For Independent Bank, Credit Stability Comes at a Price

Independent Bank Corp. has managed to persuade stubborn trust-preferred holders and the Treasury Department to become common shareholders — but those feats may turn out to be the easier pieces of its capital restoration plan.

The $2.9 billion-asset company in Ionia, Mich., intends to raise $100 million of additional equity as the third prong of a plan to shore up its balance sheet. Independent is in a similar position to other struggling bank companies that have renegotiated with existing shareholders only to be faced with finding additional ones.

Several have been unable to do so, and at least one has failed.

"It makes sense for the existing shareholders to do whatever they can to help the company," said Eliot Stark, a managing director at Capital Insight Partners Inc., an investment banking firm in Chicago. "But, as we know, getting other shareholders on board still remains very difficult."

Independent would not comment. Though it has said it plans to raise $100 million, it has yet to commence an offering.

Finding the capital it needs won't be easy, analysts said, yet Independent has the potential to succeed where others have failed as its credit trends are headed in the right direction. As of March 31, Independent reported that nonperforming assets made up 4.78% of total assets. That is nearly flat from the fourth quarter and down 47 basis points from a year earlier.

"If there is stabilization in their issues, it will help capital raising a lot," said J. Brennan Ryan, a partner in Nelson Mullins Riley & Scarborough LLP.

Yet credit stability has come at a cost. The company lost $15 million in the first quarter, following losses of $94.5 million in 2009 and $91.9 million in 2008.

Still, the stability is noteworthy, if not admirable, said Karen Dorway, the chief executive of BauerFinancial Inc., a ratings firm in Coral Gables, Fla. "There are certainly a lot of banks going in the other direction," Dorway said.

Investors, however, likely will want to see another quarter of improving credit trends. "A really aggressive fourth quarter can make a first quarter look good," Ryan said. "But a good second quarter would really validate that the company has sufficiently reserved."

Independent announced on June 23 that it had exchanged 51 million new shares of common stock for 1.6 million shares of trust-preferred securities from IBC Capital Finance III, worth $41.1 million. The exchange was a condition of its deal with the Treasury Department, which in April agreed to exchange $72 million in preferred shares and $2.3 million in accrued dividends for new shares of the company's stock.

Meanwhile, analysts said a capital-raising effort likely would be quite dilutive to the company's stock, which was trading at about 37 cents a share last week. Nasdaq has threatened to delist the shares if they don't get back above $1.

Working in Independent's favor: Its bank unit is well capitalized, and its capital plan is not part of an order from regulators.

That's how Independent differs from such companies as Midwest Banc Holdings Inc. The $3.2 billion-asset company in Melrose Park, Ill., also persuaded the Treasury to convert its investment into common equity and got its preferred shareholders on board. Midwest, though, was in much worse shape than Independent as it was under a regulatory order, its credit quality was poor and its capital position was deteriorating.

As a result, Midwest hit a roadblock in finding private capital, and its significantly undercapitalized bank unit failed in May.

Independent said in its first-quarter filing with the Securities and Exchange Commission that it has avoided a regulatory order by launching its capital restoration plan. However, it said an order could come "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."