Independent Bank Corp (Michigan) (IBCP) 2009 Q3 法說會逐字稿

Hello and welcome to the Independent Bank Corporation third quarter 2009 earnings conference call. All participants will be in listen-only mode. (Operator Instructions) After today's presentation, there will be an opportunity for you to ask questions. (Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to Michael Magee, President and CEO. Mr. Magee?

Thank you, Amy. Good afternoon, everyone and welcome to our third quarter 2009 conference call. I am Mike Magee, President and CEO of Independent Bank Corporation. Joining me on the call today are three of our executive vice presidents, Rob Shuster, our Chief Financial Officer, Stefanie Kimball, our Chief Lending Officer, and Brad Kessel, our Chief Operations Officer. Following my introductory comments, Rob will provide a detailed review of our financial performance during the third quarter. Following Rob's comments, Stefanie will provide a progress report on credit quality for commercial loans, and Brad will provide an update on our retail lending. We will conclude the call with a brief question-and-answer session.

An accompanying PowerPoint presentation will be referenced throughout today's call. To access this presentation, please go to the Investor Relations section of our Website at www.ibcp.com. Please also note that this presentation may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Please refer to our Safe Harbor Provision on slide two of the presentation for additional information on forward-looking statements.

I will begin today's discussion with a brief review of our third quarter as summarized on slides four and five of the accompanying slide presentation. For the third quarter ended September 30th, 2009, we reported a net loss attributable to common stock of $17.8 million or $0.74 per share, compared to a net loss from continuing operations of $5.3 million or $0.23 per diluted share in the third quarter of 2008. The year-over-year decline in quarterly results is largely attributed to an increase in our provision for loan losses of $2.5 million and non-interest expenses that rose by $12.9 million to $43.6 million.

The increase in non-interest expense included an $8.7 million charge to accrue for estimated losses from vehicle service contract counterparties, which I will address in a moment. Without this charge, non-interest expenses would have increased $4.2 million in the quarter, which included a $1.6 million increase in loan and collection cost, a $1.5 million increase in deposit insurance expense, and a $1.5 million increase in losses on other real estate and repossessed assets.

Let me take a moment to address our charge for estimated losses related to vehicle service contract counterparty risk related to payment plan business at our Mepco unit. These payment plans permit a consumer to purchase a vehicle service contract or product warranty and make installment payments generally for a term of 12 to 24 months. These payment plans have experienced increased rates of default and cancellation over the past two quarters, and as a result, any unpaid balance of the payment plan must be collected from both the counterparty that sold the vehicle service contract or product warranty and the counterparty that provided the coverage.

Certain counterparties have defaulted or may default in their contractual obligations to Mepco and in our continuing efforts to be proactive in dealing with these types of issues, we recognized this expense during the third quarter. Our provision for loan losses in the quarter was $22.3 million in the third quarter, an increase of $2.5 million compared to a year ago, but an improvement of $3.3 million or 12.9% from the second quarter. This marks the continuation of the positive trend we've seen so far in 2009.

Despite this recent improvement, the weakened state of the Michigan economy has continued to create challenges within IBC's lending portfolio as we deal with elevated levels of non-performing loans and the credit costs associated with managing them. As we have stated in past quarters, to help address these issues we continue to work very closely with our borrowers to identify the best possible outcomes for both them and the bank.

While we are disappointed in the reported quarterly loss, we did make continued progress on a number of fronts and I'd like to share with you some key positive takeaways from the quarter. First, we have made progress in managing our credits despite the ongoing contraction in the Michigan economy and its impact on the communities we serve. By working closely with our consumer and business customers to find the best solutions for everyone involved, our proactive efforts to manage our asset quality has resulted in two consecutive quarterly decreases in non-performing loans.

In addition, delinquencies in our 30 to 89 day consumer and mortgage portfolios have also decreased. We will continue to actively monitor and manage our asset quality. In just a moment, Stefanie and Brad will speak to these efforts in greater detail.

Second, our core pretax, pre-loan loss provision earnings showed a solid performance once again, growing more than 7% from a year ago, reaching $18.2 million. This performance forms the basis of our optimism in IBC's ability to generate improved results when more normal economic conditions return. Additionally, our net interest margin continued to perform well, reaching 5.15%, up from 4.76% one year ago and comparable to the 5.21% as reported in the second quarter. Our current margin continues to be among the best in the banking industry and our regulatory ratios remain well above the minimum required to be considered well capitalized.

Adding to the strength of our balance sheet is the deposit growth we have achieved. Independent Bank Corporation deposits totaled $2.49 billion at September 30th, 2009, representing an increase of $419.4 million since year end, which is primarily attributable to increased savings and interest bearing checking accounts and brokers' certificates of deposit. The deposit growth reflects the hard work that the entire Independent Bank Corporation team in remaining focused on our community banking routes and bank wide directive to grow deposits and enhance asset quality.

Although we have made progress in managing through this difficult economic cycle, many challenges remain. In our continuing efforts to be proactive, we have announced a number of steps to conserve cash and improve our capital position. First, we announced that we would be suspending the dividend on our common stock and deferring the interest or dividends on our trust preferred securities and preferred stock. We anticipate these actions will result in a combined cash savings of approximately $10 million. In addition, we announced our intention to conduct a special meeting of shareholders to consider a proposal to amend our articles of incorporation, to increase the number of authorized common shares to $500 million.

This approach is intended to provide us with the flexibility to raise additional capital to solidify our financial position in the face of continued economic weakness in our core markets. While we are still developing our strategy to raise additional capital, the increase in the number of authorized shares is a necessary step in this process.

The current downturn has created some of the greatest challenges in our history and it has shown few signs of easing in the near term. Even so, our entire team is fully engaged at continuing to manage through this difficult cycle. While we remain cautious in the near term, we are optimistic about the long-term future of Independent Bank Corporation and we remain focused on building and maintaining a strong foundation for improved performance once the economy recovers.

With that, I will now turn the call over to our Chief Financial Officer, Rob Shuster, for a further review of our financial performance during the quarter.

Thank you, Mike. Good morning. I am starting at page seven of our presentation, which summarizes the various items impacting third quarter 2009 results. As Mike mentioned, our loss was pretty much entirely driven by elevated credit costs, as well as the charge at Mepco for estimated losses associated with vehicle service contract payment plan counterparty risk. In addition, we recorded a $0.8 million impairment charge on capitalized mortgage loan servicing rights.

There were several positive factors evident in our third quarter 2009 results. Most notable was the continued strength of our net interest margin and well-controlled non-interest expenses when factoring out loan and collection expenses, losses on other real estate, FDIC insurance, and the aforementioned charge at Mepco. In addition, both non-performing loans and non-performing assets declined for a second consecutive quarter. Total assets were flat $2.96 billion as of September 30, 2009. We did, however, see a shift in certain categories with loans declining by a 9% annualized rate in the third quarter and a substantial increase in cash balances at the Federal Reserve Bank as we expand our liquidity.

We also experienced strong growth in core deposits, with checking, savings, and money market account balances up nearly $187 million or just over 15% from year end 2008. Also, brokered CDs were up $347 million and borrowings were down $380 million due to our liability duration extension program, as we have substantially replaced all short-term borrowings with longer-term, callable, brokered CDs.

Page eight provides an update on the valuation allowance on our deferred tax asset. The income tax benefit recognized during in the three and nine month periods in 2009 were the result of current period adjustments to other comprehensive income. As I mentioned last quarter, generally, the calculation for the income tax provision or benefit does not consider the tax effect of changes in other comprehensive income, which is a component of shareholders' equity on our balance sheet.

However, an exception is provided in certain circumstances, such as when there is a pretax loss from continuing operations. In such a case, pretax income from other categories, such as changes in our other comprehensive income, is included in the calculation of the tax provision for the current year. For the third quarter of 2009, this resulted in an income tax benefit of $1.6 million. This benefit was offset primarily by some state income taxes at the stand-alone subsidiary level and some Federal alternative minimum tax on certain preference items.

The total valuation allowance on deferred tax assets of just over $49 million at the end of the quarter represents $2.05 per common share, and is a potential future source of capital once we return to profitability on a consistent basis. Mike mentioned in his comments the growth in our pretax, pre-provision core operating earnings. The table on page nine provides details on this non-GAAP measurement, which we believe demonstrates our ability to navigate through this difficult credit cycle and our capacity to absorb credit costs. This capacity has remained strong in 2009.

Pages 10, 11 and 12 of our presentation provide information on our tax equivalent net interest margin, net interest income, and some various factors impacting the third quarter. We continue to exercise discipline in pricing both loans, including the use of interest rate floors and deposits. Such discipline is a primary factor leading to our strong margins as well as the change in loan mix. The net interest margin was up by 39 basis points year-over-year and was down just a bit on a link quarter basis. The link quarter decline was due to the aforementioned liability duration extension program and a buildup of liquidity on the balance sheet in the form of balances at the Federal Reserve Bank. At September 30, 2009, these balances totaled just over $111 million with a yield of a quarter percent. This compares to a balance of just $200,000 at the end of 2008.

Page 12 summarizes various items impacting third quarter net interest income. One positive trend to note is the decline in the average balance of non-accrual loans during 2009. Page 13 provides information on our tax equivalent net interest income and margin sensitivity, based on our September 30, 2009 balance sheet. As you can see in the base case, tax equivalent net interest income is about $141.8 million compared to an actual annualized level of about $142 million in our third quarter, and the tax equivalent net interest margin is about 5.3% in the base case.

Moving on to some of the more significant categories of non-interest income on page 14 of our presentation, service charges on deposit accounts and Visa check card income remained steady this quarter. Mortgage loan servicing produced a loss of $500,000 in the third quarter. Mortgage loan interest rates moved down a bit during this quarter. This led to a decline in the fair value of our capitalized mortgage loan servicing rights at quarter end and an $800,000 impairment charge. As you may recall, last quarter we recorded a $3 million recovery of previously recorded impairment charges. In addition, the amortization of this asset also increased by $400,000 during the third quarter as actual prepayments increased on a year-over-year basis. Absent impairment charges or recoveries of such charges, and assuming a more normalized level of amortization, this line item should run at about a positive $650,000 per quarter.

Because of the relatively low mortgage loan interest rates, we are still experiencing fairly strong refinancing volume. Gains on mortgage loan sales totaled $2.3 million in the third quarter, which is up on a year-over-year basis but is down from the second quarter of 2009. Mortgage loan origination volume and loan sales volume increased by 48% and by 174% respectively over the third quarter of 2008. Given current mortgage loan interest rates and due to seasonal factors, we do expect to see some further moderation in gains on mortgage loan sales in the first quarter compared to the second and third quarters of 2009.

Moving on to page 15 of our presentation, as Mike discussed, the increase in total non-interest expense over the year ago quarter was due to higher loan and collection costs, increased losses on other real estate owned, higher FDIC insurance costs, and the aforementioned charge at our Mepco unit. Excluding these four items, non-interest expenses fell by about $400,000 or 1.5% on a year-over-year basis.

Page 16 provides some additional information on the charge that we recorded for estimated losses related to our vehicle service contract payment plan business. Mike discussed this charge in his opening remarks. Historically, Mepco had very few losses from counterparty defaults in their obligation to return funds in the event of a cancellation of a payment plan. For example, during the first nine months of 2008, we had no counterparty defaults and finance receivable net charge-offs were only about $20,000. However, payment plan cancellation rates have increased as well as the incident of counterparty defaults in the last two quarters, leading to the above referenced charge.

In the second quarter of this year, this charge was approximately $2.2 million and was originally classified as part of our provision for loan losses. However, we have reclassified the amounts associated with these estimated losses from counterparty defaults to non-interest expense. Despite these charges, Mepco still recorded net income of $1.5 million in the third quarter and $11.1 million during the first nine months of 2009, which is an annualized ROA of over 3.5%.

Pages 17 through 21 of our presentation provide information on the provision and allowance for loan losses as well as net loan charge-offs. As you can see, we built the allowance as a percentage of portfolio loans to 3.09%, and as a percentage of non-performing loans to 63% during the third quarter. Brad and Stefanie are going to cover credit quality in detail, so I will now move forward to Page 22.

Page 22 has details on our securities available for sale at quarter end and provides both the cost basis and current market values. As I mentioned last quarter, in April 2009 the FASB issued updated guidance on fair value and other than temporary impairment. We have adopted this new guidance in the second quarter and did not have any other than temporary impairment charges on investment securities during either of the last two quarters.

Page 23 covers our regulatory capital ratios. As you can see, we remain well capitalized, although these ratios are down from the end of 2008 due to our loss for the first nine months. As I have mentioned previously, one method to increase these ratios that should not be overlooked is reducing total assets. Since the end of 2006, we have reduced our total assets by $443 million, or 13% while still increasing our net interest income.

Page 24 provides some observations on liquidity and capital. At September 30, 2009 our parent Company had approximately $22.3 million of cash on hand. In addition, our bank subsidiary continues to have ample unused borrowing capacity, which totaled approximately $854 million at the end of September.

We have now substantially completed a strategy to replace the majority of our short-term borrowings at the Federal Reserve Bank or Federal Home Loan Bank with intermediate term, which is two years to five years, callable brokered CDs to further improve our liquidity profile. Cash and cash equivalence now represent 6.2% of total assets at September 30, '09, compared to 2% of total assets at the end of 2008. This strategy has increased our cost of funds compared to the interest rates on the short-term borrowings that were paid off, but we believe the liquidity benefits currently outweigh the impact on funding costs.

As I have mentioned previously, in the first quarter of 2009, the Federal Reserve Bank issued SR09-4. This document discusses capital and the payment of dividends. The document reiterates the Feds' view that voting common shareholders equity should be the dominant element within Tier 1 capital. The initiatives that we expect to undertake to bolder our capital will keep this regulatory guidance in mind, particularly our common equity levels. Mike has already covered in his remarks the suspension of our cash dividend on common stock and deferral of interest or dividends on our trust preferred securities and preferred stock, all effective as of November 1, 2009. These were extraordinarily difficult decisions, but given our recent losses and the ongoing challenges in the Michigan economy, we believe that preserving cash at the holding company is prudent at the present time.

That concludes my prepared remarks and I would now like to turn the call over to Stefanie Kimball.

Thanks, Rob. Good morning, everyone. My remarks will start on page 26 of the presentation. While we continue to be concerned about the uncertain economic environment, there are a number of positive signs within our commercial loan portfolio that I would like to highlight this quarter.

First of all, the decline in both non-performing loans and non-performing assets are encouraging signs. These improvements have been aided by the transactions negotiated by our special assets team and a slowing of new defaults, which was experienced in both the second and the third quarters. Further, the mix of our non-performing assets is also improving with more loans moving into ORE for disposition.

Charge-offs declined by 55% in our second quarter and 69% in the third quarter as compared to our first quarter 2009. These improvements are due to two factors. First, we witnessed a slowing of the default rate in both the second third quarters. And second, we were very aggressive early in the process by writing down a number of non-accrual loans to position them for sale or resolution. Another encouraging sign is the commercial loan delinquency rate, which continued to be well managed at 1.4% for the 30 plus accruing loan, or about $12 million.

Despite these positive trends, we remain cautiously optimistic as there are challenges that we will likely face. The continued economic stress from the Michigan economy has caused a lot of stress with our clients. We have been in a recession or downturn now for several years, which has taken quite a toll. The increased stress on the income producing real estate segment of the economy has been seen. While our overall default rate has declined, the defaults that we are experiencing have been concentrated in this segment. This has received a lot of media attention nationally. And then thirdly, the watch credits did increase $4 million to $209 million during the third quarter, but they are consistent with the level of a year ago. The increase in the quarter is primarily attributable to, again, our proactive approach in classifying credits as watch at an early stage.

Turning to page 27, an overview of our portfolio segmentation can be found. Our strategic decision two years ago to contract commercial real estate lending has reshaped our portfolio. We have had approximately a 59% decline in the high risk categories of land development, and construction segments. Our remaining exposure in those three areas is now $95 million.

Turning to page 28, we have added a new slide given the recent media attention and industry report on income producing real estate and the expectations that this will be the focus of the next wave of credit concerns. This slide provides further details on the component of the income producing segment and its granularity. We continue to be very proactive with this area of our loan portfolio. For example, recently we conducted our annual review of all significant commercial real estate exposures and provided our lenders further training and market information on the income producing segments. This is in addition to the other credit best practices that have been implemented. Overall, we have a good diversification among the portfolio types in terms of size and sector of loans, and again our strategic decision to deemphasize commercial real estate in general curtailed a new loan origination several years ago, which gives us a fairly seasoned portfolio.

Turning to page 29, our commercial loan balances, and total continued decline as clients focus on paying down their debt and new loan demand remains fairly weak. Turning to page 30, as previously highlighted, the watch credits increased $4 million during the third quarter and are comparable to a year ago. The decrease in the non-accrual segment can be seen, while the internally monitored and substandard loan levels increased. The inflow of credits into these categories has flowed and is now primarily driven by income producing real estate clients that have experienced reduced runs or other operational challenges.

A key difference with this segment as compared to the land and development investors is that reduced income is a lot easier to work with than no income, which is characterized as a development project. The major challenge for our clients in this segment is the fact that taxes have remained consistent, while income and property values have fallen. The lag in value recognition will continue to stress this segment in 2010.

Our delinquencies are highlighted on page 31. We continue to exert strong early collection efforts and administrative discipline, which have resulted in relatively good levels of delinquency. This category has improved during the third quarter and has been in a consistent band over the last year. Turning to page 32, we made good progress on working through our non-accrual loans, as evidenced by a $4 million or 10% decrease in the third quarter and a $21 million decrease from year end. We continue to target key loans for settlement or disposition and shift resources to facilitate these transactions. We anticipate fewer transactions during the winter months, which are seasonally much slower in Michigan for real estate purchases of all kinds.

Turning to page 33, non-accrual loans totaled $55 million at the end of the third quarter and charge-offs or reserves are in place for approximately 50% of the loan amount. This has been a consistent level for the past three quarters and reflects the Michigan market realities. The land development and construction segment continues to account for about 50% of our non-accruals. Income producing real estate accounts for 31% of the non-accruals currently and reflects a shift in the stress experienced in this real estate market.

A primary challenge that we have seen in this segment is single tenant properties where a tenant has vacated. Given the depressed real estate market, a number of companies are shifting to buying their own buildings and vacating their leased premises. Landlords then struggle to attract new tenants.

Turning to page 34, the effective management of our non-performing assets has resulted in a reduction in each of the past three quarters. Commercial non-performing assets declined 3% in the third quarter and 13% since year end. While the overall number is declining, we continue to also see a shift in the loans into the other real estate owned as a result of foreclosures and workout negotiations. This enables us to move to final disposition of those assets. We have been generally pleased with our ability to market and sell properties given our realistic valuations of these assets.

Turning to page 35, the charge-offs for commercial loans totaled $7.4 million in the third quarter, which is improved from $10.7 million in the second quarter and the $23.8 million reported in the first quarter. The lower charge-off levels have been a result of the slowing in the default rates that I previously mentioned. And turning to page 36, while the measures that we have implemented for credit quality best practices are outlined, they are a comprehensive foundation for the future, and the new realities of today's marketplace require flexibility and a continued improvement and focus for our management on the portfolio.

In closing, while navigating through Michigan's economic challenges continues to be quite a journey, we are very fortunate to have a team that is dedicated to doing whatever it takes to help our clients and our Company through to our expected brighter days ahead. At an increasing, clients have turned to us as larger lenders look to reduce their Michigan exposure. We remain ready and committed to lend to businesses in our communities with prudent credit terms. We believe that the value proposition for community relationship banking is strong over the longer term and perhaps even greater than before this downturn, as clients want to know their banker and will favor a bank with a dedicated professional staff in their community.

I will now turn the call over to Brad Kessel, Executive Vice President and Chief Operating Officer.

Thanks, Stefanie. Moving now to the retail credit side of the bank, we are encouraged that we did see some improvement in the portfolio's performance this past quarter. This improved occurred despite a continued rise in Michigan unemployment and ongoing weak residential real estate prices. Slide 38 illustrates the most recent unemployment numbers for the state of Michigan. As of September, the jobless number reached 740,000 and the unemployment rate continued its rise, hitting 15.3%, the highest in the nation.

Independent Bank's internal tracking continues to indicate the most cited reason for loan delinquency is unemployment and/or curtailment of income, followed by excessive obligations. While the most recent Michigan Association of Realtors Sales Report for 2009 indicates residential sales have improved over the prior year at an 8.72% rate, the average sales price has declined by almost 22%. Some of our sources indicate we may be near the bottom for residential real estate values, but others indicate there is more bank inventory coming onto the market, which will put further downward pressure on real estate values.

As the job outlook continues to be difficult and uncertain for many households, the demand for new consumer financing also continues to be soft. This is reflected on slide 39 where our retail balances for our mortgage portfolio declined from $789 million to $770 million for the quarter, and consumer balances declined from $327 million to $318 million. However, the demand for refinancing of existing debt continues to be solid, as consumers continue to take advantage of the low interest rate environment. During the third quarter, saleable mortgage originations totaled $103 million versus $192 million in the second quarter and $142 million net income the first quarter of 2009.

Much of our improvement in portfolio performance this past quarter can be directly attributed to our staff's loan workout efforts, which are reflected on slide 40. Through the first none months of 2009, our team has completed 383 home retention actions, which aggregates to $61.1 million in loans, that otherwise would have gone to foreclosure. This includes both investor loans and portfolio loans. Our modification program is based on a full re-underwriting of the borrower's ability to pay and getting them into an affordable payment plan.

This is primarily accomplished by reducing the rate and/or extending the amortization with a targeted housing expense to income ratio of 31% and/or a 10% payment reduction. Additionally, we seek to automate the loan payment prospectively by AZH and we encourage the borrower to meet with a consumer credit counselor. We believe this to be an effective approach towards working with borrowers who have in most instances had some interruption in household income and/or reduction in household income due to the difficult Michigan job market. In those instances where there is simply not the income to pay on the obligation, we are working to assist them by negotiating deed in lieu of foreclosure or agreeing to short sales. Year-to-date we have completed 78 such home forfeiture actions, bypassing the lengthy and costly legal process associated with foreclosures.

Our modification and refinance workout efforts to date have been effected, as you can see on slide 41. For those loans with six months or more of seasoning, we have achieved a 76% success rate, meaning they are current and making their payments on time. These workout efforts have directly contributed to improved delinquency ratios. Slide 42 reflects retail past dues as a percent of outstandings. As you can see, our mortgage non-performing loans improved by 12 basis points during the third quarter. Our mortgage 30 to 89 days and consumer 30 to 89 days improved by 24 and 19 basis points respectively. We see this as a very encouraging sign as these shorter past due categories are good indicators of near term, non-performing loan levels.

Using updated appraisals or broker price opinions with appropriate discounting and considering the cost to sell, we have written down the entire non-performing loan portfolio, seen on slide 43, to an average of 83% of the contractual loan balance. Turning to slide 44, total retail non-performing assets, when including ORE and ORA along with non-performing loans, declined during the quarter. At quarter end, we held 132 properties in ORE totaling $10.7 million. The number of days held in inventory for the existing portfolio is 144 on average.

During the third quarter, selling through a combination of direct or via a realtor network or the auction channel, we liquidated 109 units, which aggregated to $4.9 million in net book value. Year-to-date we have liquidated 205 properties or $8.3 million worth of real estate. Our realization rate did drop this past quarter, as we netted 80% of the adjusted net book value of ORE. This is down from 87% in the second quarter, but is a function of declining real estate values as well as more sales taking place via the auction channel.

The following real estate prices have directly coincided with the continued elevated levels of charge-offs. While still higher than we would like to see, the dollars charged off were down to $6.4 million from $7.9 million in the prior quarter.

In closing, despite continued increases in unemployment and declines in real estate value, we are encouraged by improvement in our 30 to 89 day past due loans, improvement in our non-performing loans, and overall improvement in non-performing assets, as well as a reduction in net charge-offs quarter-over-quarter. While it is likely we will see several more quarters before the Michigan job market improves, we remain optimistic that we are nearing the trough of this economic cycle.

Now I would like to turn it back to Mike Magee.

Thank you, Brad. As I mentioned earlier, our team has been active in developing and implementing a number of strategies designed to help IBC weather this persistent economic downturn. Despite our challenges, IBC remains well capitalized and committed to further strengthening our financial position. For more than 145 years, our bank has focused on developing trusted relationships, a reputation for excellence, and local expertise, all the right ingredients that has enabled us to optimize and weather a variety of market cycles and business trends. We are confident that our longstanding, proven experience in community banking and focus on efficient profitable growth will continue to position Independent Bank Corporation for improved performance in the future. That concludes our prepared comments. At this time, we would like to open the line for questions.

(Operator Instructions) Our first question comes from Brad Milsaps at Sandler O'Neill. Mr. Milsaps?

Hey, good morning.

Hi, Brad.

Rob, do the mortgage loans that you guys have restructured, do those need to -- do you have those non-performing? Or how does the accounting for that function?

Well, if they are past due or delinquent depending on the category of past due they would be in non-performing. If they're performing, we would report them on our call report as a troubled debt restructuring, but they wouldn't be part of non-performing loans.

Okay, so those are classified, though, as TDRs?

Yes, but they're not classified as -- unless they're 90 days or more past due, they would not be classified as a non-performing loan.

Okay, and then secondly just on the capital and I may have missed it in your comments, but have you been giving any or do you have any sort of timetable that you've been given to improve the level of common equity in the company?

Well, we haven't -- I mean there hasn't been any mandate externally in terms of any timeframe. I think we're trying to move forward as quickly as we can to explore all of the different initiatives that you can consider to bolster capital with a particular focus on bolstering the common equity ratio. I think with an additional quarter of loss, we just got to a point where we thought preserving the level of cash we have at the holding company was prudent and accelerating the timetable at which to execute these strategies is probably necessary.

Mike, I don't know if you want to add anything?

Well, I'd just add, Brad, that we feel it's important to be out in front of the curve and get your ducks in a row before you absolutely have to have the capital. And so we felt it was prudent this time to defer the interest payments, get the ball rolling on asking our shareholders to, at a special shareholder meeting, approve the additional shares so that the management and the board of directors have the tools necessary. So moving forward, and that special shareholder meeting we did say would probably be the middle of December, that we have all the tools at our disposal. So that if we feel it's necessary after the first of the year or whenever that we need to bolster our capital, then we're in a position to do so.

I haven't seen many banks do it, but would you guys consider converting, or have you had any discussions about converting the preferred stock you issued to the government into common equity?

I would just say, Brad, that every option that is available to our Company is under consideration.

Okay, all right. Fair enough. Thank you.

The next question comes from Stephen Geyen at Stifel Nicolaus.

Yes, good morning, and thanks for the call and the detail in the release. This is really a very high, 30,000 foot view or would like to get your 30,000 foot view. And your comments were helpful, but just again looking at or talking with the retail clients and the C&I customer and just your understanding of their financial position, do you get a sense that the Michigan economy has reached a bottom following the adjustments that come from what's occurred in the automotive industry?

Good question, Steve. I think I'll let Stefanie and Brad answer that. They're closer to the customer. Go ahead.

All right, I'll start from the C&I customer perspective. I do think earlier in 2009 there was a lot of fear about the dominoes that would fall from the automotive industry. And some of that fear has lessened because the reality has played out and people that were concerned about getting paid did get paid from the auto industry and they're now moving forward. We actually see some of the tool and dye segment of the client base that is building for the 2011 model years. And so 2010 tooling and dye production is on the rise, and some of those clients are projecting a better year next year. So that would be an example, and I'll let Brad talk about the retail side.

Well, the question to restate is have we hit the bottom. I think we're close, but I think it's still very, very difficult. When we meet as a team regularly and look at the individual loans and borrowers that are coming before us, and we hear their stories about lost jobs or a new job at a lower rate, and so on, it just -- it seems like maybe the pace has somewhat slowed. But I think we've got a ways to go. Without getting too longwinded on this, obviously the state of Michigan, we've got to figure things out at the state level to make this a more attractive environment to do business, both from a tax standpoint as well as regulatory standpoint. And that filters all the way down to the local municipal level. And so everybody's working hard. We love this state and good times will be back.

Okay, thank you.

Steve.

(Operator Instructions) At this time, there are no further questions. I'd like to turn the conference back over to Michael Magee for any closing remarks.

Okay. Thanks, Amy. With that, this concludes our conference call today. Thank you so much for your interest in Independent Bank Corporation. For an archived webcast of today's call, please go to the investor section of our website at www.ibcp.com. The webcast will be archived on our website for approximately 90 days from today's date. If you do have any additional questions in the interim, please feel free to contact Stefanie, Brad, Rob, or myself. With that, that concludes the call. Thank you and have a great day.

That does conclude today's conference. Thank you for attending today's presentation. You may now disconnect.