Independent Bank Corporation Reports 2013 First Quarter Results

IONIA, Mich., April 22, 2013 /PRNewswire/ -- Independent Bank Corporation (NASDAQ: IBCP) reported first quarter 2013 net income applicable to common stock of $4.7 million, or $0.27 per diluted share, versus net income applicable to common stock of $2.4 million, or $0.07 per diluted share, in the prior-year period.

The Company's fifth consecutive profitable quarter was highlighted by:

  • Additional improvement in asset quality, with non-performing assets down 13% during the quarter and 38% since Mar. 31, 2012.
  • A $5.8 million, or 113%, year-over-year decline in the quarterly provision for loan losses.
  • Regulatory capital ratios that increased significantly and remain substantially above minimum requirements for "well-capitalized"

On Dec. 7, 2012, the Company completed the sale of 21 branches.  This transaction resulted in the transfer of approximately $403.1 million of deposits and the sale of approximately $48.0 million of loans.  The transaction also resulted in the transfer of $336.1 million of cash to the purchaser of the branches.

William B. ("Brad") Kessel, the President and Chief Executive Officer of Independent Bank Corporation, commented: "We are very pleased to report our fifth consecutive quarter of profitability as well as further progress in improving asset quality, as evidenced by a reduction in our non-performing loans, loan net charge-offs and the provision for loan losses as compared to the year ago quarter.  Our capital initiatives remain centered on strategies to convert the preferred stock owned by the U.S. Treasury ('UST') into common stock and exit TARP.  We are also focused on preserving the potential future use of our net deferred tax asset, which totaled approximately $62.5 million at Mar. 31, 2013, and on which we have established a full valuation allowance.  The potential future recovery of this valuation allowance represents a source of capital that would be of meaningful value to our shareholders."

The Company assesses whether a valuation allowance on its deferred tax assets is necessary each quarter.  Reversing or reducing the existing valuation allowance requires the Company to conclude that the realization of the deferred tax assets is  "more likely than not."  The  ultimate realization of this asset is primarily based on the Company generating future income.  As the Company continues to assess whether the valuation allowance on its deferred tax assets is necessary in the future, it will focus on demonstrating a return to sustainable profitability through the following primary criteria:

  • Achieving at least six consecutive quarters of profitability;
  • A forecast of future profitability that supports that the realization of the deferred tax assets is more likely than not; and
  • A forecast that future asset quality continues to be stable to improving and that other factors do not exist that could cause a significant adverse impact on future profitability.

Operating Results

The Company's net interest income totaled $19.6 million during the first quarter of 2013, a decrease of $2.5 million, or 11.5%, from the year-ago period, and a decrease of $1.3 million, or 6.3% from the fourth quarter of 2012.  The Company's net interest income as a percent of average interest-earning assets (the "net interest margin") was 4.21% during the first quarter of 2013 compared to 4.14% in the year ago period, and 3.96% in the fourth quarter of 2012.  The decrease in net interest income is primarily due to a decline in average interest-earning assets resulting from the aforementioned branch sale. The increase in the net interest margin is due primarily to a change in asset mix, as lower yielding interest-bearing cash balances and short-term investments decreased following the branch sale.  Average interest-earning assets were $1.87 billion in the first quarter of 2013 compared to $2.14 billion in the year ago quarter and $2.10 billion in the fourth quarter of 2012.

Non-interest income totaled $11.1 million in the first quarter of 2013, compared to $14.6 million in the year-ago period, representing a decrease of $3.5 million, or 24.1%.  Service charges on deposit accounts, interchange income and other non-interest income all declined primarily reflecting the impact of the branch sale.  In addition, the Company recorded a reduction in non-interest income of $1.0 million in the first quarter of 2013 (as compared to a reduction of $0.2 million in the first quarter of 2012), due to an increase in the fair value of the warrant issued to the UST.  The increase in the fair value of this warrant primarily reflects the significant increase in the Company's common stock price during the first three months of 2013.    

Non-interest expense totaled $25.5 million in the first quarter of 2013, compared to $28.0 million in the year-ago period representing a decrease of $2.6 million, or 9.2%.  The  branch sale had the most significant impact on the declines in most of the categories of non-interest expenses.  Loan and collection expenses (down $0.7 million) and net losses on other real estate ("ORE") and repossessed assets (down $0.3 million) declined due primarily to reduced levels of non-performing loans, commercial watch credits and ORE.  In addition, credit card and bank service fees (down $0.3 million) and vehicle service contract counterparty contingencies (down $0.3 million) declined due primarily to a decrease in the size of the Company's payment plan receivables portfolio.  The first quarter of 2012 included a $1.4 million one-time reduction in other non-interest expense related to the reversal of a previously established accrual at Mepco Finance Corporation that was determined to no longer be necessary.

Asset Quality

Commenting on asset quality, President and CEO Kessel added:  "Our provision for loan losses decreased by $5.8 million, or 113.5%, in the first quarter of 2013 as compared to the year-ago level, primarily reflecting a reduction in non-performing loans, a lower level of watch credits, reduced loan net charge-offs, and an overall decline in total loan balances.  Since Mar. 31, 2012, non-performing loans and commercial loan watch credits have declined by approximately 46% and 30%, respectively.  In addition, thirty- to eighty-nine day delinquency rates at Mar. 31, 2013 were 0.61% for commercial loans and 1.47% for mortgage and consumer loans. These delinquency rates continue to be well managed as we strive to further improve asset quality and further reduce credit related costs."

A breakdown of non-performing loans(1) by loan type is as follows:

Loan Type

    3/31/2013

12/31/2012

3/31/2012


(Dollars in Thousands)

Commercial

$ 11,595

$ 14,753

$ 24,595

Consumer/installment

2,169

2,343

3,113

Mortgage

14,081

15,736

23,544

Payment plan receivables(2)

35

104

481

  Total

$ 27,880

$ 32,936

$ 51,733

Ratio of non-performing loans to total portfolio loans

2.00%

2.32%

3.37%

Ratio of non-performing assets to total assets

2.45%

2.92%

3.42%

Ratio of the allowance for loan losses to non-performing loans

146.22%

134.43%

108.26%

 

(1)

Excludes loans that are classified as "troubled debt restructured" that are still performing.

(2)

Represents payment plans for which no payments have been received for 90 days or more and for which Mepco has not yet completed the process to charge the applicable counterparty for the balance due. These balances exclude receivables due from Mepco counterparties related to the cancellation of payment plan receivables.

Non-performing loans have declined by $5.1 million, or 15.4%, since year-end 2012.  All categories of non-performing loans declined; the principal decreases since year-end 2012 were in commercial loans and residential mortgage loans. The decline in non-performing loans primarily reflects loan net charge-offs, pay-offs, negotiated transactions and the migration of loans into ORE during 2013.  Non-performing commercial loans have declined by $66.5 million, or 85.1%, since they peaked in 2008.  Non-performing retail (residential mortgage and consumer/installment) loans have declined by $42.9 million, or 72.5%, since they peaked in 2009.  Other real estate and repossessed assets totaled $23.6 million at Mar. 31, 2013, compared to $26.1 million at Dec. 31, 2012.

The provision for loan losses was a credit of $0.7 million and an expense of $5.1 million in the first quarters of 2013 and 2012, respectively.  The level of the provision for loan losses in each period reflects the Company's overall assessment of the allowance for loan losses, taking into consideration factors such as loan mix, levels of non-performing and classified loans and loan net charge-offs.  Loan net charge-offs were $2.8 million (0.82% annualized of average loans) in the first quarter of 2013, compared to $8.0 million (2.07% annualized of average loans) in the first quarter of 2012.  The decline in first quarter 2013 loan net charge-offs compared to year ago levels is primarily due to a $2.2 million decline in commercial loan net charge-offs and a $2.7 million decline in mortgage loan net charge-offs.  At Mar. 31, 2013, the allowance for loan losses totaled $40.8 million, or 2.93% of portfolio loans, compared to $44.3 million, or 3.12% of portfolio loans, at Dec. 31, 2012.

Balance Sheet, Liquidity and Capital

Total assets were $2.11 billion at Mar. 31, 2013, an increase of $81.5 million from Dec. 31, 2012.  Loans, excluding loans held for sale, were $1.39 billion at Mar. 31, 2013, compared to $1.42 billion at Dec. 31, 2012.  Deposits totaled $1.85 billion at Mar. 31, 2012, an increase of $71.3 million from Dec. 31, 2012.  The increase in deposits is primarily due to growth in checking and savings accounts. 

Cash and cash equivalents totaled $221.6 million at Mar. 31, 2013, versus $179.8 million at Dec. 31, 2012. Securities available for sale totaled $283.9 million at Mar. 31, 2013, versus $208.4 million at Dec. 31, 2012.  This $75.5 million increase is primarily due to the purchase of residential mortgage-backed securities and municipal securities during the first quarter of 2013.

Total shareholders' equity was $144.1 million at Mar. 31, 2013, or 6.84% of total assets.  Tangible common equity totaled $55.0 million at Mar. 31, 2013, or $5.81 per share.  The Company's wholly owned subsidiary, Independent Bank, remains "well capitalized" for regulatory purposes with the following ratios:

 

 

Regulatory Capital Ratios

 

 

3/31/2013

 

 

12/31/2012

Well

Capitalized

Minimum

 

Tier 1 capital to average total assets

 

9.55%

 

8.26%

 

5.00%

Tier 1 capital to risk-weighted assets

14.39%

13.67%

6.00%

Total capital to risk-weighted assets

15.67%

14.95%

10.00%

About Independent Bank Corporation

Independent Bank Corporation (Nasdaq Symbol: IBCP) is a Michigan-based bank holding company with total assets of approximately $2.1 billion. Founded as First National Bank of Ionia in 1864, Independent Bank Corporation now operates convenient locations across Michigan's Lower Peninsula through one state-chartered bank subsidiary. This subsidiary (Independent Bank) provides a full range of financial services, including commercial banking, mortgage lending, investments and title services.  Independent Bank Corporation is committed to providing exceptional personal service and value to its customers, stockholders and the communities it serves. 

For more information, please visit our website at: www.IndependentBank.com.

Any statements in this news release 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 management's beliefs and assumptions based on information known to Independent Bank Corporation's management as of the date of this news release and do not purport to speak as of any other date. Forward-looking statements may include descriptions of plans and objectives of Independent Bank Corporation's management for future  operations, products or services, and forecasts of the Company's revenue, earnings or other measures of economic performance, including statements of profitability, estimates of credit quality trends, and statements about the potential value of our deferred tax assets. Such statements reflect the view of Independent Bank Corporation's management as of this date with respect to future events and are not guarantees of future performance.  These forward-looking statements involve assumptions and are subject to substantial risks and uncertainties, such as changes in Independent Bank Corporation's plans, objectives, expectations and intentions. Should one or more of these risks materialize or should underlying beliefs or assumptions prove incorrect, the Company's actual results could differ materially from those discussed. Factors that could cause or contribute to such differences include the ability of Independent Bank Corporation to meet the objectives of its capital restoration plan, the ability of Independent Bank to remain well-capitalized under federal regulatory standards, the pace of economic recovery within Michigan and beyond, our ability to collect receivables from Mepco Finance Corporation's counterparties related to cancellations of payment plans, 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 news release or in any documents, Independent Bank Corporation claims the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.

INDEPENDENT BANK CORPORATION AND SUBSIDIARIES
Consolidated Statements of Financial Condition








March 31,


December 31,



2013


2012



(unaudited)

Assets


(In thousands, except share amounts)

Cash and due from banks

$

51,489

$

55,487

Interest bearing deposits


170,141


124,295

Cash and Cash Equivalents


221,630


179,782

Interest bearing deposits - time


6,973


-

Trading securities


201


110

Securities available for sale


283,934


208,413

Federal Home Loan Bank and Federal Reserve Bank stock, at cost


20,838


20,838

Loans held for sale, carried at fair value


37,554


47,487

Loans held for sale, carried at lower of cost or fair value


-


3,292

Loans





  Commercial


612,331


617,258

  Mortgage


515,796


527,340

  Installment  


184,424


189,849

  Payment plan receivables


78,311


84,692

Total Loans


1,390,862


1,419,139

  Allowance for loan losses


(40,765)


(44,275)

Net Loans


1,350,097


1,374,864

Other real estate and repossessed assets


23,639


26,133

Property and equipment, net


47,440


47,016

Bank-owned life insurance


51,228


50,890

Other intangibles


3,772


3,975

Capitalized mortgage loan servicing rights


11,590


11,013

Prepaid FDIC deposit insurance assessment


8,851


9,448

Vehicle service contract counterparty receivables, net


18,270


18,449

Accrued income and other assets


19,330


22,157

Total Assets

$

2,105,347

$

2,023,867

Liabilities and Shareholders' Equity





Deposits





  Non-interest bearing

$

504,614

$

488,126

  Savings and interest-bearing checking


919,098


871,238

  Reciprocal


45,852


33,242

  Retail time


366,635


372,340

  Brokered time


14,594


14,591

Total Deposits


1,850,793


1,779,537

Other borrowings


17,630


17,625

Subordinated debentures


50,175


50,175

Vehicle service contract counterparty payables


6,443


7,725

Accrued expenses and other liabilities


36,221


33,830

Total Liabilities


1,961,262


1,888,892

Shareholders' Equity





  Convertible preferred stock, no par value, 200,000 shares authorized;





    74,426 shares issued and outstanding at March 31, 2013 and





    December 31, 2012; liquidation preference: $86,191 at March 31,





    2013 and $85,150 at December 31, 2012


85,299


84,204

  Common stock, no par value, 500,000,000 shares authorized;





     issued and outstanding:  9,473,462 shares at March 31, 2013





     and 9,093,732 shares at December 31, 2012


253,437


251,237

  Accumulated deficit


(187,698)


(192,408)

  Accumulated other comprehensive loss


(6,953)


(8,058)

Total Shareholders' Equity


144,085


134,975

Total Liabilities and Shareholders' Equity

$

2,105,347

$

2,023,867

 


INDEPENDENT BANK CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations






Three Months Ended



March 31,

December 31,

March 31,



2013

2012

2012



(unaudited)



(In thousands)

Interest Income



  Interest and fees on loans

$

20,710

$

22,353

$

24,346

  Interest on securities







    Taxable


670


688


658

    Tax-exempt


238


243


296

  Other investments


332


430


396

Total Interest Income


21,950


23,714


25,696

Interest Expense







  Deposits


1,529


1,961


2,424

  Other borrowings


865


879


1,172

Total Interest Expense


2,394


2,840


3,596

Net Interest Income


19,556


20,874


22,100

Provision for loan losses


(691)


449


5,131

Net Interest Income After Provision for Loan Losses


20,247


20,425


16,969

Non-interest Income







  Service charges on deposit accounts


3,406


4,395


4,201

  Interchange income


1,757


2,135


2,322

  Net gains (losses) on assets







    Mortgage loans


3,637


5,282


3,860

    Securities


84


72


684

    Other than temporary impairment loss on securities







      Total impairment loss


-


(7)


(177)

      Loss recognized in other comprehensive loss


-


-


-

        Net impairment loss recognized in earnings


-


(7)


(177)

  Mortgage loan servicing


622


882


736

  Title insurance fees


484


484


508

  Increase in fair value of U.S. Treasury warrant


(1,045)


(74)


(154)

  Net gain on branch sale


-


5,402


-

  Other


2,123


2,826


2,604

Total Non-interest Income


11,068


21,397


14,584

Non-interest Expense







  Compensation and employee benefits


11,307


14,385


12,482

  Occupancy, net


2,424


2,416


2,716

  Loan and collection


2,226


1,836


2,890

  Data processing


1,916


2,049


1,933

  Furniture, fixtures and equipment


1,032


1,145


1,196

  Communications


780


886


973

  Legal and professional


692


1,058


897

  Provision for loss reimbursement on sold loans


663


361


432

  Net losses on other real estate and repossessed assets


652


943


987

  FDIC deposit insurance


630


817


857

  Advertising


570


652


556

  Interchange expense


410


478


406

  Credit card and bank service fees


334


383


651

  Vehicle service contract counterparty contingencies


127


551


471

  Recoveries related to unfunded lending commitments


(19)


(91)


(47)

  Other


1,729


2,038


649

Total Non-interest Expense


25,473


29,907


28,049

Income Before Income Tax


5,842


11,915


3,504

Income tax expense


35


-


-

                                                       Net Income 

$

5,807

$

11,915

$

3,504

Preferred stock dividends and discount accretion


1,095


1,106


1,056

Net Income Applicable to Common Stock

$

4,712

$

10,809

$

2,448

 

INDEPENDENT BANK CORPORATION AND SUBSIDIARIES

Selected Financial Data






Three Months Ended



March 31,


December 31,


March 31,



2013


2012


2012



(unaudited)

Per Common Share Data



Net Income Per Common Share (A)







  Basic (B)

$

0.51

$

1.21

$

0.29


  Diluted (C)


0.27


0.36


0.07


Cash dividends declared per common share


0.00


0.00


0.00


















Selected Ratios (D)








As a Percent of Average Interest-Earning Assets








  Interest income


4.73

%

4.50

%

4.82

%

  Interest expense


0.52


0.54


0.68


  Net interest income


4.21


3.96


4.14


Net Income to (A)







  Average common shareholders' equity


34.76

%

99.01

%

42.29

%

  Average assets


0.93


1.87


0.42


















Average Shares








  Basic (B)


9,266,072


8,921,761


8,533,584


  Diluted (C)


21,831,316


33,301,197


47,318,098


 

(A)

These amounts are calculated using net income applicable to common stock.  Dividends on convertible preferred stock are added back in the diluted per share calculation. 



(B)

Average shares of common stock for basic net income per common share include shares issued and outstanding during the period and participating share awards. 



(C)

Average shares of common stock for diluted net income per common share include shares to be issued upon conversion of convertible preferred stock, shares to be issued upon exercise of common stock warrants, shares to be issued upon exercise of stock options, restricted stock units and stock units for a deferred compensation plan for non-employee directors. 



(D)

Ratios have been annualized.

 

SOURCE Independent Bank Corporation



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