaluate our proposal. However, we do
not know at this time whether the UST will accept our proposal,
whether they will make a counterproposal, or, if they agree to
any form of an exchange, what conditions might be imposed on
their participation. We also do not know the timing of when the
UST will make its decision or whether, if the UST agrees to
participate in an exchange, what the timing of that exchange may
be.
A reconciliation of basic and diluted earnings per share for the
years ended December 31 follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands, except per share amounts)
|
|
|
Income (loss) from continuing operations
|
|
$
|
(90,227
|
)
|
|
$
|
(91,664
|
)
|
|
$
|
9,955
|
|
Preferred dividends
|
|
|
4,301
|
|
|
|
215
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations applicable to common
shareholders
|
|
$
|
(94,528
|
)
|
|
$
|
(91,879
|
)
|
|
$
|
9,955
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(90,227
|
)
|
|
$
|
(91,664
|
)
|
|
$
|
10,357
|
|
Preferred dividends
|
|
|
4,301
|
|
|
|
215
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) applicable to common stock
|
|
$
|
(94,528
|
)
|
|
$
|
(91,879
|
)
|
|
$
|
10,357
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares outstanding(1)
|
|
|
23,866
|
|
|
|
22,985
|
|
|
|
22,684
|
|
Stock units for deferred compensation plan for non-employee
directors
|
|
|
70
|
|
|
|
61
|
|
|
|
62
|
|
Effect of stock options
|
|
|
|
|
|
|
3
|
|
|
|
118
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares outstanding for calculation of diluted earnings per
share(1)
|
|
|
23,936
|
|
|
|
23,049
|
|
|
|
22,864
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) per common share from continuing operations
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(3.96
|
)
|
|
$
|
(4.00
|
)
|
|
$
|
0.44
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
(3.96
|
)
|
|
$
|
(4.00
|
)
|
|
$
|
0.44
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(3.96
|
)
|
|
$
|
(4.00
|
)
|
|
$
|
0.46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
(3.96
|
)
|
|
$
|
(4.00
|
)
|
|
$
|
0.45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
For any period in which a loss is recorded, the assumed exercise
of stock options and stock units for the deferred compensation
plan for non-employee directors would have an anti-dilutive
impact on the loss per share and thus are ignored in the diluted
per share calculation. |
Diluted income/loss per share attributed to discontinued
operations was income of $0.02 in 2007.
Weighted average stock options outstanding that were not
considered in computing diluted earnings (loss) per share
because they were anti-dilutive totaled 1.5 million,
1.5 million and 1.1 million for 2009, 2008 and 2007,
respectively. The Warrant to purchase 3,461,538 shares of
our common stock was also not considered in computing the loss
per share in 2009 and 2008 as it was anti-dilutive.
76
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The composition of income tax expense (benefit) from continuing
operations for the years ended December 31 follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Current
|
|
$
|
(5,356
|
)
|
|
$
|
(7,873
|
)
|
|
$
|
5,160
|
|
Deferred
|
|
|
(4,504
|
)
|
|
|
(16,629
|
)
|
|
|
(6,263
|
)
|
Change in valuation allowance
|
|
|
6,650
|
|
|
|
27,565
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense (benefit)
|
|
$
|
(3,210
|
)
|
|
$
|
3,063
|
|
|
$
|
(1,103
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The deferred income tax benefit of $4.5 million during 2009
is primarily attributed to the affects of pretax other
comprehensive income while the deferred income tax benefits of
$16.6 million and $6.3 million in 2008 and 2007,
respectively can be attributed to tax effects of temporary
differences. The tax benefit related to the exercise of stock
options recorded in shareholders equity was none during
2009 and $0.02 million and $0.3 million during 2008
and 2007, respectively.
A reconciliation of income tax expense to the amount computed by
applying the statutory federal income tax rate of 35% in each
year presented to income from continuing operations before
income tax for the years ended December 31 follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Statutory rate applied to income (loss) from continuing
operations before income tax
|
|
$
|
(32,703
|
)
|
|
$
|
(31,010
|
)
|
|
$
|
3,098
|
|
Change in valuation allowance
|
|
|
23,999
|
|
|
|
27,565
|
|
|
|
|
|
Goodwill impairment
|
|
|
5,857
|
|
|
|
11,172
|
|
|
|
120
|
|
Tax-exempt income
|
|
|
(1,455
|
)
|
|
|
(3,047
|
)
|
|
|
(4,031
|
)
|
Bank owned life insurance
|
|
|
(565
|
)
|
|
|
(682
|
)
|
|
|
(674
|
)
|
Non-deductible meals, entertainment and memberships
|
|
|
86
|
|
|
|
133
|
|
|
|
157
|
|
Dividends paid to Employee Stock Ownership Plan
|
|
|
(28
|
)
|
|
|
(145
|
)
|
|
|
(366
|
)
|
Other, net
|
|
|
1,599
|
|
|
|
(923
|
)
|
|
|
593
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
$
|
(3,210
|
)
|
|
$
|
3,063
|
|
|
$
|
(1,103
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Generally, the amount of tax expense or benefit allocated to
continuing operations is determined without regard to the tax
effects of other categories of income or loss, such as other
comprehensive income. However, an exception to the general rule
is provided when there is a pretax loss from continuing
operations and pretax income from other categories in the
current year. In such instances, income from other categories
must offset the current loss from operations, the tax benefit of
such offset being reflected in continuing operations even when a
valuation allowance has been established against deferred tax
assets. In 2009, pretax other comprehensive income of
$11.6 million reduced our current year valuation allowance
and resulted in a benefit of $4.1 million being allocated
to the current year loss from continuing operations.
We assess the need for a valuation allowance against our
deferred tax assets periodically. The realization of deferred
tax assets (net of the recorded valuation allowance) is largely
dependent upon future taxable income, future reversals of
existing taxable temporary differences and ability to carry-back
losses to available tax years. In assessing the need for a
valuation allowance, we consider all positive and negative
evidence, including anticipated operating results, taxable
income in carry-back years, scheduled reversals of deferred tax
liabilities and tax planning strategies. In 2008, our conclusion
that we needed a valuation allowance was based on a number of
factors, including our declining operating performance since
2005 and our net operating loss in 2008, overall negative trends
in the banking industry and our expectation that our operating
results will continue to be negatively affected
77
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
by the overall economic environment. As a result, we recorded a
valuation allowance in 2008 of $36.2 million on our
deferred tax assets which consisted of $27.6 million
recognized as income tax expense and $8.6 million
recognized through the accumulated other comprehensive loss
component of shareholders equity. The valuation allowance
against our deferred tax assets at December 31, 2008 of
$36.2 million represented our entire net deferred tax asset
except for that amount which could be carried back to 2007 and
recovered in cash as well as for certain deferred tax assets at
Mepco that relate to state income taxes and that can be
recovered based on Mepcos individual earnings. During
2009, we concluded that we needed to continue to carry a
valuation allowance based on similar factors discussed above. As
a result we recorded an additional valuation allowance of
$24.0 million. The valuation allowance against our deferred
tax assets of $60.2 million at December 31,
2009 may be reversed to income in future periods to the
extent that the related deferred income tax assets are realized
or the valuation allowance is otherwise no longer required. This
valuation allowance represents our entire net deferred tax asset
except for certain deferred tax assets at Mepco that relate to
state income taxes and that can be recovered based on
Mepcos individual earnings.
78
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The tax effects of temporary differences that give rise to
significant portions of the deferred tax assets and deferred tax
liabilities at December 31 follow:
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Deferred tax assets
|
|
|
|
|
|
|
|
|
Allowance for loan losses
|
|
$
|
29,290
|
|
|
$
|
21,054
|
|
Net operating loss carryforward
|
|
|
14,378
|
|
|
|
2,760
|
|
Purchase premiums, net
|
|
|
5,317
|
|
|
|
5,563
|
|
Vehicle service contract counterparty risk reserve
|
|
|
4,867
|
|
|
|
768
|
|
Unrealized loss on securities available for sale
|
|
|
2,414
|
|
|
|
5,714
|
|
Alternative minimum tax credit carry forward
|
|
|
2,577
|
|
|
|
1,678
|
|
Valuation allowance on other real estate owned
|
|
|
2,274
|
|
|
|
827
|
|
Unrealized loss on derivative financial instruments
|
|
|
1,545
|
|
|
|
2,220
|
|
Fixed assets
|
|
|
1,276
|
|
|
|
1,379
|
|
Deferred compensation
|
|
|
779
|
|
|
|
790
|
|
Non accrual loan interest income
|
|
|
774
|
|
|
|
457
|
|
Unrealized loss on trading securities
|
|
|
611
|
|
|
|
1,668
|
|
Share based payments
|
|
|
574
|
|
|
|
303
|
|
Mepco claims expense
|
|
|
571
|
|
|
|
608
|
|
Other than temporary impairment charge on securities available
for sale
|
|
|
87
|
|
|
|
209
|
|
Unrealized loss on available for sale security upon dissolution
of money
|
|
|
|
|
|
|
|
|
market auction rate security
|
|
|
|
|
|
|
2,170
|
|
Other
|
|
|
|
|
|
|
177
|
|
|
|
|
|
|
|
|
|
|
Gross deferred tax assets
|
|
|
67,334
|
|
|
|
48,345
|
|
Valuation allowance
|
|
|
(60,158
|
)
|
|
|
(36,159
|
)
|
|
|
|
|
|
|
|
|
|
Total net deferred tax assets
|
|
|
7,176
|
|
|
|
12,186
|
|
Deferred tax liabilities
|
|
|
|
|
|
|
|
|
Mortgage servicing rights
|
|
|
5,345
|
|
|
|
4,188
|
|
Federal Home Loan Bank stock
|
|
|
480
|
|
|
|
480
|
|
Deferred loan fees
|
|
|
477
|
|
|
|
387
|
|
Loans held for sale
|
|
|
97
|
|
|
|
239
|
|
Other
|
|
|
86
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross deferred tax liabilities
|
|
|
6,485
|
|
|
|
5,294
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
691
|
|
|
$
|
6,892
|
|
|
|
|
|
|
|
|
|
|
79
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
At December 31, 2009, we had a net operating loss
(NOL) carryforward of approximately
$42.8 million which, if not used against taxable income,
will expire as follows:
|
|
|
|
|
|
|
(In thousands)
|
|
|
2010
|
|
|
929
|
|
2011
|
|
|
411
|
|
2012
|
|
|
3,437
|
|
2013
|
|
|
189
|
|
2019
|
|
|
194
|
|
2020
|
|
|
359
|
|
2029
|
|
|
37,264
|
|
|
|
|
|
|
Total
|
|
$
|
42,783
|
|
|
|
|
|
|
The use of $5.5 million NOL carryforward in the total
above, which was acquired through the acquisitions of two
financial institutions is limited to $3.3 million per year
as the result of a change in control as defined in the Internal
Revenue Code.
Changes in unrecognized tax benefits for the year ended
December 31, follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Balance at beginning of year
|
|
$
|
1,736
|
|
|
$
|
2,821
|
|
|
$
|
2,303
|
|
Additions based on tax positions related to the current year
|
|
|
443
|
|
|
|
483
|
|
|
|
633
|
|
Reductions due to the statute of limitations
|
|
|
(198
|
)
|
|
|
|
|
|
|
(39
|
)
|
Reductions based on tax position related to prior years
|
|
|
|
|
|
|
(1,513
|
)
|
|
|
|
|
Settlements
|
|
|
|
|
|
|
(55
|
)
|
|
|
(76
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
$
|
1,981
|
|
|
$
|
1,736
|
|
|
$
|
2,821
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
If recognized, the entire amount of unrecognized tax benefits,
net of $0.5 million federal tax on state benefits, would
affect our effective tax rate. We do not expect the total amount
of unrecognized tax benefits to significantly increase or
decrease in the next twelve months. No amounts were expensed for
interest and penalties for the years ended December 31,
2009 and 2008, while $0.03 million was expensed for the
year ended December 31, 2007. No amounts were accrued for
interest and penalties at December 31, 2009 or 2008. At
December 31, 2009, U.S. Federal tax years 2006 through
the present remain open.
|
|
NOTE 14
|
SHARE
BASED COMPENSATION
|
We maintain performance-based compensation plans that include a
long-term incentive plan that permits the issuance of share
based compensation, including stock options and non-vested share
awards. This plan, which is shareholder-approved, permits the
grant of share based awards for up to 0.5 million shares of
common stock as of December 31, 2009. Share based
compensation awards are measured at fair value at the date of
grant and are expensed over the requisite service period. Common
shares issued upon exercise of stock options come from currently
authorized but unissued shares.
Pursuant to our performance-based compensation plans we granted
0.3 million and 0.2 million stock options to our
officers in 2009 and 2007, respectively. We also granted
0.2 million and 0.1 million shares of non-vested
common stock to these same individuals in 2008 and 2007,
respectively. The stock options have an exercise price equal to
the market value of the common stock on the date of grant, vest
ratably over a three year period and expire 10 years from
date of grant. The non-vested common stock cliff vests in five
years. We use the Black-Scholes option pricing model to measure
compensation cost for stock options and use the market value of
the common stock on the
80
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
date of grant to measure compensation cost for non-vested share
awards. We also estimate expected forfeitures over the vesting
period.
During 2008 and 2007 we modified 0.1 million stock options
in each year originally issued in prior years for two former
officers. These modified options vested immediately and the
expense associated with these modifications of
$0.01 million and $0.1 million, in 2008 and 2007,
respectively, was included in compensation and benefits expense.
The modification consisted of extending the date of exercise
subsequent to resignation of the officers from 3 months to
18 months.
Total compensation expense recognized for stock option and
non-vested common stock grants was $0.8 million,
$0.6 million and $0.3 million in 2009, 2008 and 2007,
respectively. The corresponding tax benefit relating to this
expense was $0.3 million, $0.2 million and
$0.1 million during 2009, 2008 and 2007, respectively.
A summary of outstanding stock option grants and transactions
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
Aggregated
|
|
|
|
Number of
|
|
|
Exercise
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
|
Shares
|
|
|
Price
|
|
|
Term (Years)
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
Outstanding at January 1, 2009
|
|
|
1,502,038
|
|
|
$
|
19.73
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
299,987
|
|
|
|
1.59
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(703,475
|
)
|
|
|
22.21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2009
|
|
|
1,098,550
|
|
|
$
|
13.19
|
|
|
|
5.06
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest at December 31, 2009
|
|
|
1,090,597
|
|
|
$
|
13.27
|
|
|
|
5.04
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2009
|
|
|
762,649
|
|
|
$
|
17.59
|
|
|
|
3.38
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A summary of non-vested stock and transactions follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
Average
|
|
|
|
Number of
|
|
|
Grant Date
|
|
|
|
Shares
|
|
|
Fair Value
|
|
|
Outstanding at January 1, 2009
|
|
|
262,381
|
|
|
$
|
9.27
|
|
Granted
|
|
|
|
|
|
|
|
|
Vested
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2009
|
|
|
262,381
|
|
|
$
|
9.27
|
|
|
|
|
|
|
|
|
|
|
A summary of the weighted-average assumptions used in the
Black-Scholes option pricing model for grants of stock options
follows:
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2007
|
|
|
Expected dividend yield
|
|
|
2.60
|
%
|
|
|
3.76
|
%
|
Risk-free interest rate
|
|
|
2.59
|
|
|
|
4.55
|
|
Expected life (in years)
|
|
|
6.00
|
|
|
|
5.99
|
|
Expected volatility
|
|
|
58.39
|
%
|
|
|
27.64
|
%
|
Per share weighted-average fair value
|
|
$
|
0.69
|
|
|
$
|
3.74
|
|
81
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The risk-free interest rate for the expected term of the option
is based on the U.S. Treasury yield curve in effect at the
time of the grant. The expected life was obtained using a
simplified method that, in general, averaged the vesting term
and original contractual term of the stock option. This method
was used as relevant historical data of actual exercise activity
was not available. The expected volatility was based on
historical volatility of our common stock.
At December 31, 2009, the total expected compensation cost
related to non vested stock option and restricted stock awards
not yet recognized was $1.6 million. The weighted-average
period over which this amount will be recognized is
2.7 years.
Certain information regarding options exercised during the
periods ending December 31 follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Intrinsic value
|
|
|
|
|
|
$
|
61
|
|
|
$
|
144
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash proceeds received
|
|
|
|
|
|
$
|
51
|
|
|
$
|
156
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax benefit realized
|
|
|
|
|
|
$
|
21
|
|
|
$
|
33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We maintain 401(k) and employee stock ownership plans covering
substantially all of our full-time employees. We match employee
contributions to the 401(k) plan up to a maximum of 3% of
participating employees eligible wages. The match of
employee contributions was 3% of eligible wages during each of
the years 2009, 2008 and 2007. Contributions to the employee
stock ownership plan are determined annually and require
approval of our Board of Directors. The maximum contribution is
6% of employees eligible wages. The contribution to the
employee stock ownership plan was zero, 3% and 3% in 2009, 2008
and 2007, respectively. Amounts expensed for these retirement
plans was $1.0 million, $2.1 million and
$2.1 million in 2009, 2008 and 2007, respectively.
Our officers participate in various performance-based
compensation plans. Amounts expensed for all incentive plans
totaled $1.1 million, $2.2 million, and
$2.4 million, in 2009, 2008 and 2007, respectively.
We also provide certain health care and life insurance programs
to substantially all full-time employees. Amounts expensed for
these programs totaled $4.6 million in each year ending
December 31, 2009, 2008 and 2007. These insurance programs
are also available to retired employees at their own expense.
|
|
NOTE 16
|
DERIVATIVE
FINANCIAL INSTRUMENTS
|
We are required to record derivatives on the balance sheet as
assets and liabilities measured at their fair value. The
accounting for increases and decreases in the value of
derivatives depends upon the use of derivatives and whether the
derivatives qualify for hedge accounting.
82
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Our derivative financial instruments according to the type of
hedge in which they are designated at December 31 follow:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Notional
|
|
|
Maturity
|
|
|
Fair
|
|
|
|
Amount
|
|
|
(Years)
|
|
|
Value
|
|
|
|
(Dollars thousands)
|
|
|
Cash Flow Hedge
|
|
|
|
|
|
|
|
|
|
|
|
|
Pay-fixed interest-rate swap agreements
|
|
$
|
115,000
|
|
|
|
1.1
|
|
|
$
|
(2,328
|
)
|
Interest-rate cap agreements
|
|
|
45,000
|
|
|
|
0.4
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
160,000
|
|
|
|
0.9
|
|
|
$
|
(2,329
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
No hedge designation
|
|
|
|
|
|
|
|
|
|
|
|
|
Pay-fixed interest-rate swap agreements
|
|
$
|
45,000
|
|
|
|
1.7
|
|
|
$
|
(1,930
|
)
|
Interest-rate cap agreements
|
|
|
50,000
|
|
|
|
0.7
|
|
|
|
|
|
Rate-lock mortgage loan commitments
|
|
|
28,952
|
|
|
|
0.1
|
|
|
|
217
|
|
Mandatory commitments to sell mortgage loans
|
|
|
61,140
|
|
|
|
0.1
|
|
|
|
715
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
185,092
|
|
|
|
0.7
|
|
|
$
|
(998
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Notional
|
|
|
Maturity
|
|
|
Fair
|
|
|
|
Amount
|
|
|
(Years)
|
|
|
Value
|
|
|
|
(Dollars in thousands)
|
|
|
Cash Flow Hedge
|
|
|
|
|
|
|
|
|
|
|
|
|
Pay-fixed interest-rate swap agreements
|
|
$
|
142,000
|
|
|
|
2.3
|
|
|
$
|
(5,622
|
)
|
Interest-rate cap agreements
|
|
|
168,500
|
|
|
|
0.7
|
|
|
|
(8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
310,500
|
|
|
|
1.4
|
|
|
$
|
(5,630
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
No hedge designation
|
|
|
|
|
|
|
|
|
|
|
|
|
Pay-fixed interest-rate swap agreements
|
|
$
|
26,000
|
|
|
|
1.8
|
|
|
$
|
(241
|
)
|
Interest-rate cap agreements
|
|
|
110,000
|
|
|
|
1.5
|
|
|
|
202
|
|
Rate-lock mortgage loan commitments
|
|
|
43,090
|
|
|
|
0.1
|
|
|
|
839
|
|
Mandatory commitments to sell mortgage loans
|
|
|
67,406
|
|
|
|
0.1
|
|
|
|
(663
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
246,496
|
|
|
|
0.9
|
|
|
$
|
137
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We have established management objectives and strategies that
include interest-rate risk parameters for maximum fluctuations
in net interest income and market value of portfolio equity. We
monitor our interest rate risk position via simulation modeling
reports. The goal of our asset/liability management efforts is
to maintain profitable financial leverage within established
risk parameters.
We use variable-rate and short-term fixed-rate (less than
12 months) debt obligations to fund a portion of our
balance sheet, which exposes us to variability in interest
rates. To meet our objectives, we may periodically enter into
derivative financial instruments to mitigate exposure to
fluctuations in cash flows resulting from changes in interest
rates. Cash flow hedges currently include certain pay-fixed
interest-rate swaps and interest-rate cap agreements.
Through certain special purposes entities (see note #10) we
issue trust preferred securities as part of our capital
management strategy. Certain of these trust preferred securities
are variable rate which exposes us to variability in cash flows
. To mitigate our exposure to fluctuations in cash flows
resulting from changes in interest rates, on
83
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
approximately $20.0 million of variable rate trust
preferred securities, we entered into a pay-fixed interest-rate
swap agreement in September, 2007. During the fourth quarter of
2009 we elected to defer payment of interest on this variable
rate trust preferred security. As a result, this pay-fixed
interest rate swap was transferred to a no hedge designation and
the $1.6 million unrealized loss which was included as a
component of accumulated other comprehensive income at the time
of the transfer will be reclassified into earnings over the
remaining life of this pay-fixed swap. Any future changes in the
fair value of this pay-fixed swap will be recorded in earnings.
Pay-fixed interest-rate swaps convert the variable-rate cash
flows on debt obligations to fixed-rates. Under interest-rate
cap agreements, we will receive cash if interest rates rise
above a predetermined level. As a result, we effectively have
variable-rate debt with an established maximum rate. We pay an
upfront premium on interest rate caps which is recognized in
earnings in the same period in which the hedged item affects
earnings. Unrecognized premiums from interest rate caps
aggregated to $0.1 million and $0.5 million at
December 31, 2009 and 2008 respectively.
It is anticipated that $2.5 million of unrealized losses on
Cash Flow Hedges at December 31, 2009, will be reclassified
into earnings over the next twelve months. The maximum term of
any Cash Flow Hedge at December 31, 2009 is 5.0 years.
We also use long-term, callable fixed-rate brokered certificates
of deposit (Brokered CDs) to fund a portion of our
balance sheet. These instruments expose us to variability in
fair value due to changes in interest rates. To meet our
objectives, we may enter into derivative financial instruments
to mitigate exposure to fluctuations in fair values of such
callable fixed-rate debt instruments. We did not have any fair
value hedges at December 31, 2009 or 2008. Fair Value
Hedges at December 31, 2007 included pay-variable
interest-rate swaps whereby the counterparty had the right to
terminate the transaction without paying a fee. During 2008,
interest rates declined which caused the counterparties to
exercise their right to cancel the pay-variable interest rate
swaps. These terminations totaled $318.2 million.
Certain financial derivative instruments have not been
designated as hedges. The fair value of these derivative
financial instruments have been recorded on our balance sheet
and are adjusted on an ongoing basis to reflect their then
current fair value. The changes in fair value of derivative
financial instruments not designated as hedges, are recognized
in earnings.
In the ordinary course of business, we enter into rate-lock
mortgage loan commitments with customers (Rate Lock
Commitments). These commitments expose us to interest rate
risk. We also enter into mandatory commitments to sell mortgage
loans (Mandatory Commitments) to reduce the impact
of price fluctuations of mortgage loans held for sale and Rate
Lock Commitments. Mandatory Commitments help protect our loan
sale profit margin from fluctuations in interest rates. The
changes in the fair value of Rate Lock Commitments and Mandatory
Commitments are recognized currently as part of gains on the
sale of mortgage loans. We obtain market prices on Mandatory
Commitments and Rate Lock Commitments. Net gains on the sale of
mortgage loans, as well as net income may be more volatile as a
result of these derivative instruments, which are not designated
as hedges.
84
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table illustrates the impact that the derivative
financial instruments discussed above have on individual line
items in the consolidated statements of financial condition for
the periods presented:
Fair Values of Derivative Instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Derivatives
|
|
|
Liability Derivatives
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
Balance
|
|
|
|
|
Balance
|
|
|
|
|
Balance
|
|
|
|
|
Balance
|
|
|
|
|
|
Sheet
|
|
Fair
|
|
|
Sheet
|
|
Fair
|
|
|
Sheet
|
|
Fair
|
|
|
Sheet
|
|
Fair
|
|
|
|
Location
|
|
Value
|
|
|
Location
|
|
Value
|
|
|
Location
|
|
Value
|
|
|
Location
|
|
Value
|
|
|
|
(in thousands)
|
|
|
Derivatives designated
as hedging instruments
Pay-fixed interest rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
Other
|
|
|
|
|
swap agreements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
liabilities
|
|
$
|
2,328
|
|
|
liabilities
|
|
$
|
5,622
|
|
Interest-rate cap
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
Other
|
|
|
|
|
|
Other
|
|
|
|
|
agreements
|
|
|
|
|
|
|
|
assets
|
|
$
|
2
|
|
|
liabilities
|
|
|
1
|
|
|
liabilities
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
2
|
|
|
|
|
|
2,329
|
|
|
|
|
|
5,632
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives not designated
as hedging instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pay-fixed interest rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
Other
|
|
|
|
|
swap agreements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
liabilities
|
|
|
1,930
|
|
|
liabilities
|
|
|
241
|
|
Interest-rate cap
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
agreements
|
|
|
|
|
|
|
|
assets
|
|
|
202
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rate-lock mortgage
|
|
Other
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
loan commitments
|
|
assets
|
|
$
|
217
|
|
|
assets
|
|
|
839
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mandatory commitments
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
to sell mortgage loans
|
|
assets
|
|
|
715
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
liabilities
|
|
|
663
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
932
|
|
|
|
|
|
1,041
|
|
|
|
|
|
1,930
|
|
|
|
|
|
904
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivatives
|
|
|
|
$
|
932
|
|
|
|
|
$
|
1,043
|
|
|
|
|
$
|
4,259
|
|
|
|
|
$
|
6,536
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
85
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The effect of derivative financial instruments on the
Consolidated Statements of Operations follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
Location of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassified
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
from
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (Loss)
|
|
|
Accumulated
|
|
Gain (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recognized in
|
|
|
Other
|
|
Reclassified from
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
Comprehensive
|
|
Accumulated Other Comprehensive
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
|
|
|
Income into
|
|
Income
|
|
|
Location of
|
|
Gain (Loss)
|
|
|
|
Income
|
|
|
Income
|
|
into Income
|
|
|
Gain (Loss)
|
|
Recognized
|
|
|
|
(Effective Portion)
|
|
|
(Effective
|
|
(Effective Portion)
|
|
|
Recognized
|
|
in Income(1)
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Portion)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
in Income(1)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flow Hedges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pay-fixed interest
rate swap
agreements
|
|
$
|
4,834
|
|
|
$
|
(4,918
|
)
|
|
$
|
(2,767
|
)
|
|
Interest
expense
|
|
$
|
(3,110
|
)
|
|
$
|
(478
|
)
|
|
$
|
909
|
|
|
Interest
expense
|
|
|
|
|
|
$
|
1
|
|
|
|
|
|
Interest-rate cap
agreements
|
|
|
871
|
|
|
|
1,241
|
|
|
|
(505
|
)
|
|
Interest
expense
|
|
|
(437
|
)
|
|
|
(774
|
)
|
|
|
65
|
|
|
Interest
expense
|
|
$
|
8
|
|
|
|
(10
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
5,705
|
|
|
$
|
(3,677
|
)
|
|
$
|
(3,272
|
)
|
|
|
|
$
|
(3,547
|
)
|
|
$
|
(1,252
|
)
|
|
$
|
974
|
|
|
|
|
$
|
8
|
|
|
$
|
(9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Hedges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
pay-variable
interest rate
swap agreements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
|
|
|
$
|
6
|
|
|
$
|
45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
6
|
|
|
$
|
45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
No hedge designation
Pay-fixed interest rate
swap agreements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
$
|
(120
|
)
|
|
$
|
(254
|
)
|
|
|
|
|
Pay-variable interest rate
swap agreements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
|
|
|
|
13
|
|
|
$
|
34
|
|
Interest-rate cap
agreements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
5
|
|
|
|
(457
|
)
|
|
|
223
|
|
Rate-lock mortgage
loan commitments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage loan
gains
|
|
|
(622
|
)
|
|
|
887
|
|
|
|
(17
|
)
|
Mandatory
commitments to
sell mortgage loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage loan
gains
|
|
|
1,378
|
|
|
|
(600
|
)
|
|
|
(162
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
641
|
|
|
$
|
(411
|
)
|
|
$
|
78
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
For cash flow hedges, this location and amount refers to the
ineffective portion. |
Accumulated other comprehensive loss included derivative losses
of $4.0 million and $6.2 million at December 31,
2009 and 2008, respectively and derivative losses, net of tax,
of $0.8 million at December 31, 2007.
|
|
NOTE 17
|
RELATED
PARTY TRANSACTIONS
|
Certain of our directors and executive officers, including
companies in which they are officers or have significant
ownership, were loan and deposit customers during 2009 and 2008.
A summary of loans to directors and executive officers whose
borrowing relationship exceeds $60,000, and to entities in which
they own a 10% or more voting interest for the years ended
December 31 follows:
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Balance at beginning of year
|
|
$
|
363
|
|
|
$
|
902
|
|
New loans and advances
|
|
|
298
|
|
|
|
817
|
|
Repayments
|
|
|
(62
|
)
|
|
|
(1,356
|
)
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
$
|
599
|
|
|
$
|
363
|
|
|
|
|
|
|
|
|
|
|
Deposits held by us for directors and executive officers totaled
$0.9 million and $0.6 million at December 31,
2009 and 2008, respectively.
86
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
NOTE 18
|
OTHER
NON-INTEREST EXPENSES
|
Other non-interest expenses for the years ended December 31
follow:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Communications
|
|
$
|
4,424
|
|
|
$
|
4,018
|
|
|
$
|
3,809
|
|
Legal and professional
|
|
|
3,222
|
|
|
|
2,032
|
|
|
|
1,978
|
|
Amortization of intangible assets
|
|
|
1,930
|
|
|
|
3,072
|
|
|
|
3,373
|
|
Supplies
|
|
|
1,835
|
|
|
|
2,030
|
|
|
|
2,411
|
|
Other
|
|
|
5,655
|
|
|
|
7,639
|
|
|
|
7,505
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other non-interest expense
|
|
$
|
17,066
|
|
|
$
|
18,791
|
|
|
$
|
19,076
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We have non-cancelable operating leases for certain office
facilities, some of which include renewal options and escalation
clauses.
A summary of future minimum lease payments under non-cancelable
operating leases at December 31, 2009, follows:
|
|
|
|
|
|
|
(In thousands)
|
|
|
2010
|
|
$
|
1,179
|
|
2011
|
|
|
1,047
|
|
2012
|
|
|
932
|
|
2013
|
|
|
843
|
|
2014
|
|
|
815
|
|
2015 and thereafter
|
|
|
4,813
|
|
|
|
|
|
|
Total
|
|
$
|
9,629
|
|
|
|
|
|
|
Rental expense on operating leases totaled $1.2 million,
$1.5 million and $1.4 million in 2009, 2008 and 2007,
respectively.
|
|
NOTE 20
|
CONCENTRATIONS
OF CREDIT RISK
|
Credit risk is the risk to earnings and capital arising from an
obligors failure to meet the terms of any contract with
our organization, or otherwise fail to perform as agreed. Credit
risk can occur outside of our traditional lending activities and
can exist in any activity where success depends on counterparty,
issuer or borrower performance. Concentrations of credit risk
(whether on- or off-balance sheet) arising from financial
instruments can exist in relation to individual borrowers or
groups of borrowers, certain types of collateral, certain types
of industries or certain geographic regions. Credit risk
associated with these concentrations could arise when a
significant amount of loans or other financial instruments,
related by similar characteristics, are simultaneously impacted
by changes in economic or other conditions that cause their
probability of repayment or other type of settlement to be
adversely affected. Our major concentrations of credit risk
arise by collateral type and by industry. The significant
concentrations by collateral type at December 31, 2009
include $887.8 million of loans secured by residential real
estate and $69.5 million of construction and development
loans. In addition, we have a concentration of credit within the
vehicle service contract industry. At December 31, 2009, we
had $406.3 million of finance receivables. Our recourse for
nonpayment of these finance receivables is against our
counterparties operating within the vehicle service contract
industry.
Additionally, within our commercial real estate and commercial
loan portfolio we had significant standard industry
classification concentrations in the following categories as of
December 31, 2009: Lessors of Nonresidential Real Estate
($211.5 million); Lessors of Residential Real Estate
($91.7 million); Construction General
87
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Contractors and Land Development ($99.2 million); and
Health Care and Social Assistance ($62.3 million). A
geographic concentration arises because we primarily conduct our
lending activities in the State of Michigan.
Mepco purchases payment plans, on a full recourse basis, from
companies (which we refer to as Mepcos
counterparties) that provide vehicle service
contracts and similar products to consumers. When a
consumers payment plan is voluntarily or involuntarily
cancelled, Mepco has recourse against certain counterparties
involved pursuant to Mepcos contractual arrangements with
the counterparties. Mepco generally has recourse against the
seller and the administrator of the vehicle service contract. In
addition, the insurance company or risk retention group (RRG)
that provides the coverage for the vehicle service contract may
also guarantee the full recourse obligation or a portion of the
recourse obligation of the administrator to Mepco. The sudden
failure of one of Mepcos major counterparties (an
insurance company, RRG, vehicle service contract administrator
or seller) could expose us to significant losses. In 2009, we
incurred $31.2 million of such losses (compared to
$1.0 million in 2008 and none in 2007). The determination
of losses related to vehicle service contract counterparty
contingencies requires a significant amount of judgment because
a number of factors can influence the amount of loss that we may
ultimately incur. These factors include our estimate of future
cancellations of vehicle service contracts, our evaluation of
collateral that may be available to recover funds due from our
counterparties, and the amount collected from counterparties in
connection with their contractual recourse obligations. We apply
a rigorous process, based upon observable contract activity and
past experience, to estimate probable losses and quantify the
necessary reserves for our vehicle service contract counterparty
contingencies, but there can be no assurance that our modeling
process will successfully identify all such losses. As a result,
we could record future losses associated with vehicle service
contract counterparty contingencies that may be significantly
different than the levels that we recorded in 2009.
Mepco monitors counterparty concentrations in order to attempt
to manage our exposure for recourse obligations from each of
these counterparties. In addition, even where an insurance
company or RRG does not have a recourse obligation to Mepco, the
failure of the insurance company or RRG could result in a mass
cancellation of the vehicle service contracts (and the related
payment plans) insured by such insurance company or RRG. Such a
mass cancellation would trigger and accelerate the recourse
obligations of the counterparties that did have recourse
obligations to Mepco. The counterparty concentration levels are
managed based on the AM Best rating and statutory surplus level
for an insurance company and on other factors including
financial evaluation, collateral, funding holdbacks, guarantees,
and distribution of concentrations for vehicle service contract
administrators and vehicle service contract sellers/dealers.
The five largest concentrations by insurance company, risk
retention group or other party backing the service contract
represents approximately 16.6%, 13.7%, 13.2%, 9.8% and 8.9%,
respectively, of Mepcos finance receivables at
December 31, 2009.
These companies have provided the insurance coverage for the
vehicle service contracts underlying the finance receivables;
however, these companies are not all obligated to Mepco for the
repayment of the finance receivables upon cancellation of the
underlying vehicle service contracts and payment plans. Mepco
has varying levels of recourse against such companies.
The top five vehicle service contract sellers from which Mepco
purchases payment plans represent approximately 45.6%, 12.9%,
4.5%, 4.1% and 4.1%, respectively of Mepcos finance
receivables at December 31, 2009. As described in
note 11 Commitments and Contingent Liabilities
Mepcos largest counterparty from which it acquired payment
plans has defaulted in it obligations to Mepco and is in the
process of winding down its operations.
|
|
NOTE 21
|
REGULATORY
MATTERS
|
Capital guidelines adopted by Federal and State regulatory
agencies and restrictions imposed by law limit the amount of
cash dividends our bank can pay to us. Under these guidelines,
the amount of dividends that may be paid in any calendar year is
limited to the banks current years net profits,
combined with the retained net profits of the preceding two
years. It is not our intent to have dividends paid in amounts
which would reduce the capital of our bank to levels below those
which we consider prudent and in accordance with guidelines of
regulatory authorities.
88
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In December 2009 the Board of Directors of Independent Bank
Corporation adopted resolutions that impose the following
restrictions:
|
|
|
|
|
We will not pay dividends on our outstanding common stock or the
outstanding preferred stock held by the UST and we will not pay
distributions on our outstanding trust preferred securities
without, in each case, the prior written approval of the FRB and
the Michigan Office of Financial and Insurance Regulation
(OFIR);
|
|
|
|
We will not incur or guarantee any additional indebtedness
without the prior approval of the FRB;
|
|
|
|
We will not repurchase or redeem any of our common stock without
the prior approval of the FRB; and
|
|
|
|
We will not rescind or materially modify any of these
limitations without notice to the FRB and the Michigan OFIR.
|
The substance of all of the resolutions described above was
developed in conjunction with discussions held with the FRB and
the Michigan OFIR in response to the FRBs most recent
examination report of Independent Bank, which was completed in
October of 2009. It is very possible that if we had not adopted
these resolutions, the FRB and the Michigan OFIR may have
imposed similar requirements on us through a memorandum of
understanding or similar undertaking. We are not currently
subject to any such regulatory agreement or enforcement action.
However, we believe that if our financial condition and
performance do not materially improve, we may face additional
regulatory scrutiny and restrictions in the form of a memorandum
of understanding or similar undertaking imposed by the
regulators.
We are also subject to various regulatory capital requirements.
The prompt corrective action regulations establish quantitative
measures to ensure capital adequacy and require minimum amounts
and ratios of total and Tier 1 capital to risk-weighted
assets and Tier 1 capital to average assets. Failure to
meet minimum capital requirements can initiate certain
mandatory, and possibly discretionary, actions by regulators
that could have a material effect on our consolidated financial
statements. Under capital adequacy guidelines, we must meet
specific capital requirements that involve quantitative measures
as well as qualitative judgments by the regulators. The most
recent notifications from the FDIC as of December 31, 2009
and 2008, categorized our bank as well capitalized. Management
is not aware of any conditions or events that would have changed
the most recent FDIC categorization.
89
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Our actual capital amounts and ratios at December 31,
follow:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum for
|
|
|
Minimum for
|
|
|
|
|
|
|
Adequately Capitalized
|
|
|
Well-Capitalized
|
|
|
|
Actual
|
|
|
Institutions
|
|
|
Institutions
|
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
|
(Dollars in thousands)
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital to risk-weighted assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
233,166
|
|
|
|
10.58
|
%
|
|
$
|
176,333
|
|
|
|
8.00
|
%
|
|
|
NA
|
|
|
|
NA
|
|
Independent Bank
|
|
|
228,128
|
|
|
|
10.36
|
|
|
|
176,173
|
|
|
|
8.00
|
|
|
$
|
220,216
|
|
|
|
10.00
|
%
|
Tier 1 capital to risk-weighted assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
156,702
|
|
|
|
7.11
|
%
|
|
$
|
88,166
|
|
|
|
4.00
|
%
|
|
|
NA
|
|
|
|
NA
|
|
Independent Bank
|
|
|
199,909
|
|
|
|
9.08
|
|
|
|
88,086
|
|
|
|
4.00
|
|
|
$
|
132,130
|
|
|
|
6.00
|
%
|
Tier 1 capital to average assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
156,702
|
|
|
|
5.27
|
%
|
|
$
|
119,045
|
|
|
|
4.00
|
%
|
|
|
NA
|
|
|
|
NA
|
|
Independent Bank
|
|
|
199,909
|
|
|
|
6.72
|
|
|
|
118,909
|
|
|
|
4.00
|
|
|
$
|
148,636
|
|
|
|
5.00
|
%
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital to risk-weighted assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
308,649
|
|
|
|
13.05
|
%
|
|
$
|
189,207
|
|
|
|
8.00
|
%
|
|
|
NA
|
|
|
|
NA
|
|
Independent Bank
|
|
|
280,971
|
|
|
|
11.91
|
|
|
|
188,784
|
|
|
|
8.00
|
|
|
$
|
235,980
|
|
|
|
10.00
|
%
|
Tier 1 capital to risk-weighted assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
261,063
|
|
|
|
11.04
|
%
|
|
$
|
94,603
|
|
|
|
4.00
|
%
|
|
|
NA
|
|
|
|
NA
|
|
Independent Bank
|
|
|
250,639
|
|
|
|
10.62
|
|
|
|
94,392
|
|
|
|
4.00
|
|
|
$
|
141,588
|
|
|
|
6.00
|
%
|
Tier 1 capital to average assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
261,063
|
|
|
|
8.61
|
%
|
|
$
|
121,350
|
|
|
|
4.00
|
%
|
|
|
NA
|
|
|
|
NA
|
|
Independent Bank
|
|
|
250,639
|
|
|
|
8.25
|
|
|
|
121,503
|
|
|
|
4.00
|
|
|
$
|
151,879
|
|
|
|
5.00
|
%
|
NA Not applicable
As of December 31, 2009, our bank continued to meet the
requirements to be considered well-capitalized under
federal regulatory standards. However, minimum capital ratios
established by the Board of Directors of our bank are higher
than the ratios required in order to be considered
well-capitalized under federal standards. The Board
imposed these higher ratios in order to ensure we have
sufficient capital to withstand potential continuing losses
based on our elevated level of non-performing assets and given
certain other risks and uncertainties we face. Set forth below
are the actual capital ratios of our subsidiary bank as of
December 31, 2009, the minimum capital ratios imposed by
the Board resolutions, and the minimum ratios necessary to be
considered well-capitalized under federal regulatory
standards:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Independent Bank -
|
|
Minimum Ratios
|
|
|
|
|
Actual as of
|
|
Established by Our
|
|
Required to be
|
|
|
12/31/09
|
|
Board
|
|
Well-Capitalized
|
|
Total Capital to Risk-Weighted Assets
|
|
|
10.36
|
%
|
|
|
11.0
|
%
|
|
|
10.0
|
%
|
Tier 1 Capital to Average Total Assets
|
|
|
6.72
|
|
|
|
8.0
|
|
|
|
5.0
|
|
In January of 2010, we adopted a Capital Restoration Plan (the
Capital Plan), as required by Board resolutions
adopted in December of 2009 and submitted such Capital Plan to
the FRB and the Michigan OFIR. The Capital Plan sets forth an
objective of achieving these minimum capital ratios as soon as
practicable, but no later than April 30, 2010, and
maintaining such capital ratios though at least the end of 2012.
If we are unable to achieve the minimum capital ratios set forth
in our Capital Plan it would likely materially and adversely
affect our business and financial condition. An inability to
improve our capital position would make it
90
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
very difficult for us to withstand continued losses that we may
incur and that may be increased or made more likely as a result
of continued economic difficulties and other factors.
In addition, we believe that if we are unable to achieve the
minimum capital ratios set forth in our capital restoration plan
by or within a reasonable time after the April 30, 2010
deadline imposed by our Board of Directors and if our financial
condition and performance otherwise fail to improve
significantly, it is likely we will not be able to remain
well-capitalized under federal regulatory standards. In that
case, we also expect our primary bank regulators would impose
additional regulatory restrictions and requirements on us
through a regulatory enforcement action. If we fail to remain
well-capitalized under federal regulatory standards, we will be
prohibited from accepting or renewing brokered certificates of
deposit (Brokered CDs) without the prior consent of
the Federal Deposit Insurance Corporation (FDIC),
which would likely have a material adverse impact on our
business and financial condition. If our regulators take
enforcement action against us, it would likely increase our
expenses and could limit our business operations. There could be
other expenses associated with a continued deterioration of our
capital, such as increased deposit insurance premiums payable to
the FDIC.
|
|
NOTE 22
|
FAIR
VALUE DISCLOSURES
|
FASB ASC topic 820 defines fair value as the exchange price that
would be received for an asset or paid to transfer a liability
(an exit price) in the principal or most advantageous market for
the asset or liability in an orderly transaction between market
participants on the measurement date. FASB ASC topic 820 also
establishes a fair value hierarchy which requires an entity to
maximize the use of observable inputs and minimize the use of
unobservable inputs when measuring fair value.
The standard describes three levels of inputs that may be used
to measure fair value:
|
|
Level 1:
|
Valuation is based upon quoted prices for identical instruments
traded in active markets. Level 1 instruments include
securities traded on active exchange markets, such as the New
York Stock Exchange, as well as U.S. Treasury securities
that are traded by dealers or brokers in active
over-the-counter
markets.
|
|
Level 2:
|
Valuation is based upon quoted prices for similar instruments in
active markets, quoted prices for identical or similar
instruments in markets that are not active, and model-based
valuation techniques for which all significant assumptions are
observable in the market. Level 2 instruments include
securities traded in less active dealer or broker markets.
|
|
Level 3:
|
Valuation is generated from model-based techniques that use at
least one significant assumption not observable in the market.
These unobservable assumptions reflect estimates of assumptions
that market participants would use in pricing the asset or
liability. Valuation techniques include use of option pricing
models, discounted cash flow models and similar techniques.
|
We used the following methods and significant assumptions to
estimate fair value:
Securities: Where quoted market prices are
available in an active market, securities (trading or available
for sale) are classified as level 1 of the valuation
hierarchy. Level 1 securities include certain preferred
stocks and a trust preferred security for which there are quoted
prices in active markets. If quoted market prices are not
available for the specific security, then fair values are
estimated by (1) using quoted market prices of securities
with similar characteristics, (2) matrix pricing, which is
a mathematical technique used widely in the industry to value
debt securities without relying exclusively on quoted prices for
specific securities but rather by relying on the
securities relationship to other benchmark quoted prices,
or (3) a discounted cash flow analysis whose significant
fair value inputs can generally be verified and do not typically
involve judgment by management. These securities are classified
as level 2 of the valuation hierarchy and include agency
mortgage-backed securities, municipal securities and certain
trust preferred securities. Level 3 securities at
December 31, 2009 consist of certain private label
mortgage-backed and asset-backed securities whose fair values
are estimated using an internal discounted cash flow analysis.
The underlying loans within these securities include Jumbo
(60%), Alt A (25%) and manufactured housing (15%). Except for
the discount rate, the inputs used in this analysis can
generally be verified and do not
91
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
involve judgment by management. The discount rate used (an
unobservable input) was established using a multi-factored
matrix whose base rate was the yield on agency mortgage-backed
securities. The analysis adds a spread to this base rate based
on several credit related factors, including vintage, product,
payment priority, credit rating and non performing asset
coverage ratio. The add-on for vintage ranges from zero for
transactions backed by loans originated before 2003 to 0.525%
for the 2007 vintage. Product adjustments to the discount rate
are: 0.05% to 0.20% for jumbo, 0.35% to 2.575% for Alt-A, and
3.00% for manufactured housing. Adjustments for payment priority
are -0.25% for super seniors, zero for seniors, 1.00% for senior
supports and 3.00% for mezzanine securities. The add-on for
credit rating ranges from zero for AAA securities to 5.00% for
ratings below investment grade. The discount rate for
subordination coverage of nonperforming loans ranges from zero
for structures with a coverage ratio of more than 10 times to
10.00% if the coverage ratio declines to less than 0.5 times.
The discount rate calculation has a minimum add on rate of
0.25%. These discount rate adjustments are reviewed quarterly
for reasonableness. This review considers trends in mortgage
market credit metrics by product and vintage. The discount rates
calculated in this manner are intended to differentiate
investments by risk characteristics. Using this approach,
discount rates range from 4.11% to 16.64%, with a weighted
average rate of 8.91% and a median rate of 7.99%.
The assumptions used reflect what we believe market participants
would use in pricing these assets. The unrealized losses at
December 31, 2009 ($7.8 million and included in
accumulated other comprehensive loss) were not considered to be
other than temporary as we continue to have sufficient credit
enhancement via subordination to assure full realization of
amortized cost and continue to receive principal and interest
payments (see note 3).
Loans held for sale: The fair value of
mortgage loans held for sale is based on mortgage-backed
security pricing for comparable assets (recurring level 2).
During the fourth quarter of 2009, we transferred a
$2.2 million commercial real estate loan from the
commercial loan portfolio to held for sale. The fair value of
this loan was based on a bid from a buyer and, therefore, is
classified as a recurring level 1. This loan was sold for
the recorded amount in January, 2009.
Impaired loans: From time to time, certain
loans are considered impaired and an allowance for loan losses
is established. Loans for which it is probable that payment of
interest and principal will not be made in accordance with the
contractual terms of the loan agreement are considered impaired.
We measure our investment in an impaired loan based on one of
three methods: the loans observable market price, the fair
value of the collateral or the present value of expected future
cash flows discounted at the loans effective interest
rate. Those impaired loans not requiring an allowance represent
loans for which the fair value of the expected repayments or
collateral exceed the recorded investments in such loans. At
December 31, 2009, all of the total impaired loans were
evaluated based on either the fair value of the collateral or
the present value of expected future cash flows discounted at
the loans effective interest rate. When the fair value of
the collateral is based on an observable market price we record
the impaired loan as nonrecurring Level 2. When the fair
value of the collateral is based on an appraised value or when
an appraised value is not available we record the impaired loan
as nonrecurring Level 3.
Other real estate: At the time of acquisition,
other real estate is recorded at fair value, less estimated
costs to sell, which becomes the propertys new basis.
Subsequent write-downs to reflect declines in value since the
time of acquisition may occur from time to time and are recorded
in other expense in the consolidated statements of operations.
The fair value of the property used at and subsequent to the
time of acquisition is typically determined by a third party
appraisal of the property (nonrecurring Level 3).
Capitalized mortgage loan servicing
rights: The fair value of capitalized mortgage
loan servicing rights is based on a valuation model that
calculates the present value of estimated net servicing income.
The valuation model incorporates assumptions that market
participants would use in estimating future net servicing
income. The valuation model inputs and results can be compared
to widely available published industry data for reasonableness.
Derivatives The fair value of derivatives, in
general, is determined using a discounted cash flow model whose
significant fair value inputs can generally be verified and do
not typically involve judgment by management.
92
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Assets and liabilities measured at fair value, including
financial liabilities for which we have elected the fair value
option, are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using
|
|
|
|
|
Quoted
|
|
|
|
|
|
|
|
|
Prices in
|
|
|
|
|
|
|
|
|
Active
|
|
Significant
|
|
|
|
|
|
|
Markets for
|
|
Other
|
|
Significant
|
|
|
|
|
Identical
|
|
Observable
|
|
Un-observable
|
|
|
Fair Value
|
|
Assets
|
|
Inputs
|
|
Inputs
|
|
|
Measurements
|
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
|
|
(In thousands)
|
|
December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Measured at Fair Value on a Recurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading securities
|
|
$
|
54
|
|
|
$
|
54
|
|
|
|
|
|
|
|
|
|
Securities available for sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. agency residential mortgage-backed
|
|
|
47,522
|
|
|
|
|
|
|
$
|
47,522
|
|
|
|
|
|
Private label residential mortgage-backed
|
|
|
30,975
|
|
|
|
|
|
|
|
|
|
|
$
|
30,975
|
|
Other asset-backed
|
|
|
5,505
|
|
|
|
|
|
|
|
|
|
|
|
5,505
|
|
Obligations of states and political subdivisions
|
|
|
67,132
|
|
|
|
|
|
|
|
67,132
|
|
|
|
|
|
Trust preferred
|
|
|
13,017
|
|
|
|
612
|
|
|
|
12,405
|
|
|
|
|
|
Loans held for sale
|
|
|
34,234
|
|
|
|
2,200
|
|
|
|
32,034
|
|
|
|
|
|
Derivatives(1)
|
|
|
932
|
|
|
|
|
|
|
|
932
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives(2)
|
|
|
4,259
|
|
|
|
|
|
|
|
4,259
|
|
|
|
|
|
Measured at Fair Value on a Non-recurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capitalized mortgage loan servicing rights
|
|
|
9,599
|
|
|
|
|
|
|
|
9,599
|
|
|
|
|
|
Impaired loans
|
|
|
48,262
|
|
|
|
|
|
|
|
|
|
|
|
48,262
|
|
Other real estate
|
|
|
30,821
|
|
|
|
|
|
|
|
|
|
|
|
30,821
|
|
December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Measured at Fair Value on a Recurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading securities
|
|
$
|
1,929
|
|
|
$
|
1,929
|
|
|
|
|
|
|
|
|
|
Securities available for sale
|
|
|
215,412
|
|
|
|
5,275
|
|
|
$
|
210,137
|
|
|
|
|
|
Loans held for sale
|
|
|
27,603
|
|
|
|
|
|
|
|
27,603
|
|
|
|
|
|
Derivatives(1)
|
|
|
1,043
|
|
|
|
|
|
|
|
1,043
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives(2)
|
|
|
6,536
|
|
|
|
|
|
|
|
6,536
|
|
|
|
|
|
Measured at Fair Value on a Non-recurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capitalized mortgage loan servicing rights
|
|
|
9,636
|
|
|
|
|
|
|
|
9,636
|
|
|
|
|
|
Impaired loans
|
|
|
60,172
|
|
|
|
|
|
|
|
|
|
|
$
|
60,172
|
|
|
|
|
(1) |
|
Included in accrued income and other assets |
|
(2) |
|
Included in accrued expenses and other liabilities |
93
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Changes in fair values for financial assets which we have
elected the fair value option for the periods presented were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in Fair Values for the Years
|
|
|
Ended December 31 for Items Measured at
|
|
|
Fair Value Pursuant to Election of the Fair Value Option
|
|
|
2009
|
|
2008
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
Change in
|
|
|
|
|
|
Change in
|
|
|
|
|
|
|
Fair
|
|
|
|
|
|
Fair
|
|
|
|
|
|
|
Values
|
|
|
|
|
|
Values
|
|
|
|
|
|
|
Included in
|
|
|
|
|
|
Included in
|
|
|
Net Gains (Losses)
|
|
Current
|
|
Net Gains (Losses)
|
|
Current
|
|
|
on Assets
|
|
Period
|
|
on Assets
|
|
Period
|
|
|
Securities
|
|
Loans
|
|
Earnings
|
|
Securities
|
|
Loans
|
|
Earnings
|
|
|
(In thousands)
|
|
Trading securities
|
|
$
|
954
|
|
|
|
|
|
|
$
|
954
|
|
|
$
|
(10,386
|
)
|
|
|
|
|
|
$
|
(10,386
|
)
|
Loans held for sale
|
|
|
|
|
|
$
|
(404
|
)
|
|
|
(404
|
)
|
|
|
|
|
|
$
|
(682
|
)
|
|
|
(682
|
)
|
For those items measured at fair value pursuant to our election
of the fair value option, interest income is recorded within the
consolidated statements of operations based on the contractual
amount of interest income earned on these financial assets and
dividend income is recorded based on cash dividends.
The following represent impairment charges recognized during the
years ended December 31, 2009 and 2008 relating to assets
measured at fair value on a non-recurring basis:
|
|
|
|
|
Capitalized mortgage loan servicing rights, whose individual
strata are measured at fair value had a carrying amount of
$9.6 million which is net of a valuation allowance of
$2.3 million at December 31, 2009 and had a carrying
amount of $9.6 million which is net of a valuation
allowance of $4.7 million at December 31, 2008. A
recovery (charge) of $2.3 million and $(4.3) million
was included in our results of operations for the years ending
December 31, 2009 and 2008, respectively.
|
|
|
|
Loans which are measured for impairment using the fair value of
collateral for collateral dependent loans had a carrying amount
of $69.5 million, with a valuation allowance of
$21.3 million at December 31, 2009 and had a carrying
amount of $77.0 million, with a valuation allowance of
$16.8 million at December 31, 2008. An additional
provision for loan losses relating to impaired loans of
$56.7 million and $47.9 million was included in our
results of operations for the years ending December 31,
2009 and 2008, respectively.
|
|
|
|
Other real estate, which is measured using the fair value of the
property, had a carrying amount of $30.8 million which is
net of a valuation allowance of $6.5 million at
December 31, 2009. An additional charge of
$8.6 million was included in our results of operations
during the year ended December 31, 2009.
|
94
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
A reconciliation for all assets and liabilities measured at fair
value on a recurring basis using significant unobservable inputs
(Level 3) for the year ended December 31, follows:
|
|
|
|
|
|
|
|
|
|
|
Securities Available for Sale
|
|
|
|
2009
|
|
|
2008
|
|
|
Beginning balance
|
|
$
|
|
|
|
$
|
21,497
|
|
Total gains (losses) realized and unrealized:
|
|
|
|
|
|
|
|
|
Included in results of operations
|
|
|
(52
|
)
|
|
|
|
|
Included in other comprehensive income
|
|
|
(325
|
)
|
|
|
|
|
Purchases, issuances, settlements, maturities and calls
|
|
|
(10,524
|
)
|
|
|
(11,469
|
)
|
Transfers in and/or out of Level 3
|
|
|
47,381
|
|
|
|
(10,028
|
)
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
36,480
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Amount of total gains (losses) for the period included in
earnings attributable to the change in unrealized gains (losses)
relating to assets still held at December 31
|
|
$
|
(65
|
)
|
|
$
|
0
|
|
|
|
|
|
|
|
|
|
|
As discussed above, the $47.4 million of securities
available for sale transferred to a Level 3 valuation
technique during the first quarter of 2009 consisted entirely of
certain private label mortgage-backed and asset-backed
securities. We believe that the market dislocation for these
securities began in the last four months of 2008, particularly
after the collapse of Lehman Brothers in September 2008. Since
the disruption was very recent and historically there exists
seasonally poor liquidity conditions at year end, we decided
that it was appropriate to retain Level 2 pricing in 2008
and continue to monitor and review market conditions as we moved
into 2009. During the first quarter of 2009 market conditions
did not improve, in fact we believe market conditions worsened
due to continued declines in residential home prices, increased
consumer credit delinquencies, high levels of foreclosures,
continuing losses at many financial institutions, and further
weakness in the U.S. and global economies. This resulted in
the market for these securities being extremely dislocated,
level 2 pricing not being based on orderly transactions and
such pricing possibly being described as based on
distressed sales. As a result, we determined that it
was appropriate to modify the discount rate in the valuation
model described above which resulted in these securities being
reclassified to Level 3 pricing in the first quarter of
2009.
The following table reflects the difference between the
aggregate fair value and the aggregate remaining contractual
principal balance outstanding for loans held for sale for which
the fair value option has been elected at December 31.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate
|
|
|
|
Contractual
|
|
|
Fair Value
|
|
Difference
|
|
Principal
|
|
|
(In thousands)
|
|
Loans held for sale
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
$
|
34,234
|
|
|
$
|
278
|
|
|
$
|
33,956
|
|
2008
|
|
|
27,603
|
|
|
|
682
|
|
|
|
26,921
|
|
|
|
NOTE 23
|
FAIR
VALUES OF FINANCIAL INSTRUMENTS
|
Most of our assets and liabilities are considered financial
instruments. Many of these financial instruments lack an
available trading market and it is our general practice and
intent to hold the majority of our financial instruments to
maturity. Significant estimates and assumptions were used to
determine the fair value of financial instruments. These
estimates are subjective in nature, involving uncertainties and
matters of judgment, and therefore, fair values cannot be
determined with precision. Changes in assumptions could
significantly affect the estimates.
Estimated fair values have been determined using available data
and methodologies that are considered suitable for each category
of financial instrument. For instruments with
adjustable-interest rates which reprice
95
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
frequently and without significant credit risk, it is presumed
that estimated fair values approximate the recorded book
balances.
Financial instrument assets actively traded in a secondary
market, such as securities, have been valued using quoted market
prices while recorded book balances have been used for cash and
due from banks and accrued interest.
It is not practicable to determine the fair value of Federal
Home Loan Bank and Federal Reserve Bank Stock due to
restrictions placed on transferability.
The fair value of loans is calculated by discounting estimated
future cash flows using estimated market discount rates that
reflect credit and interest-rate risk inherent in the loans.
Financial instrument liabilities with a stated maturity, such as
certificates of deposit and other borrowings, have been valued
based on the discounted value of contractual cash flows using a
discount rate approximating current market rates for liabilities
with a similar maturity.
Subordinated debentures have generally been valued based on a
quoted market price of the specific or similar instruments.
Derivative financial instruments have principally been valued
based on discounted value of contractual cash flows using a
discount rate approximating current market rates.
Financial instrument liabilities without a stated maturity, such
as demand deposits, savings, NOW and money market accounts, have
a fair value equal to the amount payable on demand.
The estimated fair values and recorded book balances at December
31 follow:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
2008
|
|
|
|
|
Recorded
|
|
|
|
Recorded
|
|
|
Estimated
|
|
Book
|
|
Estimated
|
|
Book
|
|
|
Fair Value
|
|
Balance
|
|
Fair Value
|
|
Balance
|
|
|
|
|
(In thousands)
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
$
|
65,200
|
|
|
$
|
65,200
|
|
|
$
|
57,500
|
|
|
$
|
57,500
|
|
Interest bearing deposits
|
|
|
223,500
|
|
|
|
223,500
|
|
|
|
200
|
|
|
|
200
|
|
Trading securities
|
|
|
50
|
|
|
|
50
|
|
|
|
1,900
|
|
|
|
1,900
|
|
Securities available for sale
|
|
|
164,200
|
|
|
|
164,200
|
|
|
|
215,400
|
|
|
|
215,400
|
|
Federal Home Loan Bank and Federal Reserve Bank Stock
|
|
|
NA
|
|
|
|
27,900
|
|
|
|
NA
|
|
|
|
28,100
|
|
Net loans and loans held for sale
|
|
|
2,178,000
|
|
|
|
2,251,900
|
|
|
|
2,280,000
|
|
|
|
2,429,200
|
|
Accrued interest receivable
|
|
|
8,900
|
|
|
|
8,900
|
|
|
|
11,300
|
|
|
|
11,300
|
|
Derivative financial instruments
|
|
|
900
|
|
|
|
900
|
|
|
|
1,000
|
|
|
|
1,000
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits with no stated maturity
|
|
$
|
1,394,400
|
|
|
$
|
1,394,400
|
|
|
$
|
1,215,200
|
|
|
$
|
1,215,200
|
|
Deposits with stated maturity
|
|
|
1,183,200
|
|
|
|
1,171,300
|
|
|
|
865,000
|
|
|
|
851,300
|
|
Other borrowings
|
|
|
136,300
|
|
|
|
131,200
|
|
|
|
547,500
|
|
|
|
542,700
|
|
Subordinated debentures
|
|
|
46,500
|
|
|
|
92,900
|
|
|
|
67,300
|
|
|
|
92,900
|
|
Accrued interest payable
|
|
|
4,500
|
|
|
|
4,500
|
|
|
|
4,425
|
|
|
|
4,425
|
|
Derivative financial instruments
|
|
|
4,300
|
|
|
|
4,300
|
|
|
|
6,500
|
|
|
|
6,500
|
|
The fair values for commitments to extend credit and standby
letters of credit are estimated to approximate their aggregate
book balance, which is nominal.
Fair value estimates are made at a specific point in time, based
on relevant market information and information about the
financial instrument. These estimates do not reflect any premium
or discount that could result from offering for sale the entire
holdings of a particular financial instrument.
96
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Fair value estimates are based on existing on- and off-balance
sheet financial instruments without attempting to estimate the
value of anticipated future business, the value of future
earnings attributable to off-balance sheet activities and the
value of assets and liabilities that are not considered
financial instruments.
Fair value estimates for deposit accounts do not include the
value of the core deposit intangible asset resulting from the
low-cost funding provided by the deposit liabilities compared to
the cost of borrowing funds in the market.
|
|
NOTE 24
|
OPERATING
SEGMENTS
|
Our reportable segments are based upon legal entities. We have
two reportable segments: Independent Bank (IB) and
Mepco. The accounting policies of the segments are the same as
those described in Note 1 to the consolidated financial
statements. We evaluate performance based principally on net
income of the respective reportable segments. During 2007, we
consolidated our four former bank charters into one. Prior to
this consolidation we reported each of the four banks as
separate segments.
In the normal course of business, our IB segment provides
funding to our Mepco segment through an intercompany line of
credit priced principally based on Brokered CD rates. Our IB
segment also provides certain administrative services to our
Mepco segment which reimburses at an agreed upon rate. These
intercompany transactions are eliminated upon consolidation. The
only other material intersegment balances and transactions are
investments in subsidiaries at the parent entities and cash
balances on deposit at our IB segment.
A summary of selected financial information for our reportable
segments follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
IB
|
|
Mepco(1)
|
|
Other(2)
|
|
Elimination(3)
|
|
Total
|
|
|
(In thousands)
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
2,539,315
|
|
|
$
|
424,094
|
|
|
$
|
210,634
|
|
|
$
|
(208,679
|
)
|
|
$
|
2,965,364
|
|
Interest income
|
|
|
136,051
|
|
|
|
53,005
|
|
|
|
|
|
|
|
|
|
|
|
189,056
|
|
Net interest income
|
|
|
95,190
|
|
|
|
49,953
|
|
|
|
(6,620
|
)
|
|
|
|
|
|
|
138,523
|
|
Provision for loan losses
|
|
|
102,721
|
|
|
|
311
|
|
|
|
|
|
|
|
|
|
|
|
103,032
|
|
Income (loss) from continuing operations before income tax
|
|
|
(76,888
|
)
|
|
|
(9,106
|
)
|
|
|
(7,349
|
)
|
|
|
(94
|
)
|
|
|
(93,437
|
)
|
Net income (loss)
|
|
|
(71,095
|
)
|
|
|
(11,689
|
)
|
|
|
(7,636
|
)
|
|
|
193
|
|
|
|
(90,227
|
)
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
2,638,092
|
|
|
$
|
312,710
|
|
|
$
|
290,993
|
|
|
$
|
(285,550
|
)
|
|
$
|
2,956,245
|
|
Interest income
|
|
|
170,588
|
|
|
|
33,148
|
|
|
|
|
|
|
|
|
|
|
|
203,736
|
|
Net interest income
|
|
|
110,788
|
|
|
|
26,503
|
|
|
|
(7,142
|
)
|
|
|
|
|
|
|
130,149
|
|
Provision for loan losses
|
|
|
71,285
|
|
|
|
36
|
|
|
|
|
|
|
|
|
|
|
|
71,321
|
|
Income (loss) from continuing operations before income tax
|
|
|
(96,824
|
)
|
|
|
17,274
|
|
|
|
(8,956
|
)
|
|
|
(95
|
)
|
|
|
(88,601
|
)
|
Net income (loss)
|
|
|
(92,551
|
)
|
|
|
10,729
|
|
|
|
(9,780
|
)
|
|
|
(62
|
)
|
|
|
(91,664
|
)
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
3,002,899
|
|
|
$
|
235,813
|
|
|
$
|
342,664
|
|
|
$
|
(333,860
|
)
|
|
$
|
3,247,516
|
|
Interest income
|
|
|
199,386
|
|
|
|
23,868
|
|
|
|
|
|
|
|
|
|
|
|
223,254
|
|
Net interest income
|
|
|
111,884
|
|
|
|
15,603
|
|
|
|
(6,896
|
)
|
|
|
|
|
|
|
120,591
|
|
Provision for loan losses
|
|
|
42,765
|
|
|
|
395
|
|
|
|
|
|
|
|
|
|
|
|
43,160
|
|
Income (loss) from continuing operations before income tax
|
|
|
8,469
|
|
|
|
8,118
|
|
|
|
(8,650
|
)
|
|
|
915
|
|
|
|
8,852
|
|
Discontinued operations, net of tax
|
|
|
|
|
|
|
402
|
|
|
|
|
|
|
|
|
|
|
|
402
|
|
Net income (loss)
|
|
|
9,729
|
|
|
|
5,472
|
|
|
|
(5,439
|
)
|
|
|
595
|
|
|
|
10,357
|
|
|
|
|
(1) |
|
Total assets include gross finance receivables of
$1.6 million at December 31, 2009 from customers
domociled in Canada. This amount represents less than 1% of
total finance receivables outstanding. We anticipate this
balance to decline in future periods. There were no finance
receivables for customers domiciled in Canada in 2008 or 2007. |
97
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
(2) |
|
Includes amounts relating to our parent company and certain
insignificant operations. |
|
(3) |
|
Includes parent companys investment in subsidiaries and
cash balances maintained at subsidiary. |
|
|
NOTE 25
|
INDEPENDENT
BANK CORPORATION (PARENT COMPANY ONLY) FINANCIAL
INFORMATION
|
Presented below are condensed financial statements for our
parent company.
CONDENSED
STATEMENTS OF FINANCIAL CONDITION
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
ASSETS
|
Cash and due from banks
|
|
$
|
9,488
|
|
|
$
|
27,534
|
|
Investment in subsidiaries
|
|
|
199,207
|
|
|
|
261,930
|
|
Other assets
|
|
|
1,939
|
|
|
|
1,529
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
210,634
|
|
|
$
|
290,993
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY
|
Subordinated debentures
|
|
$
|
92,888
|
|
|
$
|
92,888
|
|
Other liabilities
|
|
|
8,611
|
|
|
|
3,762
|
|
Shareholders equity
|
|
|
109,135
|
|
|
|
194,343
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Shareholders Equity
|
|
$
|
210,634
|
|
|
$
|
290,993
|
|
|
|
|
|
|
|
|
|
|
98
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
CONDENSED
STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
OPERATING INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends from subsidiaries
|
|
|
|
|
|
$
|
6,000
|
|
|
$
|
20,750
|
|
Management fees from subsidiaries and other income
|
|
$
|
175
|
|
|
|
199
|
|
|
|
17,730
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Operating Income
|
|
|
175
|
|
|
|
6,199
|
|
|
|
38,480
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
6,620
|
|
|
|
7,142
|
|
|
|
6,896
|
|
Administrative and other expenses
|
|
|
904
|
|
|
|
2,013
|
|
|
|
19,484
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Operating Expenses
|
|
|
7,524
|
|
|
|
9,155
|
|
|
|
26,380
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) Before Income Tax and Equity in Undistributed Net
Income (Loss) of Subsidiaries Continuing Operations
|
|
|
(7,349
|
)
|
|
|
(2,956
|
)
|
|
|
12,100
|
|
Income tax (expense) benefit
|
|
|
(287
|
)
|
|
|
(824
|
)
|
|
|
3,211
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) Before Equity in Undistributed Net Income (Loss)
of Subsidiaries Continuing Operations
|
|
|
(7,636
|
)
|
|
|
(3,780
|
)
|
|
|
15,311
|
|
Equity in undistibuted net loss of subsidiaries continuing
operations
|
|
|
(82,591
|
)
|
|
|
(87,884
|
)
|
|
|
(5,356
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) from Continuing Operations
|
|
|
(90,227
|
)
|
|
|
(91,664
|
)
|
|
|
9,955
|
|
Discontinued operations
|
|
|
|
|
|
|
|
|
|
|
402
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss)
|
|
$
|
(90,227
|
)
|
|
$
|
(91,664
|
)
|
|
$
|
10,357
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
99
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
CONDENSED
STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Net Income (Loss)
|
|
$
|
(90,227
|
)
|
|
$
|
(91,664
|
)
|
|
$
|
10,357
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO NET
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FROM (USED IN) OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation, amortization of intangible assets and premiums, and
|
|
|
|
|
|
|
|
|
|
|
|
|
accretion of discounts on securities and loans
|
|
|
2
|
|
|
|
4
|
|
|
|
1,347
|
|
Goodwill impairment
|
|
|
|
|
|
|
343
|
|
|
|
|
|
Loss on sale of property and equipment
|
|
|
|
|
|
|
|
|
|
|
947
|
|
(Increase) decrease in other assets
|
|
|
(411
|
)
|
|
|
3,220
|
|
|
|
883
|
|
Increase (decrease) in other liabilities
|
|
|
4,531
|
|
|
|
(391
|
)
|
|
|
(1,889
|
)
|
Equity in undistributed net loss of subsidiaries continuing
operations
|
|
|
82,591
|
|
|
|
87,884
|
|
|
|
5,356
|
|
Equity in undistributed net income of subsidiaries discontinued
operations
|
|
|
|
|
|
|
|
|
|
|
(402
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Adjustments
|
|
|
86,713
|
|
|
|
91,060
|
|
|
|
6,242
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Cash From (Used in) Operating Activities
|
|
|
(3,514
|
)
|
|
|
(604
|
)
|
|
|
16,599
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOW USED IN INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment in subsidiaries
|
|
|
(13,000
|
)
|
|
|
(53,600
|
)
|
|
|
(9,500
|
)
|
Proceeds from the sale of property and equipment
|
|
|
|
|
|
|
|
|
|
|
5,276
|
|
Capital expenditures
|
|
|
|
|
|
|
|
|
|
|
(1,823
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Cash Used in Investing Activities
|
|
|
(13,000
|
)
|
|
|
(53,600
|
)
|
|
|
(6,047
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOW FROM (USED IN) FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends paid
|
|
|
(3,384
|
)
|
|
|
(7,769
|
)
|
|
|
(18,874
|
)
|
Proceeds from issuance of common stock
|
|
|
1,852
|
|
|
|
1,892
|
|
|
|
354
|
|
Repayment of long-term debt
|
|
|
|
|
|
|
(3,000
|
)
|
|
|
(2,000
|
)
|
Repayment of other borrowings
|
|
|
|
|
|
|
|
|
|
|
(11,500
|
)
|
Proceeds from issuance of preferred stock
|
|
|
|
|
|
|
68,421
|
|
|
|
|
|
Proceeds from issuance of common stock warrants
|
|
|
|
|
|
|
3,579
|
|
|
|
|
|
Proceeds from short-term borrowings
|
|
|
|
|
|
|
|
|
|
|
4,000
|
|
Proceeds from issuance of subordinated debt
|
|
|
|
|
|
|
|
|
|
|
32,991
|
|
Redemption of subordinated debt
|
|
|
|
|
|
|
|
|
|
|
(5,050
|
)
|
Repurchase of common stock
|
|
|
|
|
|
|
|
|
|
|
(5,989
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Cash From (Used in) Financing Activities
|
|
|
(1,532
|
)
|
|
|
63,123
|
|
|
|
(6,068
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Increase (Decrease) in Cash and Cash Equivalents
|
|
|
(18,046
|
)
|
|
|
8,919
|
|
|
|
4,484
|
|
Cash and Cash Equivalents at Beginning of Year
|
|
|
27,534
|
|
|
|
18,615
|
|
|
|
14,131
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents at End of Year
|
|
$
|
9,488
|
|
|
$
|
27,534
|
|
|
$
|
18,615
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
NOTE 26
|
DISCONTINUED
OPERATIONS
|
On January 15, 2007 we sold substantially all of the assets
of Mepcos insurance premium finance business to Premium
Financing Specialists, Inc. (PFS). Revenues and
expenses associated with Mepcos insurance premium finance
business have been presented as discontinued operations in the
consolidated statements of operations. We have elected to not
make any reclassifications in the consolidated statements of
cash flows.
Funding for Mepcos insurance premium and vehicle service
contract payment plan businesses is accomplished by loans from
its parent company, Independent Bank. Those loans are primarily
funded with Brokered CDs. Mepco is charged interest by its
parent company based upon the amount borrowed at an interest
rate that approximates the parent companys borrowing rate.
Interest expense recorded by Mepco was allocated to discontinued
operations based primarily upon the ratio of insurance premium
finance receivables to Mepcos total finance receivables.
The results of discontinued operations are as follows:
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
Interest income interest and fees on loans
|
|
$
|
976
|
|
Interest expense
|
|
|
328
|
|
|
|
|
|
|
Net Interest Income
|
|
|
648
|
|
Provision for loan losses
|
|
|
8
|
|
|
|
|
|
|
Net Interest Income After Provision for Loan Losses
|
|
|
640
|
|
|
|
|
|
|
NON-INTEREST EXPENSE
|
|
|
|
|
Compensation and employee benefits
|
|
|
229
|
|
Other expenses
|
|
|
(124
|
)
|
|
|
|
|
|
Total Non-interest Expense
|
|
|
105
|
|
|
|
|
|
|
Income Before Income Taxes
|
|
|
535
|
|
Income tax expense
|
|
|
133
|
|
|
|
|
|
|
Income from discontinued operations
|
|
$
|
402
|
|
|
|
|
|
|
|
|
NOTE 27
|
MANAGEMENT
PLANS
|
Our operating results since 2007 have been negatively impacted
by the difficult economic conditions in Michigans Lower
Peninsula. Substantial increases in our provision for loan
losses and other credit and collection costs, and in 2009,
losses related to vehicle service contract counterparty
contingencies, have resulted in net operating losses in 2008 and
2009 and reduced our capital. As discussed in note 21, we
have adopted a Capital Restoration Plan, which includes a series
of actions designed to increase our common equity capital,
decrease our expenses and enable us to withstand and better
respond to current market conditions and the potential for
worsening market conditions. These actions include: (i) an
offer to our trust preferred securities holders to convert the
securities they hold into our common stock; (ii) an offer
to the UST to convert the preferred stock it holds into our
common stock, and (iii) a public offering of our common
stock for cash. We cannot be sure that we will be able to
successfully execute on these identified initiatives in a timely
manner or at all.
101
QUARTERLY
FINANCIAL DATA (UNAUDITED)
A summary of selected quarterly results of operations for the
years ended December 31 follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
March 31,
|
|
June 30,
|
|
September 30,
|
|
December 31,
|
|
|
|
|
(In thousands, except per share amounts)
|
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
47,565
|
|
|
$
|
48,144
|
|
|
$
|
47,905
|
|
|
$
|
45,442
|
|
Net interest income
|
|
|
34,347
|
|
|
|
35,519
|
|
|
|
35,259
|
|
|
|
33,398
|
|
Provision for loan losses
|
|
|
30,038
|
|
|
|
25,593
|
|
|
|
22,285
|
|
|
|
25,116
|
|
Income (loss) before income tax expense
|
|
|
(18,304
|
)
|
|
|
(6,120
|
)
|
|
|
(19,402
|
)
|
|
|
(49,611
|
)
|
Net income (loss)
|
|
|
(18,597
|
)
|
|
|
(5,161
|
)
|
|
|
(18,314
|
)
|
|
|
(48,155
|
)
|
Net income (loss) applicable to common stock
|
|
|
(19,672
|
)
|
|
|
(6,236
|
)
|
|
|
(19,389
|
)
|
|
|
(49,231
|
)
|
Income (loss) per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.84
|
)
|
|
$
|
(0.26
|
)
|
|
$
|
(0.81
|
)
|
|
$
|
(2.05
|
)
|
Diluted
|
|
|
(0.84
|
)
|
|
|
(0.26
|
)
|
|
|
(0.81
|
)
|
|
|
(2.05
|
)
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
53,034
|
|
|
$
|
51,387
|
|
|
$
|
50,623
|
|
|
$
|
48,692
|
|
Net interest income
|
|
|
30,385
|
|
|
|
33,221
|
|
|
|
33,947
|
|
|
|
32,596
|
|
Provision for loan losses
|
|
|
11,316
|
|
|
|
12,352
|
|
|
|
19,788
|
|
|
|
27,865
|
|
Income (loss) before income tax expense
|
|
|
(1,690
|
)
|
|
|
3,815
|
|
|
|
(11,049
|
)
|
|
|
(79,677
|
)
|
Net income (loss)
|
|
|
341
|
|
|
|
3,346
|
|
|
|
(5,326
|
)
|
|
|
(90,025
|
)
|
Net income (loss) applicable to common stock
|
|
|
341
|
|
|
|
3,346
|
|
|
|
(5,326
|
)
|
|
|
(90,240
|
)
|
Income (loss) per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.01
|
|
|
$
|
0.15
|
|
|
$
|
(0.23
|
)
|
|
$
|
(3.92
|
)
|
Diluted
|
|
|
0.01
|
|
|
|
0.14
|
|
|
|
(0.23
|
)
|
|
|
(3.92
|
)
|
During the fourth quarter of 2009 we recognized a
$19.5 million expense for vehicle service contract
counterparty risk (see notes #11 and #20) and
$16.7 million of goodwill impairment (see note #7).
During the fourth quarter of 2008 we recognized
$50.0 million of goodwill impairment (see note #7), a
deferred tax valuation allowance that increased income tax
expense by $27.6 million (see note #13), securities
losses of $6.9 million, impairment of our capitalized
mortgage loan servicing rights of $4.3 million (see
note #4) and losses on other real estate of
$2.3 million.
QUARTERLY
SUMMARY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reported Sale Prices of Common Shares
|
|
Cash Dividends
|
|
|
2009
|
|
2008
|
|
Declared
|
|
|
High
|
|
Low
|
|
Close
|
|
High
|
|
Low
|
|
Close
|
|
2009
|
|
2008
|
|
First quarter
|
|
$
|
3.00
|
|
|
$
|
0.90
|
|
|
$
|
2.34
|
|
|
$
|
14.12
|
|
|
$
|
7.50
|
|
|
$
|
10.38
|
|
|
$
|
0.01
|
|
|
$
|
0.11
|
|
Second quarter
|
|
|
2.90
|
|
|
|
1.11
|
|
|
|
1.32
|
|
|
|
10.98
|
|
|
|
3.66
|
|
|
|
4.00
|
|
|
|
0.01
|
|
|
|
0.01
|
|
Third quarter
|
|
|
2.16
|
|
|
|
1.09
|
|
|
|
1.90
|
|
|
|
8.40
|
|
|
|
2.52
|
|
|
|
6.19
|
|
|
|
0.01
|
|
|
|
0.01
|
|
Fourth quarter
|
|
|
1.89
|
|
|
|
0.59
|
|
|
|
0.72
|
|
|
|
6.95
|
|
|
|
1.48
|
|
|
|
2.16
|
|
|
|
0.00
|
|
|
|
0.01
|
|
We have approximately 2,200 holders of record of our common
stock. Our common stock trades on the Nasdaq National Market
System under the symbol IBCP. The prices shown above
are supplied by Nasdaq and reflect the inter-dealer prices and
may not include retail markups, markdowns or commissions. There
may have been transactions or quotations at higher or lower
prices of which we are not aware.
In addition to the provisions of the Michigan Business
Corporation Act, our ability to pay dividends is limited by our
ability to obtain funds from our bank and by regulatory capital
guidelines applicable to us (see note #21).
102
SENIOR
OFFICERS AND DIRECTORS
INDEPENDENT BANK CORPORATION
SENIOR
OFFICERS
Michael M. Magee, Jr. Robert N.
Shuster James J. Twarozynski
BOARD OF
DIRECTORS
Jeffrey A. Bratsburg, Chairman Donna J.
Banks Stephen L.
Gulis, Jr. Terry L.
Haske Robert L.
Hetzler Michael M.
Magee, Jr. Clarke B.
Maxson James E.
McCarty Charles A.
Palmer Charles C. Van Loan
INDEPENDENT
BANK
SENIOR
OFFICERS
Michael M. Magee, Jr. Robert N.
Shuster Mark L.
Collins William B.
Kessel Stefanie M.
Kimball David C. Reglin Cheryl
A. Bartholic Richard E.
Butler Larry R. Daniel Gary C.
Dawley Michael J. Furst Peter
R. Graves Jose A. Infante Beth
J. Jungel Keith J.
Lightbody Ann M. Lingle Dennis
J. Mack Cheryl L.
McKellar Dean M.
Morse Laurinda M. Neve Shelby
L. Reno R. Darren Rhoads Henry
B. Risley Charles F.
Schadler Raymond P.
Stecko Michael J.
Stodolak Brian R. Talbot James
J. Twarozynski Denise E. Wheaton
BOARD OF
DIRECTORS
Jeffrey A. Bratsburg, Chairman Donna J.
Banks Stephen L.
Gulis, Jr. Terry L.
Haske Robert L.
Hetzler Michael M.
Magee, Jr. Clarke B.
Maxson James E.
McCarty Charles A.
Palmer Charles C. Van Loan
MEPCO
FINANCE CORPORATION
SENIOR
OFFICERS
Robert N. Shuster Theresa F.
Kendziorski Scott A. McMillan
103