Independent Bank Corporation Reports 2014 Third Quarter Results

IONIA, Mich., Oct. 27, 2014 /PRNewswire/ -- Independent Bank Corporation (NASDAQ: IBCP) reported third quarter 2014 net income applicable to common stock of $4.9 million, or $0.21 per diluted share, versus net income applicable to common stock of $10.3 million, or $0.17 per diluted share, in the prior-year period.  For the nine months ended Sept. 30, 2014, the Company reported net income applicable to common stock of $14.1 million, or $0.60 per diluted share, compared to net income applicable to common stock of $77.3 million, or $3.40 per diluted share, in the prior-year period.  Third quarter and year-to-date 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 also include an income tax benefit of $57.3 million (or approximately $2.68 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 eleventh consecutive profitable quarter was highlighted by:

• A $3.5 million, or 92.1%, year-over-year increase in income before income taxes.
• A $3.9 million, or 14.8%, year-over-year decrease in total non-interest expenses.
• Total net portfolio loan growth of $21.3 million, or 6.1% annualized.
• Improvement in asset quality, with non-performing assets down $8.5 million, or 24.1%, during the quarter.
• An increase in tangible book value per share to $10.65 at Sept. 30, 2014 from $10.47 at June 30, 2014.
• The payment of a six cent per share dividend on common stock on Aug. 15, 2014.

William B. ("Brad") Kessel, the President and Chief Executive Officer of Independent Bank Corporation, commented: "We are very pleased to report our eleventh consecutive quarter of profitability as well as further progress in improving asset quality, as evidenced by a reduction in our non-performing assets and loan net charge-offs as compared to the year-ago quarter.  We remain focused on 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 third quarter of 2014, our commercial loans and consumer installment loans grew by $24.8 million, or 11.5% annualized.  Also, since year end 2013, checking and savings account balances have increased by $59.2 million, or 4.1%."

Operating Results

The Company's net interest income totaled $18.2 million during the third quarter of 2014, a decrease of $1.3 million, or 6.9% from the year-ago period, and a decrease of $0.4 million, or 1.9%, from the second quarter of 2014.  The Company's tax equivalent net interest income as a percent of average interest-earning assets (the "net interest margin") was 3.61% during the third quarter of 2014, compared to 4.10% in the year-ago period and 3.74% in the second quarter of 2014. The decrease in net interest income is due to the decline in the net interest margin that was only partially offset by an increase in average interest-earning assets.  The decrease in the net interest margin is primarily due to the prolonged low interest rate environment that has resulted in declining average yields on the Company's loan portfolio.  Average interest-earning assets were $2.02 billion in the third quarter of 2014 compared to $1.91 billion in the year-ago quarter and $2.01 billion in the second quarter of 2014.

For the first nine months of 2014, net interest income totaled $55.2 million, a decrease of $3.4 million, or 5.8% from 2013.  The Company's net interest margin for the first nine months of 2014 decreased to 3.71% compared to 4.17% in 2013.  The reasons for the decline in net interest income for the first nine months of 2014 are generally consistent with those described above for the comparative year-over-year quarterly periods.

Service charges on deposit accounts totaled $3.6 million and $10.2 million, respectively, for the third quarter and first nine months of 2014, representing decreases of 1.0% and 4.1%, 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 $2.0 million and $6.0 million for the third quarter and first nine months of 2014, respectively, representing increases of 7.1% and 8.1%, 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 third quarter of 2014, compared to $1.6 million in the year-ago quarter.  For the first nine months of 2014, net gains on mortgage loans totaled $4.1 million compared to $8.4 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 decrease in refinance volume resulting primarily from an increase in mortgage loan interest rates compared to the first five months of 2013. 

Mortgage loan servicing generated income of $0.9 million and $0.3 million in the third quarters of 2014 and 2013, respectively.  For the first nine months of 2014 and 2013, mortgage loan servicing generated income of $1.4 million and $2.6 million, respectively.  The comparative variances are due primarily to changes in the impairment reserve and in the level of amortization of capitalized mortgage loan servicing rights.  Capitalized mortgage loan servicing rights totaled $13.2 million at Sept. 30, 2014 compared to $13.7 million at Dec. 31, 2013.  As of Sept. 30, 2014, the Company serviced approximately $1.67 billion in mortgage loans for others on which servicing rights have been capitalized.

Non-interest expenses totaled $22.1 million in the third quarter of 2014, a reduction of $3.9 million compared to the year-ago period.  For the first nine months of 2014, non-interest expenses totaled $67.0 million, a reduction of $12.1 million from the first nine months of 2013.  Credit related costs collectively declined by $2.1 million (65.3%) and $8.9 million (71.3%) in the third quarter and for the first nine 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, interchange costs, and credit card and bank service fees. 

The Company recorded an income tax expense of $2.3 million and $5.7 million in the third quarter and first nine months of 2014, respectively.  This compares to an income tax expense of $0.3 million recorded in the third quarter of 2013 and an income tax benefit of $56.2 million recorded in the first nine months of 2013. The 2013 year-to-date 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 year-to-date 2014 income tax expense was reduced by a credit of approximately $0.7 million in the second quarter 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 third quarter and first nine months of 2013 included $0.7 million and $3.0 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 assets decreased by $10.1 million, or 27.3%, between Sept. 30, 2013 and Sept. 30, 2014.  We remain confident about the long-term continued improvement in our asset quality metrics.  In the third quarter of 2014, we sold our two largest ORE properties, which represented nearly one-half of our total ORE balance at June 30, 2014.   Our provision for loan losses was a credit of $2.0 million in the first nine months of 2014 compared to a credit of $3.2 million in the year-ago period.  Other credit costs declined by approximately $8.9 million year-over-year.  Finally, thirty- to eighty-nine day delinquency rates at Sept. 30, 2014 were 0.21% for commercial loans and 1.04% 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:

(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 $0.4 million, or 2.0%, since Dec. 31, 2013 and by $2.8 million, or 13.9%, since Sept. 30, 2013.  The decline in non-performing loans primarily reflects loan charge-offs, pay-offs, negotiated transactions and the migration of loans into ORE.  ORE and repossessed assets totaled $9.4 million at Sept. 30, 2014, compared to $18.3 million at Dec. 31, 2013.  In the third quarter of 2014, the Company closed on the cash sales of its two largest ORE properties.  The combined book value of these properties was $8.6 million and the Company recorded an aggregate net gain of $0.56 million on these sales.

The provision for loan losses was a credit of $0.6 million and $0.4 million in the third quarters of 2014 and 2013, respectively.  The provision for loan losses was a credit of $2.0 million and $3.2 million in the first nine 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 $0.06 million (0.02% annualized of average loans) in the third quarter of 2014, compared to $2.0 million (0.58% annualized of average loans) in the third quarter of 2013.  Loan net charge-offs were $2.8 million (0.27% of average loans) and $6.7 million (0.65% of average loans) for the first nine months of 2014 and 2013, respectively.  The year-to-date declines in 2014 loan net charge-offs by category were: commercial loans $1.6 million; mortgage loans $1.7 million; and consumer/installment loans $0.7 million.  At Sept. 30, 2014, the allowance for loan losses totaled $27.5 million, or 1.97% 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 $2.24 billion at Sept. 30, 2014, an increase of $29.9 million from Dec. 31, 2013.  Loans, excluding loans held for sale, were $1.40 billion at Sept. 30, 2014, compared to $1.37 billion at Dec. 31, 2013, an increase of 1.8%.  Deposits totaled $1.90 billion at Sept. 30, 2014, an increase of $11.1 million from Dec. 31, 2013.  The increase in deposits is due to growth in checking and savings account balances. 

Cash and cash equivalents totaled $65.5 million at Sept. 30, 2014, versus $119.1 million at Dec. 31, 2013. Securities available for sale totaled $533.2 million at Sept. 30, 2014, versus $462.5 million at Dec. 31, 2013.  This $70.7 million increase is primarily due to the purchase of residential mortgage-backed securities, asset-backed securities, municipal securities and corporate securities during the first nine months of 2014.

Total shareholders' equity was $247.1 million at Sept. 30, 2014, or 11.0% of total assets.  Tangible common equity totaled $244.3 million at Sept. 30, 2014, or $10.65 per share.  The capital ratios for the Company's wholly-owned subsidiary, Independent Bank, remain significantly above the minimum capital ratios required for the Bank to be considered "well capitalized" for regulatory purposes as follows:

About Independent Bank Corporation

Independent Bank Corporation (NASDAQ: IBCP) is a Michigan-based bank holding company with total assets of approximately $2.24 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.

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SOURCE Independent Bank Corporation

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