Independent Bank Corporation Reports 2014 Second Quarter Results

IONIA, Mich., July 28, 2014 /PRNewswire/ -- Independent Bank Corporation (NASDAQ: IBCP) reported second quarter 2014 net income applicable to common stock of $6.1 million, or $0.26 per diluted share, versus net income applicable to common stock of $62.2 million, or $2.64 per diluted share, in the prior-year period.  For the six months ended June 30, 2014, the Company reported net income applicable to common stock of $9.2 million, or $0.39 per diluted share, compared to net income applicable to common stock of $66.9 million, or $2.90 per diluted share, in the prior-year period.  Second quarter and year-to-date 2013 results include an income tax benefit of $57.6 million (or approximately $2.40 per diluted share) associated with the reversal of substantially all of the Company's deferred tax asset valuation allowance in June 2013. 

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

  • A $1.0 million, or 14.5%, year-over-year increase in income before income taxes.
  • A $5.2 million, or 18.7%, year-over-year decrease in total non-interest expenses.
  • Total net loan growth of $17.0 million, or 5.0% annualized.
  • Improvement in asset quality, with non-performing loans down 16.7% during the quarter.
  • An increase in tangible book value per share to $10.47 at June 30, 2014 from $10.19 at Mar. 31, 2014.
  • The payment of a six cent per share dividend on common stock on May 15, 2014.

William B. ("Brad") Kessel, the President and Chief Executive Officer of Independent Bank Corporation, commented: "We are very pleased to report our tenth consecutive quarter of profitability as well as further progress in improving asset quality, as evidenced by a reduction in our non-performing loans and loan net charge-offs as compared to the year ago quarter.  We remain focused on the long-term improvement in our profitability, primarily through organic growth with a particular emphasis on commercial and consumer lending as well as core deposits.  During the second quarter of 2014, our commercial loans and consumer installment loans grew by $25.1 million, or 12% annualized.  Also, since year end 2013, checking and savings account balances have increased by $56.1 million, or 3.9%.  Finally, as previously announced, on July 22, 2014, our board of directors declared a six cent per share dividend on common stock.  This dividend is payable on Aug. 15, 2014, to shareholders of record as of Aug. 5, 2014."

Operating Results

The Company's net interest income totaled $18.5 million during the second quarter of 2014, a decrease of $1.0 million, or 5.0% from the year-ago period, and up slightly (by $0.1 million, or 0.3%) from the first quarter of 2014.  The Company's tax equivalent net interest income as a percent of average interest-earning assets (the "net interest margin") was 3.74% during the second quarter of 2014, compared to 4.16% in the year-ago period, and 3.79% in the first quarter of 2014. The decrease in net interest income is due to the decline in the net interest margin, which reflects a change in asset mix, as higher yielding loans decreased and lower yielding investment securities increased from year ago levels.  Average interest-earning assets were $2.01 billion in the second quarter of 2014 compared to $1.90 billion in the year ago quarter and $1.99 billion in the first quarter of 2014.

For the first six months of 2014, net interest income totaled $37.0 million, a decrease of $2.1 million, or 5.3% from 2013.  The Company's net interest margin for the first six months of 2014 decreased to 3.76% compared to 4.20% in 2013.  The reasons for the decline in net interest income for the first six months of 2014 are generally consistent with those described above for the comparative year-over-year quarterly periods.

Service charges on deposit accounts totaled $3.5 million and $6.6 million, respectively, for the second quarter and first six months of 2014, representing decreases of 1.4% and 5.8%, respectively, from the comparable year ago periods.  The decline in service charges is due principally to a decrease in non-sufficient funds ("NSF") occurrences and related NSF fees. 

Interchange income totaled $2.1 million and $4.0 million for the second quarter and first six months of 2014, respectively, representing increases of 6.9% and 8.6%, respectively, over the year ago comparative periods.  The increase in interchange income primarily reflects the impact of the Company's new debit card brand agreement. 

Net gains on mortgage loans were $1.5 million in the second quarter of 2014, compared to $3.2 million in the year-ago quarter.  For the first six months of 2014, net gains on mortgage loans totaled $2.6 million compared to $6.8 million in 2013. The decrease in net gains relates primarily to decreases in mortgage loan originations and sales.  The decline in mortgage lending and sales volumes principally reflects a significant decrease in refinance volume resulting from a year-over-year increase in mortgage loan interest rates. 

Mortgage loan servicing generated income of $0.2 million and $1.7 million in the second quarters of 2014 and 2013, respectively. The quarterly comparative variance is due primarily to the change in the impairment reserve (a $0.2 million impairment charge in the second quarter of 2014 as compared to a $1.7 million recovery of previously recorded impairment charges in the year-ago quarter) that was partially offset by a $0.4 million decrease in the amortization of capitalized mortgage loan servicing rights.  For the first six months of 2014, mortgage loan servicing generated income of $0.5 million compared to income of $2.3 million in 2013.  The first six months comparative variance is primarily due to the change in the impairment reserve (a $0.5 million impairment charge in the first six months of 2014 as compared to a $2.5 million recovery of previously recorded impairment charges in the year-ago period) that was partially offset by a $1.1 million decrease in the amortization of capitalized mortgage loan servicing rights.  Capitalized mortgage loan servicing rights totaled $12.8 million at June 30, 2014 compared to $13.7 million at Dec. 31, 2013.  As of June 30, 2014, the Company serviced approximately $1.69 billion in mortgage loans for others on which servicing rights have been capitalized.

Non-interest expenses totaled $22.6 million in the second quarter of 2014, compared to $27.7 million in the year-ago period.  For the first six months of 2014, non-interest expenses totaled $45.0 million versus $53.2 million in 2013.  Credit related costs,  collectively declined by $4.0 million (73.2%) and $6.7 million (73.4%) in the second quarter and for the first six months of 2014, respectively, as compared to the same periods in 2013.  Credit related costs include loan and collection expenses, net (gains) losses on other real estate ("ORE") and repossessed assets, the provision for loss reimbursement on sold loans and vehicle service contract counterparty contingencies expense.  Several other categories of expenses declined in 2014 as compared to the year ago period, including, data processing, advertising, FDIC deposit insurance, legal and professional fees, interchange costs and credit card and bank service fees. 

The Company recorded an income tax expense of $1.8 million and $3.3 million in the second quarter and first six months of 2014, respectively.  This compares to an income tax benefit of $56.5 million recorded for both the second quarter and first six months of 2013. The 2013 results include an income tax benefit of $57.6 million associated with the reversal of substantially all of the Company's deferred tax asset valuation allowance in June 2013.  The second quarter and year-to-date 2014 income tax expense was reduced by a credit of approximately $0.7 million due to a true-up of the amount of unrecognized tax benefits relative to certain net operating loss carryforwards and the reversal of the valuation allowance on a capital loss carryforward that is now believed to be more likely than not to be realized due to a strategy executed during the second quarter of 2014.      

In determining net income applicable to common stock, the second quarter and first six months of 2013 included $1.2 million and $2.3 million, respectively, of preferred stock dividends and discount accretion.  This preferred stock, which had been issued to the U.S. Treasury, was redeemed and retired in Aug. 2013.

Asset Quality

Commenting on asset quality, President and CEO Kessel added:  "Non-performing loans decreased by $3.5 million, or 16.7%, between Mar. 31, 2014 and June 30, 2014.  We remain confident about the long-term continued improvement in our asset quality metrics.  Subsequent to quarter end, in July 2014, we sold our single largest ORE property, which represented nearly one-third of our total ORE balance at June 30, 2014.   Our provision for loan losses was a credit of $1.4 million in the first six months of 2014 compared to a credit of $2.8 million in the year-ago quarter.  However, other credit costs declined by approximately $6.7 million year-over year.  In addition, thirty- to eighty-nine day delinquency rates at June 30, 2014 were 0.11% for commercial loans and 1.13% 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

    6/30/2014

12/31/2013

6/30/2013


(Dollars in Thousands)

Commercial

$   5,107

$   5,369

$   4,986

Consumer/installment

1,705

2,147

2,209

Mortgage

10,520

10,366

12,842

Payment plan receivables(2)

11

23

67

  Total

$ 17,343

$ 17,905

$ 20,104

Ratio of non-performing loans to total portfolio loans

1.26%

1.30%

1.45%

Ratio of non-performing assets to total assets

1.58%

1.64%

1.78%

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

162.58%

180.54%

182.98%

(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 $0.6 million, or 3.1%, since Dec. 31, 2013 and by $2.8 million, or 13.7%, since June 30, 2013.  The decline in non-performing loans primarily reflects loan net charge-offs, pay-offs, negotiated transactions and the migration of loans into ORE.  ORE and repossessed assets totaled $18.1 million at June 30, 2014, compared to $18.3 million at Dec. 31, 2013.  In July 2014, the Company closed on the cash sale of its largest ORE property.  The book value of this property was $5.6 million at June 30, 2014 (representing 30.6% of total ORE and repossessed assets) and the Company recorded a net gain of $0.4 million on this sale in July 2014.

The provision for loan losses was a credit of $1.8 million and $2.1 million in the second quarters of 2014 and 2013, respectively.  The provision for loan losses was a credit of $1.4 million and $2.8 million in the first six months of 2014 and 2013, 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 $0.4 million (0.12% annualized of average loans) in the second quarter of 2014, compared to $1.9 million (0.54% annualized of average loans) in the second quarter of 2013.  Loan net charge-offs were $2.7 million (0.40% of average loans) and $4.7 million (0.68% of average loans) for the first six months of 2014 and 2013, respectively.  The year to date declines in 2014 loan net charge-offs by category were: commercial loans $0.4 million; mortgage loans $1.0 million; and consumer/installment loans $0.6 million.  At June 30, 2014, the allowance for loan losses totaled $28.2 million, or 2.05% of portfolio loans, compared to $32.3 million, or 2.35% of portfolio loans, at Dec. 31, 2013.

Balance Sheet, Liquidity and Capital

Total assets were $2.25 billion at June 30, 2014, an increase of $39.9 million from Dec. 31, 2013.  Loans, excluding loans held for sale, were $1.38 billion at June 30, 2014, compared to $1.37 billion at Dec. 31, 2013.  Deposits totaled $1.91 billion at June 30, 2014, an increase of $23.3 million from Dec. 31, 2013.  The increase in deposits is primarily due to growth in checking and savings account balances. 

Cash and cash equivalents totaled $105.5 million at June 30, 2014, versus $119.1 million at Dec. 31, 2013. Securities available for sale totaled $518.1 million at June 30, 2014, versus $462.5 million at Dec. 31, 2013.  This $55.6 million increase is primarily due to the purchase of residential mortgage-backed securities, asset-backed securities, municipal securities and corporate securities during the first six months of 2014.

Total shareholders' equity was $243.0 million at June 30, 2014, or 10.80% of total assets.  Tangible common equity totaled $240.1 million at June 30, 2014, or $10.47 per share.  The Company's wholly owned subsidiary, Independent Bank, remains significantly above "well capitalized" for regulatory purposes with the following ratios:

 

 

Regulatory Capital Ratios

 

 

6/30/2014

 

 

12/31/2013

Well
Capitalized
Minimum

 

Tier 1 capital to average total assets

 

9.91%

 

10.09%

 

5.00%

Tier 1 capital to risk-weighted assets

15.07%

15.30%

6.00%

Total capital to risk-weighted assets

16.33%

16.57%

10.00%

About Independent Bank Corporation

Independent Bank Corporation (NASDAQ: IBCP) is a Michigan-based bank holding company with total assets of approximately $2.25 billion.  Founded as First National Bank of Ionia in 1864, Independent Bank Corporation operates a 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 "anticipates," "believes," "contemplates," "feels," "expects," "estimates," "seeks," "strives," "plans," "intends," "outlook," "forecast," "position," "target," "mission," "assume," "achievable," "potential," "strategy," "goal," "aspiration," "opportunity," "initiative," "outcome," "continue," "remain," "maintain," "on course," "trend," "objective," "looks forward" and variations of such words and similar expressions, or future or conditional verbs such as "will," "would," "should," "could," "might," "can," "may" or similar expressions, as they relate to Independent Bank Corporation or its management, are intended to identify forward-looking statements. These forward-looking statements are predicated on the beliefs and assumptions of Independent Bank Corporation's management 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 or past operations, products or services, and forecasts of Independent Bank Corporation's revenue, earnings or other measures of economic performance, including statements of profitability, business segments and subsidiaries, and estimates of credit trends. Such statements reflect the view of Independent Bank Corporation's management as of this date with respect to future events and are subject to risks and uncertainties. Should one or more of these risks materialize or should underlying beliefs or assumptions prove incorrect, Independent Bank Corporation's actual results could differ materially from those discussed. Factors that could cause or contribute to such differences are changes in general economic, political or industry conditions; changes in monetary and fiscal policies, including the interest rate policies of the Federal Reserve Board; volatility and disruptions in capital and credit markets; the interdependence of financial service companies; changes in regulation or oversight; unfavorable developments concerning credit quality; any future acquisitions or divestitures; the effects of more stringent capital or liquidity requirements; declines or other changes in the businesses or industries of Independent Bank Corporation's customers; the implementation of Independent Bank Corporation's strategies and business models; Independent Bank Corporation's ability to utilize technology to efficiently and effectively develop, market and deliver new products and services; operational difficulties, failure of technology infrastructure or information security incidents; changes in the financial markets, including fluctuations in interest rates and their impact on deposit pricing; competitive product and pricing pressures among financial institutions within Independent Bank Corporation's markets; changes in customer behavior; management's ability to maintain and expand customer relationships; management's ability to retain key officers and employees; the impact of legal and regulatory proceedings or determinations; the effectiveness of methods of reducing risk exposures; the effects of terrorist activities and other hostilities; the effects of catastrophic events; changes in accounting standards and the critical nature of Independent Bank Corporation's accounting policies. Independent Bank Corporation cautions that the foregoing list of factors is not exclusive. For discussion of factors that may cause actual results to differ from expectations, please refer to our filings with the Securities and Exchange Commission. In particular, please refer to "Item 1A. Risk Factors" in Independent Bank Corporation's Annual Report on Form 10-K for the year ended December 31, 2013. 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



June 30,


December 31,



2014


2013



(unaudited)



(In thousands, except share



amounts)

Assets

Cash and due from banks 


$    58,599


$        48,156

Interest bearing deposits and repurchase agreement


46,938


70,925

    Cash and Cash Equivalents


105,537


119,081

Interest bearing deposits - time


15,340


17,999

Trading securities


609


498

Securities available for sale 


518,126


462,481

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


23,414


23,419

Loans held for sale, carried at fair value 


23,199


20,390

Loans





  Commercial 


654,248


635,234

  Mortgage 


472,202


486,633

  Installment 


201,206


192,065

  Payment plan receivables


49,838


60,638

      Total Loans 


1,377,494


1,374,570

  Allowance for loan losses 


(28,197)


(32,325)

      Net Loans 


1,349,297


1,342,245

Other real estate and repossessed assets


18,121


18,282

Property and equipment, net 


46,842


48,594

Bank-owned life insurance 


52,913


52,253

Deferred tax assets, net


52,676


57,550

Capitalized mortgage loan servicing rights


12,796


13,710

Vehicle service contract counterparty receivables, net


7,104


7,716

Other intangibles 


2,895


3,163

Accrued income and other assets 


20,995


22,562

        Total Assets 


$2,249,864


$   2,209,943






Liabilities and Shareholders' Equity

Deposits





  Non-interest bearing 


$   548,090


$      518,658

  Savings and interest-bearing checking


937,031


910,352

  Reciprocal


63,183


83,527

  Retail time


346,534


358,800

  Brokered time


13,233


13,469

      Total Deposits 


1,908,071


1,884,806

Other borrowings 


26,614


17,188

Subordinated debentures 


40,723


40,723

Vehicle service contract counterparty payables


3,088


4,089

Accrued expenses and other liabilities 


28,407


31,556

      Total Liabilities  


2,006,903


1,978,362






Shareholders' Equity





  Preferred stock, no par value, 200,000 shares authorized; none issued or outstanding


-


-

  Common stock, no par value, 500,000,000 shares authorized; issued and outstanding:  





     22,931,769 shares at June 30, 2014 and 22,819,136 shares at December 31, 2013


351,791


351,173

  Accumulated deficit


(102,532)


(110,347)

  Accumulated other comprehensive loss


(6,298)


(9,245)

      Total Shareholders' Equity 


242,961


231,581

        Total Liabilities and Shareholders' Equity 


$2,249,864


$   2,209,943

 

 

 

INDEPENDENT BANK CORPORATION AND SUBSIDIARIES

Consolidated Statements of Operations














Three Months Ended


Six Months Ended



June 30,


March 31,


June 30, 


June 30,



2014


2014


2013


2014


2013



(unaudited)

Interest Income


(In thousands)

  Interest and fees on loans 


$ 18,146


$ 18,215


$ 20,303


$ 36,361


$ 41,013

  Interest on securities 











    Taxable 


1,596


1,383


993


2,979


1,663

    Tax-exempt 


287


262


242


549


480

  Other investments 


328


423


324


751


656

    Total Interest Income 


20,357


20,283


21,862


40,640


43,812

Interest Expense











  Deposits 


1,260


1,293


1,463


2,553


2,992

  Other borrowings 


559


512


876


1,071


1,741

    Total Interest Expense 


1,819


1,805


2,339


3,624


4,733

    Net Interest Income 


18,538


18,478


19,523


37,016


39,079

Provision for loan losses 


(1,845)


428


(2,107)


(1,417)


(2,798)

    Net Interest Income After Provision for Loan Losses 


20,383


18,050


21,630


38,433


41,877

Non-interest Income











  Service charges on deposit accounts 


3,532


3,055


3,583


6,587


6,989

  Interchange income 


2,067


1,941


1,933


4,008


3,690

  Net gains (losses) on assets











    Mortgage loans 


1,505


1,144


3,208


2,649


6,845

    Securities 


54


112


107


166


191

    Other than temporary impairment loss on securities











      Total impairment loss


-


-


(26)


-


(26)

      Loss recognized in other comprehensive loss


-


-


-


-


-

        Net impairment loss recognized in earnings


-


-


(26)


-


(26)

  Mortgage loan servicing 


193


264


1,654


457


2,276

  Title insurance fees 


217


274


368


491


852

  Decrease (increase) in fair value of U.S. Treasury warrant


-


-


20


-


(1,025)

  Other


2,508


2,165


2,164


4,673


4,287

    Total Non-interest Income 


10,076


8,955


13,011


19,031


24,079

Non-Interest Expense











  Compensation and employee benefits 


11,818


11,238


11,715


23,056


23,022

  Occupancy, net 


2,153


2,483


2,147


4,636


4,571

  Data processing


1,777


2,086


2,042


3,863


3,958

  Loan and collection


1,427


1,465


1,702


2,892


3,928

  Furniture, fixtures and equipment 


1,053


1,069


1,088


2,122


2,120

  Communications


711


789


730


1,500


1,510

  Advertising


601


519


659


1,120


1,229

  FDIC deposit insurance


422


417


711


839


1,341

  Legal and professional


420


401


664


821


1,356

  Interchange expense


342


402


418


744


828

  Credit card and bank service fees


245


263


331


508


665

  Vehicle service contract counterparty contingencies


73


68


3,127


141


3,254

  Costs related to unfunded lending commitments


5


10


48


15


29

  Provision for loss reimbursement on sold loans


15


(481)


356


(466)


1,019

  Net (gains) losses on other real estate and 











    repossessed assets


(38)


(87)


320


(125)


972

  Other


1,536


1,758


1,684


3,294


3,413

    Total Non-interest Expense 


22,560


22,400


27,742


44,960


53,215

      Income Before Income Tax


7,899


4,605


6,899


12,504


12,741

Income tax expense (benefit)


1,847


1,467


(56,489)


3,314


(56,454)

      Net Income


$  6,052


$   3,138


$ 63,388


$  9,190


$ 69,195

Preferred stock dividends and discount accretion


-


-


(1,157)


-


(2,252)

      Net Income Applicable to Common Stock


$  6,052


$   3,138


$ 62,231


$  9,190


$ 66,943

 

 

INDEPENDENT BANK CORPORATION AND SUBSIDIARIES



Selected Financial Data




Three Months Ended


Six Months Ended




June 30,


March 31,


June 30,


June 30,




2014


2014


2013


2014


2013




(unaudited)



Per Common Share Data












Net Income Per Common Share (A)












  Basic (B)

$      0.26


$      0.14


$      6.56


$      0.40


$      7.14



  Diluted (C)

0.26


0.13


2.64


0.39


2.90



Cash dividends declared per common share

0.06


-


-


0.06


-



























Selected Ratios (D)












As a Percent of Average Interest-Earning Assets











  Interest income

4.10

%

4.16

%

4.65

%

4.13

%

4.71

%


  Interest expense

0.36


0.37


0.49


0.37


0.51



  Net interest income

3.74


3.79


4.16


3.76


4.20



Net Income to (A)












  Average common shareholders' equity

10.13

%

5.41

%

388.31

%

7.81

%

226.29

%


  Average assets

1.08


0.57


12.00


0.83


6.52



























Average Shares












  Basic (B)

22,928,009


22,887,502


9,480,454


22,907,867


9,373,855



  Diluted (C)

23,465,780


23,436,228


24,031,142


23,454,020


23,896,728







































(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 exercise of

stock options, restricted stock units and stock units for a deferred compensation plan for non-employee directors.



During 2013 average shares of common stock also include shares to be issued upon conversion of convertible preferred stock

and shares to be issued upon exercise of common stock warrants.





















(D)  Ratios have been annualized.












 

 

SOURCE Independent Bank Corporation



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