Independent Bank Corp (Michigan) (IBCP) 2005 Q2 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to the Independent Bank Corporation second-quarter earnings release teleconference call. At this time all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (OPERATOR INSTRUCTIONS) As a reminder, this teleconference is being recorded. The webcast may contain forward-looking statements as defined in section 27 A-1 of the Securities Act of 1933 as amended, including statements regarding among other things, the Company's business strategy and growth strategy. Expressions which identify forward-looking statements speak only as of the date the statement is made. These forward-looking statements are based largely on this Company's expectations and are subject to a number of risks and uncertainties, some of which cannot be predicted or quantified and are beyond their control. Future developments and actual results could differ materially from those set forth in, contemplated by or underlying the forward-looking statements.

In light of these risks and uncertainties there can be no assurance that the forward-looking information will prove to be accurate. This webcast does not constitute an offer to purchase any securities nor a solicitation of a proxy, consent, authorization or agent (inaudible) with respect to a meeting of Company stockholders. It is now my pleasure to introduce your host, Mr. Michael Magee, President and Chief Executive Officer of Independent Bank Corp. Thank you, Mr. Magee, you may begin.

Thank you. Good afternoon. We are pleased that you could join us on our conference call to discuss second-quarter 2005 results. Joining me this afternoon is Rob Shuster, our corporate CFO and Charles Van Loan, Chairman of the Board. We achieved record earnings in the second quarter of 2005 with net income of 12.1 million, which was up approximately 3.1 million or 35% from the second quarter of 2004 and up 7.3% on a linked quarter basis. Our earnings per share of $0.56 this quarter was up 27% from the year ago comparative quarterly earnings per share of $0.44.

The quarter reflects continued growth in our level of interest-earning assets and our net interest income, as well as only modest erosion in our net interest margin despite the challenges of the flat yield curve environment. Profitability measures remain strong in the second quarter of 2005 with a return on average equity of nearly 20% and a return on average assets of 1.52%. Based on our actual 2005 year-to-date results and our expectations for the remainder of the year, I believe that we could reach the higher end of our estimated range of $2.10 to $2.20 for the diluted earnings per share for the full year.

I am disappointed with the rise in nonperforming loans during the second quarter. Two commercial credits in particular contributed to the half of the increase with much of the balance of the increase being in mortgage loans and finance receivables. We did not have any particular concerns with either of these two portfolios. As many of you know, the Michigan economy is weak with relatively high unemployment rates and sluggish growth. However, other than perhaps the increase in nonperforming mortgage loans, we do not really see this economic weakness as significantly contributing to our increase in nonperforming loans. Rather, it is primarily the addition of a handful of commercial credits that has been the reason for the increase. We will touch on the details of some of these credits later in the call.

Before turning the call over to Rob Shuster I want to emphasize the confidence that I have in the ability of our management team to tackle the increase in nonperforming loans and the diligent focus we will have over the next several quarters in this regard. Rob will now provide some additional details on second-quarter results.

Thanks, Mike, and good afternoon, everyone. As Mike mentioned, the most significant driver of our increase in second quarter 2005 earnings was our growth in net interest income. Tax equivalent net interest income reached $36.1 million in the second quarter of '05, which was up 24% on a comparative quarterly basis and up about 3% on a linked-quarter basis. The increase in comparative quarterly tax equivalent net interest income was due primarily to a $619 million increase in interest-earning assets as a result of our two bank acquisitions that were completed in mid 2004 and growth in commercial loans, finance receivables and investment securities. Partially offsetting this was an 11 basis point decline in our net interest margin to 4.89% from 5% on a comparative quarterly basis.

The increase in linked-quarter tax equivalent net interest income was due to an $80 million increase in average interest-earning assets resulting from growth in real estate mortgage loans, commercial loans and finance receivables, which was partially offset by a small decline in the average balance of investment securities. The decline in investment securities reflects the difficulty in replacing the paydown or maturing of existing investments with new trades that meet our return and risk objectives given the flat yield curve environment.

The growth in total average interest-earning assets was slightly offset by a three basis point decline in our net interest margin on a linked-quarter basis. On a comparative quarterly basis and a linked-quarterly basis our yield on interest-earning assets and our cost of funds both increased due primarily to the rise in short-term interest rates.

Looking ahead, we continue to be relatively balanced in terms of interest rate sensitivity. However, as we have previously indicated, the flatter yield curve currently in place is expected to continue to gradually erode our net interest margin. At the present time we anticipate that continued loan growth will more than offset the impact of any erosion in our net interest margin.

During the first six months of 2005 portfolio loans outstanding increased by $174 million, which is nearly a 16% annualized growth rate. The somewhat slower annualized second-quarter 2005 loan growth rate of 13% primarily reflects a decline in commercial loan growth. We believe this reflects both the relatively sluggish Michigan economy, as well as robust competition for commercial credits. However, we are optimistic that we can continue to maintain overall loan growth in the 10 to 13% range for the balance of 2005.

To give you some additional trend analysis, adjusted net interest income for the month of June 2005 was up approximately $300,000 or 2.8% from April 2005, both of which were obviously thirty-day months. The adjustment I refer to in this analysis for June 2005 is to eliminate the impact of approximately $250,000 that month for the reversal of interest income due to two large commercial credits that were placed on nonaccrual, which I will touch on later in my comments.

Moving on to non-interest income, service charges on deposit accounts were up 16.4% on a comparative quarterly basis and were up 22.7% on a linked-quarter basis. The comparative quarterly increase is primarily due to our two bank acquisitions in '04, and the linked-quarter increase is due primarily to a higher occurrence rate of MSF checks per checking account.

Gains on the sale of real estate mortgage loans were down about 40% on a comparative quarterly basis due to both a decline in the volume of loans sold and a decline in the profit margin on such sales. On a linked-quarter basis gains on real estate mortgage loan sales were relatively unchanged. Our loan sales margin declined by about 20 basis points in the second quarter of 2005 due primarily to a very competitive pricing climate. We had securities gains of about $1.3 million in the second quarter of 2005, which was net of about $100,000 in other than temporary impairment charges. We sold the stock of four community banks that we owned at the Holding Company which generated a gain of about $1.4 million. This portfolio was only generating $33,000 in annual dividend income. So this sale will not have any adverse impact on future earnings.

In fact, the interest income from the reinvestment of the proceeds from the sale of these stocks will more than offset the lost dividend income. Real estate mortgage loans servicing income was down $1.6 million on a comparative quarterly basis and down $890,000 on a linked-quarter basis. These decreases primarily reflect changes in the impairment reserve on capitalized, originated mortgage loan servicing. During the second quarter of 2005 we had a $285,000 impairment charge. Excluding changes in the impairment reserve, we would expect real estate mortgage loans servicing to run at about 400,000 to $450,000 on a quarterly basis.

Noninterest expense totaled $26 million in the second quarter of '05, which was down about $220,000 on a comparative quarterly basis and relatively unchanged on a linked-quarter basis. We would expect quarterly run rate for non-interest expenses to continue at about $26 million for the balance of 2005 barring any unusual charges or expenses. Our effective income tax rate was 29% in the second quarter of '05, which was somewhat higher on both a comparative and linked-quarter basis. This increase was primarily due to tax-exempt earnings, representing a smaller percentage of total pretax earnings and due to a rise in state income taxes. Our assessment of the allowance for loan losses resulted in a provision for loan losses of $2.5 million in the second quarter of '05, which was higher on both a comparative and linked-quarter basis. The increased provision was due primarily to recording a $1.1 million additional specific allowance on two commercial real estate loans that were placed on nonaccrual during the second quarter of 2005.

Nonperforming loans were up to 27.5 million or 1.15% of total portfolio loans at June 30, 2005. The rise since year end was due primarily to a $9.2 million increase in commercial loans, a $1.6 million increase in real estate mortgage loans and a $1.4 million increase in finance receivables. The increase in finance receivables is due to portfolio loan growth and the timing of the receipt of return premiums as nearly the entire balance of the 3.5 million in finance receivables is expected to be recovered upon receipt of return premiums.

As Mike Magee mentioned earlier the increase in nonperforming commercial loans was largely due to the addition of four credits. One of these credits with the balance of approximately $800,000 was brought current by the borrower subsequent to quarter end. Another commercial credit to a contractor has a balance of about $1 million, and at the present time we do not see any significant risk of loss. The two largest credits, both to the same borrower group, one with the gross balance of $3.2 million and the other with a gross balance of $3 million are secured by two low-income apartment complexes in the Saginaw, Michigan area.

These two projects were financed with the combination of our loans and the sale of tax credits. The occupancy rates in these two apartment complexes had dropped to the mid 40% level, which led to severe debt service coverage shortfalls and the current delinquency situation. The general partner in these projects has replaced the managers and recently the occupancy rates have increased into the low 60% level. We just recently obtained new appraisals on these two properties and based on these new appraisals and an updated impairment analysis, we increased the specific allowances on these loans from a total of $200,000 to a total of $1.3 million. We are currently working on a forbearance agreement with these borrowers.

Finally, since I am likely to have some questions in this area, Mepco had a strong second quarter with net income of $2.2 million compared to $2 million in the first quarter. Further, there is nothing new to report regarding the Mepco litigation which is currently in the discovery phase. I would now like to turn the call back over to Mike Magee.

Thank you, Rob. I would now like to open the call up for any questions that you may have for Rob, Chuck or myself.

(OPERATOR INSTRUCTIONS) Brad Milsaps, Sandler O'Neill.

I just wanted to talk I guess a little bit more on the credit. Can you tell us exactly what I guess the loan to value would be on the two largest loans that you added to non-accrual?

Well, what we did is we had brand-new appraisals done that we just received; in fact just a few days after quarter end and then we discount the appraisals down in our impairment analysis. So we actually discount the appraisals by 25%. So we are taking the current value and reducing it by 25%. And then we deduct from that estimated costs to dispose of the property, including holding costs, for example for things such as property taxes. So it is really what you would call a liquidation analysis is what we're doing there. And that is what resulted in the increase from the $200,000 specific reserve to the $1.3 million specific reserve. So we basically now got those credits written down to what we would see as a liquidation value taking into account costs of liquidation and disposal.

Does that answer your question, Brad? The original loan to values were probably in the 70% range, but those appraised values are lower. And it may have been even lower when you take into account the tax credits. But because you have to continue to operate the property as a low income -- and it's got to qualify with a certain percent of the tenants below a certain income level -- it is not like your typical apartment complex. So that is, again, why we had the new appraisal done. So the new appraisal reflects current market conditions.

So you get the appraisal and you reduce that by 25%?

That is correct, and then deduct off of that holding costs and other estimated liquidation costs.

So basically the value to loans now plus what you have specifically allocated kind of gets you back to where you think you will be made whole?

Yes, basically where we think if we had to liquidate the properties, where we think -- and that is taking the 25% discount on the current appraisals. So that is what we are using to come up with that specific reserve. As I mentioned, we are working with the borrowers on a forbearance agreement. I think we are confident that we can get that put together, and it is going to take some time for them to work through this and bring the occupancy levels back up to a level where it would fully debt service. But these are relatively seasoned loans. One was made originally back in 1996, and the other in 1999. And we've had a good track record with the borrowers. So we do have some confidence that they can bring this project back to a level where it's cash flowing.

Can you make any specific comments on watch list loans and things you might be watching closely, how those change from say June 30 to March 31st?

The balance really -- I mean these loans were in our watch credit list. The question was is could we keep them out of nonperforming, could the borrowers sustain enough cash flow to continue to make the payments so it didn't get 90 days or more past due. So these were already in our watch credit list. So actually the watch credit list, the volume there really has not changed. It is just some moved from the watch credit but they weren't nonperforming. They weren't 90 days plus delinquent or not in non-accrual, and they moved into that category. So the actual watch credit list has really not changed.

Can you disclose a dollar figures there?

I do not have -- let me see if I have that here handy.

While Rob is looking at that I would like to add a little additional color I guess of those two credits. Those two specific credits. When those loans were originally made the tax credits, by syndicating those tax credits they provided 50% of the total cost of the project and we financed 50%. So if you are looking at the original balance it was 50% loan to cost. And then, as Rob mentioned, we received new appraisals on the two properties. It did come as a surprise that the two appraisals, even though they are duplicate units came back with different values because one of the properties the tax credits stay with the property a little longer than the other, and there was also a difference in occupancy rates between one of the units in the other unit. So the values between the two were just a little bit different. So we had to write down one of the loans more than we had to write down the other one I guess is what I'm saying. Going with Rob as he shared with you already the 114 impairment analysis.

And then final question and I will step back. You had some really, really nice growth linked-quarter in the NSF fees. Do you have any concerns about the consumer? That is a pretty big jump. A lot of people have been talking about just a seasonal rebound, but are you seeing any trends there that lead you to believe there is something else going on that got such a large jump in your NSF fees?

I think, Brad, the first quarter was lower than what we historically experienced and the second quarter was back to a more normalized level in terms of an occurrence rate or frequency. So I don't -- I guess what is difficult is we are not quite sure what happened in the first quarter. But I think I saw several other banks that experienced the same kind of decline and it did rebound. So I guess it is difficult to project. The one thing I would say is there are lots and lots of accounts. So the frequency is still relatively low when you look at it on a per account basis. So whether that is going to change because of economic circumstances I guess that is difficult to project. Certainly it did rebound in the second quarter.

Okay, great. Thank you.

Kevin Reevey, Ryan Beck.

Rob, can you walk us through kind of how we should be thinking about the tax rate going forward for the rest of the year?

I think it is probably going to tend to be more what you saw in the second quarter, maybe a little bit lower. It is a couple things, Kevin. One is that I said the percentage of tax-exempt income to total pretax earnings is a little bit lower. So you don't have as much income that is not being taxed. And I would suspect that is going to continue to be the case a little bit. In other words the growth in pretax earnings is probably going to be more rapid than the growth in tax-exempt earnings because as I mentioned earlier with the flat yield curve it is a little bit more difficult to find investments. Although I will say whatever investments we do are likely to be in the municipal area because we are finding at least better returns there than say in the AAA market, whether it is mortgage-backed or other asset-backed or agency type investments.

But still that is probably going to lag behind the other areas in terms of what is generating income growth. And then the other factor is because of Mepco's operations being kind of across the country it does have state income taxes. Now our banks have state income taxes, but in Michigan its a Michigan single business tax which is like an ad valorem tax. And that is up in other expenses. So that has been going up, but it is not down in provision for income tax expense. So what you're seeing there is some rise in state income taxes because Mepco's earnings have come up. So those are the components that have moved us up from about 25.5, 26% closer to 29%. And I don't see those as changing. So I suspect we will be more around 29%.

And then going forward should we expect to see you sell additional securities like you did this quarter, and is that in part of the guidance that you've outlined today on the call?

No, and we don't anticipate -- I mean, the sale we did this quarter was more of an opportunistic thing. Just to briefly touch on it, our banks can't own stocks in other institutions. That is not a permitted investment. You can at the Holding Company, and we had owned these bank stocks for several years. And as I mentioned, they were low or no dividend paying stock. So they are only generating about $33,000 in annual income. And at the Holding Company level we really have to support them dollar for dollar with capital. So if you kind of work out the ROE on those things it was pretty low.

So we just looked at them and got some updated prices on where we might be able to sell them, and it just struck us that it was a good opportunity. And plus just by reinvesting the proceeds all you needed to do was earn 1.7% on reinvesting the proceeds and you more than made up the $33,000 in lost dividend income. So it was really more an opportunistic kind of circumstance there. If you look historically we have not really generated or looked to generate securities gains in the portfolio. So we don't expect securities gains for the balance of the year, and it is not in the guidance that Mike like provided.

Okay, thanks, Rob.

Jason Werner of Howe Barnes Investments.

My first question a couple of quick questions relate to Mepco. At the end of the quarter it looked like the finance receivables were about 14.4% of total loans, and I was curious if the size of that is kind of getting at the high end of your comfort range. And two, the related part of that question is you guys have talked in the past about securitization of those receivables, if there is any change with that.

I'll take your second question first, which is yes, we are still looking at a project in terms of the potential securitization. We are looking at maybe $150 million three-year facility, and we hope to have something in place prior to the end of the year. But with respect to the earlier part of your question, other than the fact they do present -- I won't say a challenge from a funding perspective -- but other than securitization we basically have to either use brokered CDs or other borrowings to support the growth of those receivables. And so that creates some just liquidity issues, although the brokered CD market is an extraordinarily liquid market. We have been easily able to fund that growth, and we certainly can fund quite a bit more growth there.

And in terms of its percentage as a portfolio or of the total loan portfolio I would just make a couple comments which is one, they are short-duration assets. They range from probably about nine-month durations or nine-month maturities to 24-month maturities, so they are short duration. They are relatively high yield, and finally our experience has been the credit aspects have been very good relative to those loans. I guess you could just view them -- if we just stuck them up in the commercial loan portfolio it probably wouldn't raise the questions. But by and large that is what they are at least on the premium finance side is their short-term commercial loans to businesses. It is just they have got a kind of unique kind of collateral in terms of the cancellation of the insurance policy if the borrower defaults. So I think we are looking at the securitization more from a liquidity perspective than the perspective of do we have a concern if those loans become a certain percent of the portfolio.

Okay, and also with the finance receivables on the nonperforming status, obviously you guys say that is kind of a timing issue when you guys get the money back from the insurers. What is the timing frame of that? Do these things kind of roll over on a quarterly basis, so that 3.5 million you will have that money just beyond the third quarter, and by the end of the quarter, there will be new ones that are on that list?

That's exactly how it works. Typically you get most of your dollars in between the 90th day and the 120th day. If you kind of walk through the cancellation process, the cancellation may become effective at about the 40th day of delinquency. And then typically carriers will take as much time as they can. It is obviously a cash flow issue from the carriers' perspective. Sometimes you have to push them a little bit but they will typically take at least 60 days to return the premium. So that gets you out to about 100 days. Just to give you a couple more details there, the amount of that 3.5 million you can strip off 2.5 million between that are between 90 and 120 days. So there is very little that gets beyond 120 days, and then of that total amount only about 60,000 is what we would call unsecured. The rest of it is completely secured by return premiums from insurance carriers. So we foresee very little risk with respect to those nonperformers.

Unfortunately, they add to our overall level of nonperforming assets. But historically we've had very few issues with those items. And as you point out, Jason, it is kind of a revolving thing. They move in to get the return premium. It pays you down. They go away but then you have the addition of new items coming through.

One last question and I will turn it over to somebody else. In the commercial portfolio obviously there wasn't a lot of growth this quarter and you guys have kind of treated that to the Michigan economy and competition. I was just curious if there was any significant payoffs that might have offset some activity in the quarter.

Jason, there was some payoffs that we experienced during the quarter. But what we have found -- we anticipated that a lot of the commercial loans that we closed in the first and the beginning of the second quarter there were a lot of development projects, and I think the banks expected that the draws on those projects would take place a little bit faster than they did. And so we have quite a few commercial loans that we are expecting those to grow in balances in the third and fourth quarter as those developments mature and the contractors take their draws. But we did see it wasn't heavy payoffs but we did definitely lose some of our commercial loans because we just refused to compete on the price that they were being offered.

Okay. Thank you.

Kenneth James, FTN Midwest Securities.

Good afternoon, gentlemen. Rob, when you were running down your income statement analysis and outlook for the second half, did you give up, did I hear you give a margin outlook or am I hearing things?

I didn't give a margin outlook. What I gave you was some detailed trend analysis where I compared -- I basically said June 2005 net interest income was up about $300,000 or 2.8% from April 2005. So I kind of just tried to break down the quarter and say a margin, the net interest income was moving higher during the course of a quarter. And I have to compare months that have the same number of days because 31 day months our net interest income is typically a little higher than 30 day months. So that was kind of the analysis. We were down three basis points on a linked-quarter, and we have been seeing a gradual, some gradual pressure because of the flat curve and so we didn't really give any specifics other than what I told you about the trend. I did also say that we would anticipate that the growth in earning assets would more than offset any push the other way because of some gradual erosion in the margin.

Okay. Second question is in relation to the guidance if you exclude the securities from this quarter that implies something like a 56 or better, $0.57 run rate over the back half of this year. I was wondering if you could tell me a little bit about what you see as the key drivers for that kind of EPS growth.

I think if you exclude -- also, though, we had about 300,000 in temporary impairment charges. So you probably got more like $1 million if you net those two, which on an after-tax basis is somewhere in the order of $0.03 a share or so, you're at 53 or so. And we have had we think pretty good margin growth on a sequential quarter or not margin growth but net interest income growth on a sequential quarter basis. And we would hope, too, that although it is probably not going to be at the level it was in the second quarter of '04, but we would hopefully get a little back off on the provision for loan losses from the 2.5 million we recorded in this quarter. So I think it is a combination of growth in net interest income and maybe a little relief on the provision side.

Okay. Thank you.

(OPERATOR INSTRUCTIONS) Peter Mott, Deutsche Bank.

Talk to me a little bit about loan demand, particularly commercial loan demand and the impact of a very kind of weak state economy and sort of what you see for the next 10 to 12 months. That would be question number one, and question number two would be talk about if you will please, about further consolidation, further opportunities to make acquisitions.

Peter, those are both excellent questions. In the next 10 to 12 months the banks still seem very optimistic about the loan demand that they are currently experiencing. Again, we are going into the third and fourth quarter with a strong pipeline. As I mentioned, we have several closed commercial loans that have yet to be funded. So as far as over the next six months anyway we feel very comfortable or the banks do with what they have budgeted for commercial loan growth. There is concern about what the Michigan economy, the impact it may have on our banks in 2006. However, again in spending some time with the bank presidents, they have been during 2005 adding staff or commercial loan lenders who already are experienced and have a book of business in those markets. So they are anticipating through the growth of commercial lenders this year that they will see the benefit in 2006.

In Oakland County especially we have a pretty small market share in that area. And we have added a couple originators that we feel, and we already have started seeing a benefit from those relationships. So I guess, Peter, by adding originators who are already experienced, have a book of business and have several customer relationships, we are hoping that a lot of our growth will come from them. And then currently what we have in the pipeline and what we've already closed and funded.

What we are finding in Michigan is pretty quiet right now on the M&A front. It had not heard or seen a lot of announcements. I believe that is because a lot of the smaller banks are spending a lot of time in 2005 preparing for S-OX for '04, which we had to do last year. And maybe in talking to a lot of the investment bankers they are hoping that it will pick up, and so are we at the end of this year and definitely beginning of next year.

One comment to add on the M&A front and I think that there can still be a bit of a difference between what seller's expectations are and what we're willing to do from a buy side. And I think until those get closer, and there hasn't even been a lot of activity but that is probably maybe another factor that has slowed things down.

Christopher Nolan with Oppenheimer.

Rob, do you have a target level for your loan loss reserve ratio?

No, we have a model we run. In fact, that is not in accordance with GAAP, Chris, so we couldn't even -- you can't have that. The SEC would have a field day with someone who approached it on that basis. We run a model that we have been running consistently for many years, and it is a combination of several items. It takes into account portfolio mix. It takes into account charge-offs. It takes into account specific reserves on loans that are impaired. It takes into account reserves based on our rating system for commercial loans. And we just run that model the same way we have, and it produces what the allowance should be and then we adjust to bring the allowance to the figure that the model indicates it needs to be at. And it has nothing to do with what percent it is to the loan portfolio.

Now two things I will point out that on a comparative basis would probably cause our ratio to be lower than maybe someone who has a higher concentration on commercial loans is a couple things. One is one-to-four family loans is still a relatively decent chunk of our total loan portfolio. And the allowance associated with those loans is quite a bit lower because of the historical losses and what we would expect to be the losses in that portfolio. And the same thing holds true for the finance receivables where we have had very low losses with respect to those loans and so the allowance again reflects that type of activity. So the combination of those two items is probably half the portfolio, which is at the lower end.

So if you were to take our allowance of 1.06 or 7% whatever it is and start to look at it as a component of those different loan categories I think you would have a much different view of it than just looking at it in its entirety. In other words, you would see higher allocations into the commercial and consumer areas where you historically had more of your charge-offs. So I think you've got to really look at it on that basis and that is what our model does.

And (indiscernible) balance sheet growth in the quarter was affected by acquisitions in 2004, correct?

If you -- I guess I'm not sure what period you are comparing to. If you are comparing to June of '04 it would, because you didn't have Gaylord in there. If you're comparing it to December of '04 or March of '05, I mean all the acquisitions were already in the balance sheet. So what we would have is we would have the additional growth opportunities that we may have been able to take advantage of by having added new markets in Gaylord and southeastern Michigan. But all the December 31 '04 numbers include all the acquisitions.

Yes, I was thinking June '04.

In June of '04 Midwest would have closed because that closed May 31. But Gaylord had not. Gaylord closed on July 1 and Gaylord was roughly 150 million in assets. And maybe 100 million in change or so in loans. So that was not in the June '04 numbers. That didn't close until July 1.

What I was trying to get to is what was the organic loan growth earning asset growth?

From June of '04 to June of '05?

Correct.

Well, if you just take out 100 million from June of '05 for the Gaylord acquisition and then compare them and that should give you a pretty good -- I don't have my -- let me look.

I can do it. That's fine.

That would give you a very close proximity of what the organic growth rate was.

Great. Those are my questions. Thank you.

Jason Werner with Howe Barnes Investments.

My question relates to the growth you've had in your non-interest-bearing deposits. On a linked-quarter basis it was pretty strong. I was wondering if you can give some color as to where that came from and your general outlook on deposit growth for the rest of the year.

I know Independent Bank in Bay City and Independent Bank West had -- and Independent Bank East actually had success in their treasury management area during the month. Just completed some board meetings where they shared with the boards some successes with some specific relationships that brought in substantial dollars during the quarter. And these were new relationships, one loan brought in $20 million of new deposits. So we have been emphasizing, the banks have been quite a bit in the area of treasury management services. And again we are seeing quite a bit of success in that area so most of our growth has come from municipal money and new commercial loan relationships.

You said the East part of the franchise that was a new product for when you guys bought Midwest Guaranty so you are seeing some (inaudible) there?

We had the products but we didn't have -- they didn't have the products when we be acquired them. And so we've been expanding those relationships to go beyond the commercial loan relationship to also include depository products.

What was your outlook for the rest of the year in terms of loan growth?

Deposit growth?

Entire deposit growth.

The banks have budgeted a plan just to not a lot, Jason, but they had single digit growth anyway in deposits.

We are seeing in particular that it has been a tough market for core deposit growth. You had I think post the stock market kind of decline some good years there, but I think this year has been a little bit tougher. And then I think the other thing is trying to hold the line on some of the core deposit rates with this flat curve environment puts a little bit of pressure on you, because you are trying to find that right balance where you're not paying extra dollars that you don't want a flight of money out the door seeking higher yields in areas like your money market accounts. So I think it is a somewhat challenging environment right now.

Thank you.

John Rodis, Stifel Nicolaus.

Rob, you talked a little bit about the potential for securitization of some of the Mepco loans. Do you have any -- I mean if you were to do that would the loans end up coming off the balance sheet, or have you really identified what sort of structure you would end up using?

Yes, that is -- we are really trying to get a structure that would allow the loans to come off the balance sheet. Because that is really the way it would work from an economic standpoint. Because the securitization the all in cost would probably be about 50 basis points more than what we can fund it on balance sheet. But if we get enough capital relief we could redeploy that capital to make up for the impact of that 50 basis point hit if it is $150 million facility. So we really need to get that off balance sheet treatment. And as you can imagine now getting off balance sheet treatment for these types of facilities is a bit more challenging. But we think we've got a structure that would qualify on that basis.

And then you would get into if we did this, gain on some gain on sale because we would retain a residual piece that we would have to keep capital on dollar for dollar. And then we would have to on an ongoing basis evaluate that residual. Now the one good thing about finance receivables, you are probably remember a lot of people if they were securitizing things like home equity loans or things of that nature you could have a lot of problem with the residuals to the extent you get a lot of prepayment activity and that type of thing. The nice thing with the finance receivables is they are very short in duration and the prepayments are very predictable. So in terms of evaluating or valuing that residual, it is a lot more predictable so you don't kind of get the readjustments of it that would be of any significance.

That makes sense. Nice quarter.

Bryce Rowe with Legg Mason.

Just a question about capital. Rob, what is the target tangible capital ratio, and what is your appetite at this point for stock repurchases? Thank you.

Well, we don't historically we have not wanted to go below kind of 5% at the low end on the tangible capital ratio and somewhere in the 5.5 to 6.5 is probably where we kind of felt comfortable that that is a good balance between aggressively managing our capital and the kind of safety and soundness considerations we have as a bank and what the regulators look for. So we are pretty much in that range. I think the thing that with share repurchases and we still have some authorization and we have not been doing very much of it, but we would rather be growing the balance sheet than doing share repurchases. Share repurchases are lower on our list of items.

I mean we would prefer to use the capital and be able to grow assets and generate higher earnings. And we run models here, and we could even accept a lower return on equity in terms of maybe where we would price loans at if it would give us good incremental growth and the credit quality warranted that. And that is more accretive to earnings per share than repurchasing your shares in that first strategy of growing the balance sheet is not dilutive to book value per share or tangible book value and share repurchases obviously are dilutive to both of those. So I would say our appetite for share repurchases is not great right now.

Certainly if we experience weakness in our price so it was at a level where we said it is really attractive because it had dropped quite a bit, then that would be a different story. But right now I think we would rather try and see if we could grow our balance sheet and grow earnings and not have the dilution to book value in tangible book.

Thank you.

There are no further question at this time.

Thank you very much, and I would like to on behalf of Independent Bank Corporation thank everyone for participating in our 2005 second-quarter conference call. And look forward to visiting with all of you in the near future. Goodbye.

This concludes today's teleconference. Thank you for your participation.