INDEPENDENT BANK CORPORATION 
By IONIA, Mich., July 29, 2013 /PRNewswire/ -- Independent Bank Corporation (Nasdaq: IBCP) reported second quarter 2013 net income applicable to common stock of $62.2 million, or $2.64 per diluted share, versus net income applicable to common stock of $3.2 million, or $0.11 per diluted share, in the prior-year period. For the six months ended June 30, 2013, the Company reported net income applicable to common stock of $66.9 million, or $2.90 per diluted share, compared to net income applicable to common stock of $5.7 million, or $0.19 per diluted share, in the prior-year period. 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 as described in more detail below.
The Company's sixth consecutive profitable quarter was highlighted by:
-- A 59.2% year-over-year increase in income before income taxes.
-- Additional improvement in asset quality, with non-performing assets down
26% during the quarter and 36% since year end 2012.
-- A $3.2 million, or 300%, year-over-year decline in the quarterly
provision for loan losses.
-- Regulatory capital ratios that increased significantly and are
substantially above minimum requirements for "well-capitalized."
The Company assesses whether a valuation allowance on its deferred tax assets is necessary each quarter. Reversing or reducing the 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 of June 30, 2013, the Company concluded that the realization of substantially all of the Company's deferred tax assets is now more likely than not. This conclusion is based upon the following factors:
-- Achieving a sixth consecutive quarter 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.
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.
On July 26, 2013 the Company and the United States Department of the Treasury ("UST") executed a Securities Purchase Agreement ("SPA"). Under the terms of the SPA, the Company has agreed to purchase from the UST for $81.0 million in cash consideration: (i) 74,426 shares of Cumulative Mandatorily Convertible Preferred Stock, Series B, including any and all accrued and unpaid dividends; and (ii) the amended and restated warrant to purchase up to 346,154 shares of Company common stock. As a condition to the closing of the purchase of these securities, the Company has also agreed to complete a common equity offering that provides a minimum aggregate amount of $86.0 million in gross cash proceeds. The closing of the transaction with the UST is also subject to regulatory approval as well as the payment of deferred and unpaid interest on the Company's outstanding trust preferred securities.
William B. ("Brad") Kessel, the President and Chief Executive Officer of Independent Bank Corporation, commented: "We are very pleased to report our sixth 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. The reversal of substantially all of the valuation allowance on our deferred tax assets also had a significant favorable impact on 2013 results, with increases in both earnings and common equity. Additionally, reaching an agreement with the UST to purchase the preferred stock and stock warrant that they own and exit TARP is a significant milestone for the Company. We plan to complete the common equity offering necessary to close this transaction with the UST by October 31, 2013."
Operating Results
The Company's net interest income totaled $19.5 million during the second quarter of 2013, a decrease of $2.3 million, or 10.6% from the year-ago period, and essentially unchanged from the first quarter of 2013. The Company's tax equivalent net interest income as a percent of average interest-earning assets (the "net interest margin") was 4.16% during the second quarter of 2013, compared to 4.06% in the year-ago period, and 4.25% in the first 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 $1.90 billion in the second quarter of 2013 compared to $2.18 billion in the year-ago quarter. The year-over-year increase in the net interest margin is due primarily to a change in asset mix, as lower yielding interest-bearing cash balances decreased following the branch sale.
For the first six months of 2013, net interest income totaled $39.1 million, a decrease of $4.9 million, or 11.0% from 2012. The Company's net interest margin for the first six months of 2013 increased to 4.20% compared to 4.12% in 2012. The reasons for the decline in net interest income for the first six 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 $7.0 million, respectively, for the second quarter and first six months of 2013, representing decreases of 21.3% and 20.2%, respectively, from the comparable year ago periods. Interchange income totaled $1.9 million and $3.7 million for the second quarter and first six months of 2013, respectively, representing decreases of 19.7% and 22.0%, 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 $3.2 million in the second quarter of 2013, compared to $3.6 million in the year-ago quarter. For the first six months of 2013, net gains on mortgage loans totaled $6.8 million compared to $7.4 million in 2012. The decrease in net gains relates primarily to a rise in mortgage loan interest rates during the second quarter of 2013 that has reduced mortgage loan refinance volumes.
Mortgage loan servicing generated income of $1.7 million and a loss of $1.1 million in the second quarters of 2013 and 2012, respectively. The quarterly comparative variance is due primarily to the change in the impairment reserve (a $1.7 million recovery of previously recorded impairment charges in the second quarter of 2013 compared to a $0.9 million impairment charge in the year-ago quarter) as well as by a $0.1 million decrease in the amortization of capitalized mortgage loan servicing rights. The recovery of previously recorded impairment charges in the second quarter of 2013 primarily reflects significantly higher mortgage loan interest rates resulting in lower estimated future prepayment rates. For the first six months of 2013, mortgage loan servicing generated income of $2.3 million compared to a loss of $0.4 million in 2012. The first six 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 six months of 2013 compared to a $0.2 million impairment charge in the year-ago period). Capitalized mortgage loan servicing rights totaled $13.0 million at June 30, 2013 compared to $11.0 million at Dec. 31, 2012. As of June 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 $27.7 million in the second quarter of 2013, compared to $29.5 million in the year-ago period. For all of 2013, non-interest expenses totaled $53.2 million versus $57.5 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). Loan and collection expenses (down $0.7 million in the quarter and $1.4 million year-to-date) and net losses on other real estate ("ORE") and repossessed assets (down $0.3 million in the quarter and $0.6 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 $0.3 million in the quarter and $0.6 million year-to-date) declined due primarily to a decrease in the size of the Company's payment plan receivables portfolio. Vehicle service contract counterparty contingencies expense increased by $2.8 million in the quarter and $2.5 million year-to-date. This increase primarily reflects write-downs of vehicle service contract counterparty receivables in the second quarter of 2013. The Company reached tentative 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. The first quarter and first six months 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 $3.2 million in the second 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 June 30, 2012, non-performing loans and commercial loan watch credits have declined by approximately 55% and 27%, respectively. In addition, thirty- to eighty-nine day delinquency rates at June 30, 2013 were 0.35% for commercial loans and 1.23% 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 6/30/2013 12/31/2012 6/30/2012
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(Dollars in Thousands)
Commercial $4,986 $14,753 $22,752
Consumer/installment 2,209 2,343 2,673
Mortgage 12,842 15,736 19,350
Payment plan receivables(2) 67 104 278
--- --- ---
Total $20,104 $32,936 $45,053
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Ratio of non-performing loans to total portfolio loans 1.45% 2.32% 3.09%
---- ---- ----
Ratio of non-performing assets to total assets 1.78% 2.92% 3.10%
---- ---- ----
Ratio of the allowance for loan losses to non-performing loans 182.98% 134.43% 113.97%
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(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 $12.8 million, or 39.0%, 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 $73.1 million, or 93.6%, since they peaked in 2008. Non-performing retail (residential mortgage and consumer/installment) loans have declined by $44.1 million, or 74.6%, since they peaked in 2009. Other real estate and repossessed assets totaled $17.8 million at June 30, 2013, compared to $26.1 million at Dec. 31, 2012.
The provision for loan losses was a credit of $2.1 million and an expense of $1.1 million in the second quarters of 2013 and 2012, respectively. The provision for loan losses was a credit of $2.8 million and an expense of $6.2 million in the first six 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 $1.9 million (0.54% annualized of average loans) in the second quarter of 2013, compared to $4.9 million (1.31% annualized of average loans) in the second quarter of 2012. Loan net charge-offs were $4.7 million (0.68% of average loans) and $12.9 million (1.69% of average loans) for the first six months of 2013 and 2012, respectively. The year to date declines in 2013 loan net charge-offs by category were: commercial loans $3.7 million; mortgage loans $3.9 million; and consumer/installment loans $0.6 million. At June 30, 2013, the allowance for loan losses totaled $36.8 million, or 2.65% 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 $2.13 billion at June 30, 2013, an increase of $110.8 million from Dec. 31, 2012. Loans, excluding loans held for sale, were $1.39 billion at June 30, 2013, compared to $1.42 billion at Dec. 31, 2012. Deposits totaled $1.82 billion at June 30, 2013, an increase of $36.6 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 $140.4 million at June 30, 2013, versus $179.8 million at Dec. 31, 2012. Securities available for sale totaled $353.8 million at June 30, 2013, versus $208.4 million at Dec. 31, 2012. This $145.4 million increase in securities available for sale is primarily due to the purchase of residential mortgage-backed securities and municipal securities during the first six months of 2013.
Total shareholders' equity was $208.8 million at June 30, 2013, or 9.78% of total assets. Tangible common equity totaled $118.8 million (5.58% of tangible assets) at June 30, 2013, or $12.53 per share. This computation of tangible common equity per share does not include any impact related to the potential issuance of common stock to provide funds to purchase the Company's outstanding mandatorily convertible preferred stock (including any and all accrued and unpaid dividends) and the UST stock warrant. The following table provides the resulting tangible common equity per share from an assumed purchase price of $81.0 million for the mandatorily convertible preferred stock and the UST stock warrant from funds provided by an assumed $86.0 million issuance of common stock.
Proforma tangible
Assumed common stock Resulting common shares common equity per
issuance price issued (000's) share
-------------- -------------- -----
$9.00 9,556 $10.78
8.50 10,118 10.47
8.00 10,750 10.15
7.50 11,467 9.80
7.00 12,286 9.43
6.50 13,231 9.04
The Company's wholly owned subsidiary, Independent Bank, remains "well capitalized" for regulatory purposes with the following ratios:
Well
Capitalized
Regulatory Capital Ratios 6/30/2013 12/31/2012 Minimum
------------------------- --------- ---------- -------
Tier 1 capital to average
total assets 10.35% 8.26% 5.00%
Tier 1 capital to risk-
weighted assets 15.07% 13.67% 6.00%
Total capital to risk-
weighted assets 16.35% 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 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
----------------------------------------------
June 30, December 31,
2013 2012
---- ----
(unaudited)
----------
Assets (In thousands, except share amounts)
Cash and due from banks $47,512 $55,487
Interest bearing deposits 92,863 124,295
------ -------
Cash and Cash Equivalents 140,375 179,782
Interest bearing deposits - time 8,698 -
Trading securities 293 110
Securities available for sale 353,775 208,413
Federal Home Loan Bank and Federal Reserve Bank stock, at cost 21,496 20,838
Loans held for sale, carried at fair value 35,529 47,487
Loans held for sale, carried at lower of cost or fair value - 3,292
Loans
Commercial 617,050 617,258
Mortgage 503,042 527,340
Installment 190,041 189,849
Payment plan receivables 75,949 84,692
Total Loans 1,386,082 1,419,139
Allowance for loan losses (36,786) (44,275)
------- -------
Net Loans 1,349,296 1,374,864
Other real estate and repossessed assets 17,790 26,133
Property and equipment, net 47,450 47,016
Bank-owned life insurance 51,564 50,890
Deferred tax assets, net 58,066 -
Capitalized mortgage loan servicing rights 13,037 11,013
Vehicle service contract counterparty receivables, net 15,091 18,449
Other intangibles 3,569 3,975
Prepaid FDIC deposit insurance assessment - 9,448
Accrued income and other assets 18,645 22,157
Total Assets $2,134,674 $2,023,867
========== ==========
Liabilities and Shareholders' Equity
Deposits
Non-interest bearing $498,511 $488,126
Savings and interest-bearing checking 898,782 871,238
Reciprocal 46,722 33,242
Retail time 358,849 372,340
Brokered time 13,225 14,591
------ ------
Total Deposits 1,816,089 1,779,537
Other borrowings 17,503 17,625
Subordinated debentures 50,175 50,175
Vehicle service contract counterparty payables 6,292 7,725
Accrued expenses and other liabilities 35,780 33,830
Total Liabilities 1,925,839 1,888,892
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Shareholders' Equity
Convertible preferred stock, no par value, 200,000 shares authorized;
74,426 shares issued and outstanding at June 30, 2013 and
December 31, 2012; liquidation preference: $87,292 at June 30,
2013 and $85,150 at December 31, 2012 86,455 84,204
Common stock, no par value, 500,000,000 shares authorized;
issued and outstanding: 9,481,505 shares at June 30, 2013
and 9,093,732 shares at December 31, 2012 255,114 251,237
Accumulated deficit (125,464) (192,408)
Accumulated other comprehensive loss (7,270) (8,058)
Total Shareholders' Equity 208,835 134,975
------- -------
Total Liabilities and Shareholders' Equity $2,134,674 $2,023,867
========== ==========
INDEPENDENT BANK CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
-------------------------------------
Three Months Ended Six Months Ended
June 30, March 31, June 30 June 30,
2013 2013 2012 2013 2012
---- ---- ---- ---- ----
(unaudited)
----------
(In thousands)
Interest Income
Interest and fees on loans $20,303 $20,710 $23,696 $41,013 $48,042
Interest on securities
Taxable 993 670 933 1,663 1,591
Tax-exempt 242 238 244 480 540
Other investments 324 332 382 656 778
--- --- ---
Total Interest Income 21,862 21,950 25,255 43,812 50,951
------ ------ ------ ------ ------
Interest Expense
Deposits 1,463 1,529 2,305 2,992 4,729
Other borrowings 876 865 1,120 1,741 2,292
----- ----- -----
Total Interest Expense 2,339 2,394 3,425 4,733 7,021
----- ----- ----- ----- -----
Net Interest Income 19,523 19,556 21,830 39,079 43,930
Provision for loan losses (2,107) (691) 1,056 (2,798) 6,187
------ ---- ----- ------ -----
Net Interest Income After Provision for Loan Losses 21,630 20,247 20,774 41,877 37,743
------ ------ ------ ------ ------
Non-interest Income
Service charges on deposit accounts 3,583 3,406 4,552 6,989 8,753
Interchange income 1,933 1,757 2,407 3,690 4,729
Net gains (losses) on assets
Mortgage loans 3,208 3,637 3,579 6,845 7,439
Securities 107 84 169 191 853
Other than temporary impairment loss on securities
Total impairment loss (26) - (85) (26) (262)
Loss recognized in other comprehensive loss - - - - -
--- --- --- --- ---
Net impairment loss recognized in earnings (26) - (85) (26) (262)
Mortgage loan servicing 1,654 622 (1,088) 2,276 (352)
Title insurance fees 368 484 489 852 997
(Increase) decrease in fair value of U.S. Treasury warrant 20 (1,045) (25) (1,025) (179)
Other 2,164 2,123 3,044 4,287 5,648
----- ----- -----
Total Non-interest Income 13,011 11,068 13,042 24,079 27,626
------ ------ ------ ------ ------
Non-interest Expense
Compensation and employee benefits 11,715 11,307 13,506 23,022 25,988
Occupancy, net 2,147 2,424 2,490 4,571 5,206
Data processing 2,042 1,916 2,003 3,958 3,936
Loan and collection 1,702 2,226 2,407 3,928 5,297
Vehicle service contract counterparty contingencies 3,127 127 326 3,254 797
Furniture, fixtures and equipment 1,088 1,032 1,211 2,120 2,407
Communications 730 780 922 1,510 1,895
Legal and professional 664 692 1,268 1,356 2,165
FDIC deposit insurance 711 630 816 1,341 1,673
Advertising 659 570 639 1,229 1,195
Provision for loss reimbursement on sold loans 356 663 126 1,019 558
Net losses on other real estate and repossessed assets 320 652 633 972 1,620
Interchange expense 418 410 447 828 853
Credit card and bank service fees 331 334 624 665 1,275
Cost (recoveries) related to unfunded lending commitments 48 (19) (12) 29 (59)
Other 1,684 1,729 2,077 3,413 2,726
----- ----- -----
Total Non-interest Expense 27,742 25,473 29,483 53,215 57,532
------ ------ ------ ------ ------
Income Before Income Tax 6,899 5,842 4,333 12,741 7,837
Income tax expense (benefit) (56,489) 35 - (56,454) -
------- --- --- ------- ---
Net Income $63,388 $5,807 $4,333 $69,195 $7,837
Preferred stock dividends and discount accretion 1,157 1,095 1,092 2,252 2,148
----- ----- ----- ----- -----
Net Income Applicable to Common Stock $62,231 $4,712 $3,241 $66,943 $5,689
INDEPENDENT BANK CORPORATION AND SUBSIDIARIES
Selected Financial Data
-----------------------
Three Months Ended Six Months Ended
June 30, March 31, June 30, June 30,
2013 2013 2012 2013 2012
---- ---- ---- ---- ----
(unaudited)
----------
Per Common Share Data
Net Income Per Common Share (A)
Basic (B) $6.56 $0.51 $0.38 $7.14 $0.66
Diluted (C) 2.64 0.27 0.11 2.90 0.19
Cash dividends declared per common share .00 0.00 .00 .00 .00
Selected Ratios (D)
As a Percent of Average Interest-Earning Assets
Interest income 4.65% 4.77% 4.69% 4.71% 4.77%
Interest expense 0.49 0.52 0.63 0.51 0.65
Net interest income 4.16 4.25 4.06 4.20 4.12
Net Income to (A)
Average common shareholders' equity 388.31% 34.76% 47.96% 226.29% 45.34%
Average assets 12.00 0.93 0.54 6.52 0.48
Average Shares
Basic (B) 9,480,454 9,266,072 8,607,382 9,373,855 8,570,482
Diluted (C) 24,031,142 21,831,316 40,798,694 23,896,728 40,737,967
(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
