Independent Bank Corporation Reports 2013 Third Quarter Results

IONIA, Mich., Oct. 30, 2013 /PRNewswire/ -- Independent Bank Corporation (Nasdaq: IBCP) reported third quarter 2013 net income applicable to common stock of $10.3 million, or $0.17 per diluted share, versus net income applicable to common stock of $5.4 million, or $0.16 per diluted share, in the prior-year period.  For the nine months ended Sept. 30, 2013, the Company reported net income applicable to common stock of $77.3 million, or $3.40 per diluted share, compared to net income applicable to common stock of $11.0 million, or $0.36 per diluted share, in the prior-year period.  The diluted earnings per share calculations are based on earnings prior to preferred stock dividends and the preferred stock discount.  Third quarter 2013 results include a $7.6 million benefit from the redemption of the Company's mandatorily convertible preferred stock at a discount.  Year-to-date 2013 results include an income tax benefit of $57.3 million associated with the reversal of substantially all of the Company's deferred tax asset valuation allowance in June 2013. 

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

  • A successful common equity offering that resulted in raising $97.1 million of net proceeds.
  • The exit from the Troubled Asset Relief Program ("TARP") with an $81.0 million payment to the United States Department of the Treasury ("UST").
  • The restoration of interest payments on all of the Company's outstanding trust preferred securities.
  • Additional improvement in asset quality, with non-performing assets down 2.3% during the quarter and 37.3% since year end 2012.

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 seventh consecutive quarter of profitability as well as continued progress in improving asset quality, as evidenced by a reduction in our non-performing assets, loan net charge-offs and the provision for loan losses as compared to the year ago quarter.  The third quarter of 2013 was marked by several significant positive events including our common equity offering, our exit from TARP, and the restoration of interest payments on our trust preferred securities.  The Company has achieved a very strong capital structure with a tangible common equity to tangible assets ratio of 10.24% as of the end of the third quarter.  This positions the organization for potential future growth.  Having now completed all of the elements of our capital plan, we are keenly focused on further improving our operating results and efficiency ratio.  We are confident that we already have initiatives in place (such as the Oct. 11, 2013 redemption of higher cost trust preferred securities) or in process that will improve our operating results, despite the challenge of lower mortgage banking related revenues.  Our net interest income also stabilized in the third quarter and commercial loans and installment loans have grown during the year."

Operating Results

The Company's net interest income totaled $19.5 million during the third quarter of 2013, a decrease of $1.9 million, or 9.0% from the year-ago period, and essentially unchanged from the second quarter of 2013. The decrease in net interest income is primarily due to a decline in average interest-earning assets resulting from the aforementioned branch sale. Average interest-earning assets declined to $1.91 billion in the third quarter of 2013 compared to $2.18 billion in the year-ago quarter. The Company's tax equivalent net interest income as a percent of average interest-earning assets (the "net interest margin") was 4.10% during the third quarter of 2013, compared to 3.95% in the year-ago period, and 4.16% in the second quarter of 2013.  The year-over-year increase in the net interest margin is due to a change in asset mix, as lower yielding interest-bearing cash balances decreased following the branch sale, as well as a decline in the cost of funds. 

For the first nine months of 2013, net interest income totaled $58.6 million, a decrease of $6.8 million, or 10.4% from 2012.  The Company's net interest margin for the first nine months of 2013 increased to 4.17% compared to 4.06% in 2012.  The reasons for the decline in net interest income for the first nine months of 2013 are generally consistent with those described above for the comparative year-over-year quarterly periods.

Service charges on deposit accounts totaled $3.6 million and $10.6 million, respectively, for the third quarter and first nine months of 2013, representing decreases of 23.7% and 21.4%, respectively, from the comparable year ago periods.  Interchange income totaled $1.9 million and $5.5 million for the third quarter and first nine months of 2013, respectively, representing decreases of 20.3% and 21.4%, respectively, over the year ago comparative periods.  The declines in service charges on deposit accounts and interchange income primarily reflect the impact of the branch sale. 

Net gains on mortgage loans were $1.6 million in the third quarter of 2013, compared to $4.6 million in the year-ago quarter.  For the first nine months of 2013, net gains on mortgage loans totaled $8.4 million compared to $12.0 million in 2012. The decrease in net gains relates primarily to a rise in mortgage loan interest rates during mid-2013 that has significantly reduced mortgage loan refinance volumes.

Mortgage loan servicing generated income of $0.3 million and a loss of $0.4 million in the third quarters of 2013 and 2012, respectively. The quarterly comparative variance is due primarily to the change in the impairment reserve (a $0.035 million recovery of previously recorded impairment charges in the third quarter of 2013 compared to a $0.4 million impairment charge in the year-ago quarter) as well as a $0.3 million decrease in the amortization of capitalized mortgage loan servicing rights.  For the first nine months of 2013, mortgage loan servicing generated income of $2.6 million compared to a loss of $0.7 million in 2012.  The first nine months comparative variance is primarily due to the change in the impairment reserve (a $2.5 million recovery of previously recorded impairment charges in the first nine months of 2013 compared to a $0.6 million impairment charge in the year-ago period). The recovery of previously recorded impairment charges during 2013 primarily reflects higher mortgage loan interest rates resulting in lower estimated future prepayment rates. Capitalized mortgage loan servicing rights totaled $13.1 million at Sept. 30, 2013 compared to $11.0 million at Dec. 31, 2012.  As of Sept. 30, 2013, the Company serviced approximately $1.74 billion in mortgage loans for others on which servicing rights have been capitalized.

Non-interest expenses totaled $25.9 million in the third quarter of 2013, compared to $29.3 million in the year-ago period.  For the first nine months of 2013, non-interest expenses totaled $79.1 million versus $86.8 million in 2012.  The branch sale had the most significant impact on the year-over-year declines in most of the categories of non-interest expenses (compensation and benefits, occupancy, furniture, fixtures and equipment, communications and FDIC deposit insurance).  Compensation and employee benefits in the third quarter of 2013 included $0.3 million of expense related to the vesting of certain restricted stock unit awards because of the Company's exit from TARP. 

Loan and collection expenses (down $1.2 million in the quarter and $2.6 million year-to-date) and net losses on other real estate ("ORE") and repossessed assets (down $0.2 million in the quarter and $0.8 million year-to-date) declined due primarily to reduced levels of non-performing loans, commercial watch credits and ORE.  In addition, credit card and bank service fees (down $0.1 million in the quarter and $0.7 million year-to-date) declined due primarily to a decrease in the size of the Company's payment plan receivables portfolio.  

The provision for loss reimbursement on sold loans increased by $1.2 million in the third quarter of 2013 compared to the year ago quarter.  In Oct. 2013 the Company reached an agreement in principle (the "Resolution Agreement") to resolve its existing and future repurchase and make whole obligations (collectively "Repurchase Obligations") related to mortgage loans originated between Jan. 1, 2000 and Dec. 31, 2008 and delivered to Fannie Mae by Jan. 31, 2009.  The terms of the Resolution Agreement are subject to final approval by Fannie Mae. Under the proposed terms of the Resolution Agreement, the Company will pay Fannie Mae approximately $1.59 million with respect to the Repurchase Obligations, subject to reconciliation and adjustment.  The Company believes that it is in its best interests to execute the Resolution Agreement in order to bring finality to the loss reimbursement exposure with Fannie Mae for these years and reduce the resources spent on individual file reviews and defending loss reimbursement requests.  The third quarter 2013 provision includes the impact of the Resolution Agreement.  At Sept. 30, 2013 the Company's reserve for loss reimbursement on sold loans totaled $3.5 million (which includes reserves for other investors in addition to Fannie Mae).

2013 vehicle service contract counterparty contingencies expense decreased by $0.1 million in the quarter and increased $2.3 million year-to-date as compared to 2012.  This year-to-date increase primarily reflects write-downs of vehicle service contract counterparty receivables in the second quarter of 2013.  The Company reached settlements in certain of its litigation to collect these receivables.  Given the costs and uncertainty of continued litigation, management of the Company determined it was in the organization's best interests to resolve these matters.  During the third quarter of 2013 the Company received a cash payment of $5.4 million related to one of these settlements.  At Sept. 30, 2013 the Company had $9.8 million of remaining receivables from vehicle service contract counterparties that were still in process of collection. 

Asset Quality

Commenting on asset quality, President and CEO Kessel added: "Our provision for loan losses decreased by $0.6 million in the third 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 Sept. 30, 2012, non-performing loans and commercial loan watch credits have declined by approximately 48% and 32%, respectively.  In addition, thirty- to eighty-nine day delinquency rates at Sept. 30, 2013 were 0.36% for commercial loans and 1.07% for mortgage and consumer loans. These delinquency rates continue to be well managed as we strive to further improve asset quality and reduce credit related costs."

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

Loan Type

    9/30/2013

12/31/2012

9/30/2012


(Dollars in Thousands)

Commercial

$   6,685

$ 14,753

$ 19,517

Consumer/installment

2,108

2,343

2,531

Mortgage

11,546

15,736

16,586

Payment plan receivables(2)

31

104

213

  Total

$ 20,370

$ 32,936

$ 38,847

Ratio of non-performing loans to total portfolio loans

1.48%

2.32%

2.71%

Ratio of non-performing assets to total assets

1.69%

2.92%

2.88%

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

169.06%

134.43%

123.62%

 

(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 $12.6 million, or 38.2%, 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.  In addition, the Company completed a sale of commercial loans during the second quarter of 2013 that included $2.9 million of non-performing loans.  Non-performing commercial loans have declined by $71.4 million, or 91.4%, since they peaked in 2008.  Non-performing retail (residential mortgage and consumer/installment) loans have declined by $45.5 million, or 76.9%, since they peaked in 2009.  Other real estate and repossessed assets totaled $16.6 million at Sept. 30, 2013, compared to $26.1 million at Dec. 31, 2012.

The provision for loan losses was a credit of $0.4 million and an expense of $0.3 million in the third quarters of 2013 and 2012, respectively.  The provision for loan losses was a credit of $3.2 million and an expense of $6.4 million in the first nine months 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 $2.0 million (0.58% annualized of average loans) in the third quarter of 2013, compared to $3.7 million (1.00% annualized of average loans) in the third quarter of 2012.  Loan net charge-offs were $6.7 million (0.65% of average loans) and $16.7 million (1.46% of average loans) for the first nine months of 2013 and 2012, respectively.  The year to date declines in 2013 loan net charge-offs by category were: commercial loans $5.0 million; mortgage loans $4.2 million; consumer/installment loans $0.7 million; and other $0.1 million.   At Sept. 30, 2013, the allowance for loan losses totaled $34.4 million, or 2.50% 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 $2.18 billion at Sept. 30, 2013, an increase of $159.6 million from Dec. 31, 2012.  Loans, excluding loans held for sale, were $1.38 billion at Sept. 30, 2013, compared to $1.42 billion at Dec. 31, 2012.  Deposits totaled $1.85 billion at Sept. 30, 2013, an increase of $69.8 million from Dec. 31, 2012.  The increase in deposits is primarily due to growth in checking and savings account balances. 

Cash and cash equivalents totaled $130.9 million at Sept. 30, 2013, versus $179.8 million at Dec. 31, 2012. Securities available for sale totaled $415.9 million at Sept. 30, 2013, versus $208.4 million at Dec. 31, 2012.  This $207.5 million increase in securities available for sale is primarily due to the purchase of residential mortgage-backed, asset-backed, corporate and municipal securities during the first nine months of 2013.

Total shareholders' equity was $226.6 million at Sept. 30, 2013, or 10.38% of total assets.  Tangible common equity totaled $223.2 million (10.24% of tangible assets) at Sept. 30, 2013, or $9.79 per share. 

The Company's wholly owned subsidiary, Independent Bank, remains "well capitalized" for regulatory purposes with the following ratios:

Regulatory Capital Ratios

9/30/2013

12/31/2012

Well Capitalized Minimum

 

Tier 1 capital to average total assets

 

9.88%

 

8.26%

 

5.00%

Tier 1 capital to risk-weighted assets

14.74%

13.67%

6.00%

Total capital to risk-weighted assets

16.01%

14.95%

10.00%

 

About Independent Bank Corporation

Independent Bank Corporation (NASDAQ: IBCP) is a Michigan-based bank holding company with total assets of approximately $2.2 billion.  Founded as First National Bank of Ionia in 1864, Independent Bank Corporation currently operates a 71-branch network 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 Web site 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 include descriptions of plans and objectives of Independent Bank Corporation's management for future or past operations, products or services, and forecasts of the Company's revenue, earnings or other measures of economic performance. 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, involve assumptions and are subject to substantial risks and uncertainties, such as the 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 to remain well-capitalized under federal regulatory standards, the pace of economic recovery within Michigan and beyond, 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










September 30,


December 31,





2013


2012






(unaudited)



Assets


(In thousands, except share amounts)



Cash and due from banks

$

56,179

$

55,487



Interest bearing deposits


74,766


124,295



Cash and Cash Equivalents


130,945


179,782



Interest bearing deposits - time


16,946


-



Trading securities


308


110



Securities available for sale


415,885


208,413



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


21,496


20,838



Loans held for sale, carried at fair value


27,622


47,487



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


-


3,292



Loans







  Commercial


625,422


617,258



  Mortgage


491,525


527,340



  Installment  


194,542


189,849



  Payment plan receivables


68,494


84,692



Total Loans


1,379,983


1,419,139



  Allowance for loan losses


(34,437)


(44,275)



Net Loans


1,345,546


1,374,864



Other real estate and repossessed assets


16,637


26,133



Property and equipment, net


47,884


47,016



Bank-owned life insurance


51,916


50,890



Deferred tax assets, net


58,807


-



Capitalized mortgage loan servicing rights


13,051


11,013



Vehicle service contract counterparty receivables, net


9,753


18,449



Other intangibles


3,366


3,975



Prepaid FDIC deposit insurance assessment


-


9,448



Accrued income and other assets


23,342


22,157



Total Assets

$

2,183,504

$

2,023,867



Liabilities and Shareholders' Equity







Deposits







  Non-interest bearing

$

508,983

$

488,126



  Savings and interest-bearing checking


908,599


871,238



  Reciprocal


55,924


33,242



  Retail time


362,585


372,340



  Brokered time


13,227


14,591



Total Deposits


1,849,318


1,779,537



Other borrowings


17,282


17,625



Subordinated debentures


50,175


50,175



Vehicle service contract counterparty payables


5,499


7,725



Accrued expenses and other liabilities


34,629


33,830



Total Liabilities


1,956,903


1,888,892



Shareholders' Equity







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







    None issued and outstanding at September 30, 2013 and 74,426 shares







    issued and outstanding at December 31, 2012; liquidation preference:







    $85,150 at December 31, 2012


-


84,204



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







     issued and outstanding:  22,808,839 shares at September 30, 2013







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


350,926


251,237



  Accumulated deficit


(115,155)


(192,408)



  Accumulated other comprehensive loss


(9,170)


(8,058)



Total Shareholders' Equity


226,601


134,975



Total Liabilities and Shareholders' Equity

$

2,183,504

$

2,023,867

















 


 


INDEPENDENT BANK CORPORATION AND SUBSIDIARIES

Consolidated Statements of Operations
















Three Months Ended


Nine Months Ended




September 30,


June 30,


September 30,


September 30,




2013


2013


2012


2013


2012




(unaudited)




(In thousands)


Interest Income












  Interest and fees on loans

$

20,083

$

20,303

$

23,385

$

61,096

$

71,427


  Interest on securities












    Taxable


1,109


993


655


2,772


2,246


    Tax-exempt


282


242


261


762


801


  Other investments


310


324


432


966


1,210


Total Interest Income


21,784


21,862


24,733


65,596


75,684


Interest Expense












  Deposits


1,371


1,463


2,223


4,363


6,952


  Other borrowings


884


876


1,059


2,625


3,351


Total Interest Expense


2,255


2,339


3,282


6,988


10,303


Net Interest Income


19,529


19,523


21,451


58,608


65,381


Provision for loan losses


(355)


(2,107)


251


(3,153)


6,438


Net Interest Income After Provision for Loan Losses


19,884


21,630


21,200


61,761


58,943


Non-interest Income












  Service charges on deposit accounts


3,614


3,583


4,739


10,603


13,492


  Interchange income


1,852


1,933


2,324


5,542


7,053


  Net gains (losses) on assets












    Mortgage loans


1,570


3,208


4,602


8,415


12,041


    Securities


14


107


301


205


1,154



    Other than temporary impairment loss on securities













      Total impairment loss


-


(26)


(70)


(26)


(332)



      Loss recognized in other comprehensive loss


-


-


-


-


-



        Net impairment loss recognized in earnings


-


(26)


(70)


(26)


(332)


  Mortgage loan servicing


338


1,654


(364)


2,614


(716)



  Title insurance fees


409


368


482


1,261


1,479


  (Increase) decrease in fair value of U.S. Treasury warrant


-


20


(32)


(1,025)


(211)



  Other


2,040


2,164


2,560


6,327


8,208


Total Non-interest Income


9,837


13,011


14,542


33,916


42,168


Non-interest Expense












  Compensation and employee benefits


12,591


11,715


13,610


35,613


39,598


  Occupancy, net


2,017


2,147


2,482


6,588


7,688


  Data processing


2,090


2,042


2,024


6,048


5,960


  Loan and collection


1,584


1,702


2,832


5,512


8,129


  Vehicle service contract counterparty contingencies


149


3,127


281


3,403


1,078


  Furniture, fixtures and equipment


1,051


1,088


1,083


3,171


3,490


  Provision for loss reimbursement on sold loans


1,417


356


193


2,436


751


  Communications


695


730


896


2,205


2,791


  FDIC deposit insurance


685


711


816


2,026


2,489


  Advertising


652


659


647


1,881


1,842


  Legal and professional


487


664


952


1,843


3,117


  Interchange expense


410


418


468


1,238


1,321


  Net losses on other real estate and repossessed assets


119


320


291


1,091


1,911


  Credit card and bank service fees


310


331


433


975


1,708


  Write-down of property and equipment held for sale


-


-


860


-


860



  Cost (recoveries) related to unfunded lending commitments


(86)


48


(538)


(57)


(597)



  Other


1,763


1,684


1,966


5,176


4,692


Total Non-interest Expense


25,934


27,742


29,296


79,149


86,828


Income Before Income Tax


3,787


6,899


6,446


16,528


14,283



Income tax expense (benefit)


282


(56,489)


-


(56,172)


-



                                                       Net Income 

$

3,505

$

63,388

$

6,446

$

72,700

$

14,283



Preferred stock dividends and discount accretion


(749)


(1,157)


(1,093)


(3,001)


(3,241)



Preferred stock discount


7,554


-


-


7,554


-


Net Income Applicable to Common Stock

$

10,310

$

62,231

$

5,353

$

77,253

$

11,042







































                                                                         



INDEPENDENT BANK CORPORATION AND SUBSIDIARIES

Selected Financial Data


















Three Months Ended


Nine Months Ended





September 30,


June 30,


September 30,


September 30,





2013


2013


2012


2013


2012





(unaudited)



Per Common Share Data













Net Income Per Common Share (A)













  Basic (B)

$

0.73

$

6.56

$

0.61

$

7.03

$

1.28



  Diluted (C)


0.17


2.64


0.16


3.40


0.36



Cash dividends declared per common share


0.00


0.00


0.00


0.00


0.00





























Selected Ratios (D)













As a Percent of Average Interest-Earning Assets













  Interest income


4.57

%

4.65

%

4.55

%

4.66

%

4.70

%


  Interest expense


0.47


0.49


0.60


0.49


0.64



  Net interest income


4.10


4.16


3.95


4.17


4.06



Net Income to (A)













  Average common shareholders' equity


25.64

%

388.31

%

62.71

%

110.70

%

52.38

%


  Average assets


1.90


12.00


0.89


4.93


0.62





























Average Shares













  Basic (B)


14,167,043


9,480,454


8,778,899


10,989,142


8,637,176



  Diluted (C)


21,169,623


24,031,142


39,613,139


21,357,474


39,381,081



 

(A) These amounts are calculated using net income applicable to common stock.  Dividends on convertible preferred stock are added back and preferred stock discount is subtracted out 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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