Independent Bank Corporation Reports 2012 Third Quarter Results
IONIA, Mich., Oct. 30, 2012 /PRNewswire/ -- Independent Bank Corporation (Nasdaq: IBCP) reported third quarter 2012 net income applicable to common stock of $5.4 million, or $0.16 per diluted share, versus a net loss applicable to common stock of $5.2 million, or $0.61 per share, in the prior-year period. For the nine months ended Sept. 30, 2012, the Company reported net income applicable to common stock of $11.0 million, or $0.36 per diluted share, compared to a net loss applicable to common stock of $14.6 million, or $1.78 per share, in the prior-year period. For periods where the Company is reporting a profit, the diluted earnings per share calculation includes, among other things, the assumed conversion of mandatorily convertible preferred stock using a five-day average price per common share based on the applicable period end.
The Company's third consecutive profitable quarter was highlighted by:
- Additional improvement in asset quality, with non-performing assets down 7% during the quarter and 26% since the end of 2011.
- A $5.9 million, or 96%, year-over-year decline in the quarterly provision for loan losses.
- Strong mortgage-banking results with a $2.6 million, or 127%, year-over-year increase in quarterly net gains on mortgage loans.
- Year-over-year growth in core deposits (excluding the pending impact of a branch sale).
- Regulatory capital ratios that increased and remain above minimum requirements for "well-capitalized" institutions.
The previously announced sale of 21 branches to Chemical Bank (the "Branch Sale") did not close in the third quarter of 2012. The Branch Sale is now expected to close prior to year end 2012.
Michael M. Magee, the Chief Executive Officer of Independent Bank Corporation, commented: "We are very pleased to report our third consecutive quarter of profitability in 2012 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. We remain focused on building consistent profitability. Our capital initiatives remain centered on strategies to convert the preferred stock owned by the U.S. Treasury into common stock and exiting TARP, while still preserving the potential future use of our net deferred tax asset, which totaled approximately $69.2 million at Sept. 30, 2012 and on which we have established a full valuation allowance. The potential future recovery of this valuation allowance represents a source of capital that would be of substantial value to our shareholders. Also, the Branch Sale is expected to have a significant positive impact on our regulatory capital ratios."
The Company's net interest income totaled $21.5 million during the third quarter of 2012, a decrease of $2.3 million, or 9.8% from the year-ago period, and a decrease of $0.4 million, or 1.7% from the second quarter of 2012. The Company's net interest income as a percent of average interest-earning assets (the "net interest margin") was 3.92% during the third quarter of 2012, compared to 4.59% in the year-ago period, and 4.02% in the second quarter of 2012. The net interest margin decreased due primarily to a change in asset mix, as higher yielding loans declined and lower yielding short-term investments increased. The increase in lower yielding interest-bearing cash balances and other short-term investments, in part, reflects the Company's efforts to increase liquidity in order to provide the future funding needed for the pending Branch Sale. The year-over-year decrease in net interest income was partially offset by an increase in average interest-earning assets, which rose to $2.18 billion in the third quarter of 2012 compared to $2.06 billion in the year-ago quarter and $2.18 billion in the second quarter of 2012. The increase in average interest-earning assets in 2012 primarily reflects a rise in securities available for sale and overnight interest-bearing balances at the Federal Reserve Bank that were partially offset by a decline in loans.
For the first nine months of 2012, net interest income totaled $65.4 million, a decrease of $6.2 million, or 8.7% from 2011. The Company's net interest margin for the first nine months of 2012 decreased to 4.03% compared to 4.43% in 2011. The reasons for the decline in net interest income for the first nine months of 2012 are generally consistent with those described above for the comparative quarterly periods.
Service charges on deposits totaled $4.7 million and $13.5 million, respectively, for the third quarter and first nine months of 2012, relatively unchanged when compared to $4.6 million and $13.7 million, respectively, in the year ago periods. Interchange income was also relatively unchanged and totaled $2.3 million and $7.1 million for the third quarter and first nine months of 2012, respectively, compared to $2.4 million and $6.8 million, respectively, in the year ago periods.
Net gains on mortgage loans were $4.6 million in the third quarter of 2012, compared to $2.0 million in the year-ago quarter. For the first nine months of 2012, net gains on mortgage loans totaled $12.0 million compared to $5.8 million in 2011. The increase in net gains relates primarily to a rise in mortgage loan sales volume associated with increased origination volume driven by record low interest rates.
Mortgage loan servicing generated a loss of $0.4 million and $2.7 million in the third quarters of 2012 and 2011, respectively. This decreased loss was due to the change in the impairment reserve (a $0.4 million impairment charge in the third quarter of 2012 compared to a $3.1 million impairment charge in the year-ago quarter) that was partially offset by a $0.4 million increase in the amortization of capitalized mortgage loan servicing rights. The impairment charge in the third quarter of 2012 primarily reflects lower mortgage loan interest rates resulting in higher estimated future prepayment rates. For the first nine months of 2012 and 2011, mortgage loan servicing generated a loss of $0.7 million and $1.9 million, respectively. The first nine months comparative variance is primarily due to the change in the impairment reserve (a $0.6 million impairment charge in 2012 compared to a $3.2 million impairment charge in 2011) that was partially offset by a $1.3 million increase in the amortization of capitalized mortgage loan servicing rights. Capitalized mortgage loan servicing rights totaled $10.2 million at Sept. 30, 2012 compared to $11.2 million at Dec. 31, 2011. As of Sept. 30, 2012, the Company serviced approximately $1.76 billion in mortgage loans for others on which servicing rights have been capitalized.
Non-interest expenses totaled $29.3 million in the third quarter of 2012, compared to $31.5 million in the year-ago period. The quarterly year-over-year decline in non-interest expenses was primarily due to decreases in net losses on other real estate and repossessed assets (down $1.6 million), credit card and bank service fees (down $0.4 million), and vehicle service contract counterparty contingencies (down $1.1 million). These declines were partially offset by an increase in compensation and benefits (up $1.0 million) as well as a $0.9 million write down of property and equipment related to branches that will be closed in the fourth quarter of 2012. For the first nine months of 2012, non-interest expenses totaled $86.8 million versus $97.2 million in 2011. This decline in non-interest expenses was primarily due to decreases in loan and collection costs (down $2.0 million), occupancy costs (down $0.7 million), net losses on other real estate and repossessed assets (down $2.2 million), vehicle service contract counterparty contingencies expense (down $3.9 million), credit card and bank service fees (down $1.2 million), and other non-interest expenses (down $2.0 million). These year-to-date declines were partially offset by an increase in compensation and benefits (up $1.6 million) as well as the aforementioned $0.9 million write down of property and equipment. Credit related costs (loan and collection, net losses on other real estate and repossessed assets, and vehicle service contract counterparty contingencies) have declined significantly in 2012, which primarily reflects the overall decrease in the volume of problem credits (non-performing loans and "watch" credits), stabilization in collateral values, and lower expected incurred losses and reduced levels of payment plan receivables. The increase in compensation and benefits primarily reflects expenses associated with reinstating certain employee incentive programs (including the Company's employee stock ownership plan) that had been suspended or reduced in prior years. This increase was partially offset by a 5.8% decline in full time equivalent employees in the first nine months of 2012 as compared to the prior year period.
Commenting on asset quality, CEO Magee added: "Our provision for loan losses decreased by $5.9 million, or 95.9%, in the third quarter of 2012 compared to the year-ago amount, 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 the start of this year, non-performing loans and commercial loan watch credits have declined by approximately 35% and 21%, respectively. In addition, thirty- to eighty-nine day delinquency rates at Sept. 30, 2012 were 0.92% for commercial loans and 1.16% for mortgage and consumer loans. These are near to the lowest levels that we have seen in several years. Nonetheless, we continue to focus on further improving asset quality and reducing credit related costs."
A breakdown of non-performing loans(1) by loan type is as follows:
(Dollars in Millions)
Payment plan receivables(2)
Ratio of non-performing loans to total portfolio loans
Ratio of non-performing assets to total assets
Ratio of the allowance for loan losses to non-performing loans
(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 $21.0 million, or 35.1%, since year-end 2011. All categories of non-performing loans declined, but the principal decreases since year-end 2011 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 2012. Non-performing commercial loans have declined by $58.5 million, or 75.0%, since they peaked in 2008. Non-performing retail (residential mortgage and consumer/installment) loans have declined by $40.1 million, or 67.7%, since they peaked in 2009. Other real estate and repossessed assets totaled $30.3 million at Sept. 30, 2012, compared to $34.0 million at Dec. 31, 2011.
The provision for loan losses was $0.3 million and $6.2 million in the third quarters of 2012 and 2011, respectively. For the first nine months of 2012, the provision for loan losses totaled $6.4 million versus $21.0 million in 2011. 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 $3.7 million (1.00% annualized of average loans) in the third quarter of 2012, compared to $7.9 million (1.89% annualized of average loans) in the third quarter of 2011. Loan net charge-offs were $16.7 million (1.46% of average loans) and $30.1 million (2.35% of average loans) for the first nine months of 2012 and 2011, respectively. The year to date declines in 2012 loan net charge-offs by category were: commercial loans $9.2 million; mortgage loans $3.2 million; and consumer/installment loans $0.9 million. At Sept. 30, 2012, the allowance for loan losses totaled $48.0 million, or 3.35% of portfolio loans, compared to $58.9 million, or 3.73% of portfolio loans, at Dec. 31, 2011.
Balance Sheet, Liquidity and Capital
Total assets were $2.40 billion at Sept. 30, 2012, an increase of $93.4 million, or 4.0%, from Dec. 31, 2011. Loans, excluding loans held for sale, were $1.43 billion at Sept. 30, 2012, compared to $1.58 billion at Dec. 31, 2011. Deposits (including $405.9 million related to the aforementioned pending Branch Sale) totaled $2.17 billion at Sept. 30, 2012, an increase of $84.4 million from Dec. 31, 2011. The increase in deposits is primarily due to growth in checking and savings.
Cash and cash equivalents totaled $460.5 million at Sept. 30, 2012, versus $341.1 million at Dec. 31, 2011. Securities available for sale totaled $230.2 million at Sept. 30, 2012, versus $157.4 million at Dec. 31, 2011. This $72.7 million increase is primarily due to the purchase of residential mortgage-backed and U.S. government agency securities during the first nine months of 2012.
Total shareholders' equity was $121.5 million at Sept. 30, 2012, or 5.1% of total assets. Tangible common equity totaled $31.6 million at Sept. 30, 2012, or $3.59 per share. The Company's wholly owned subsidiary, Independent Bank, remains "well capitalized" for regulatory purposes with the following ratios:
Regulatory Capital Ratio
Well Capitalized Minimum
Tier 1 capital to average total assets
Tier 1 capital to risk-weighted assets
Total capital to risk-weighted assets
About Independent Bank Corporation
Independent Bank Corporation (Nasdaq Symbol: IBCP) is a Michigan-based bank holding company with total assets of approximately $2.4 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 has received the "Highest Customer Satisfaction with Retail Banking in the North Central Region" from the J.D. Power and Associates 2012 Retail Banking Satisfaction StudySM. The J.D. Power and Associates study results are based on experiences and perceptions of consumers surveyed January-February, 2012. Independent Bank Corporation is committed to providing exceptional personal service and value to its customers, stockholders and the communities it serves.
For more information, please visit our website at: www.IndependentBank.com.
Any statements in this news release that are not historical facts are forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Words such as "expect," "believe," "intend," "estimate," "project," "may" and similar expressions are intended to identify forward-looking statements. These forward-looking statements are predicated on management's beliefs and assumptions based on information known to Independent Bank Corporation's management as of the date of this news release and do not purport to speak as of any other date. Forward-looking statements may include descriptions of plans and objectives of Independent Bank Corporation's management for future operations, products or services, and forecasts of the Company's revenue, earnings or other measures of economic performance, including statements of profitability, estimates of credit quality trends, and statements about the potential value of our deferred tax assets. Such statements reflect the view of Independent Bank Corporation's management as of this date with respect to future events and are not guarantees of future performance. These forward-looking statements involve assumptions and are subject to substantial risks and uncertainties, such as changes in Independent Bank Corporation's plans, objectives, expectations and intentions. Should one or more of these risks materialize or should underlying beliefs or assumptions prove incorrect, the Company's actual results could differ materially from those discussed. Factors that could cause or contribute to such differences include the ability of Independent Bank Corporation to meet the objectives of its capital restoration plan, the ability of Independent Bank to remain well-capitalized under federal regulatory standards, the pace of economic recovery within Michigan and beyond, our ability to collect receivables from Mepco Finance Corporation's counterparties related to cancellations of payment plans, changes in interest rates, changes in the accounting treatment of any particular item, the results of regulatory examinations, changes in industries where the Company has a concentration of loans, changes in the level of fee income, changes in general economic conditions and related credit and market conditions, and the impact of regulatory responses to any of the foregoing. Forward-looking statements speak only as of the date they are made. Independent Bank Corporation does not undertake to update forward-looking statements to reflect facts, circumstances, assumptions or events that occur after the date the forward-looking statements are made. For any forward-looking statements made in this news release or in any documents, Independent Bank Corporation claims the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.
INDEPENDENT BANK CORPORATION AND SUBSIDIARIES
Consolidated Statements of Financial Condition
(In thousands, except share amounts)
Cash and due from banks
Interest bearing deposits
Cash and Cash Equivalents
Securities available for sale
Federal Home Loan Bank and Federal Reserve Bank stock, at cost
Loans held for sale, carried at fair value
Loans held for sale, carried at lower of cost or fair value
Payment plan receivables
Allowance for loan losses
Other real estate and repossessed assets
Property and equipment, net
Bank-owned life insurance
Capitalized mortgage loan servicing rights
Prepaid FDIC deposit insurance assessment
Vehicle service contract counterparty receivables, net
Property and equipment held for sale
Accrued income and other assets
Liabilities and Shareholders' Equity
Savings and interest-bearing checking
Deposits held for sale relating to branch sale
Vehicle service contract counterparty payables
Accrued expenses and other liabilities
Preferred stock, no par value, 200,000 shares authorized; 74,426 shares
issued and outstanding at September 30, 2012 and December 31, 2011;
liquidation preference: $84,099 at September 30, 2012 and
$81,023 at December 31, 2011
Common stock, no par value, 500,000,000 shares authorized;
issued and outstanding: 8,804,415 shares at September 30, 2012
and 8,491,526 shares at December 31, 2011
Accumulated other comprehensive loss
Total Shareholders' Equity
Total Liabilities and Shareholders' Equity
INDEPENDENT BANK CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
Three Months Ended
Nine Months Ended
Interest and fees on loans
Interest on securities
Total Interest Income
Total Interest Expense
Net Interest Income
Provision for loan losses
Net Interest Income After Provision for Loan Losses
Service charges on deposit accounts
Net gains (losses) on assets
Other than temporary impairment loss on securities
Total impairment loss
Loss recognized in other comprehensive loss
Net impairment loss recognized in earnings
Mortgage loan servicing
Title insurance fees
(Increase) decrease in fair value of U.S. Treasury warrant
Total Non-interest Income
Compensation and employee benefits
Loan and collection
Furniture, fixtures and equipment
Legal and professional
FDIC deposit insurance
Net losses on other real estate and repossessed assets
Credit card and bank service fees
Vehicle service contract counterparty contingencies
Write-down of property and equipment held for sale
Provision for loss reimbursement on sold loans
Costs (recoveries) related to unfunded lending commitments
Total Non-interest Expense
Income (Loss) Before Income Tax
Income tax benefit
Net Income (Loss)
Preferred stock dividends and discount accretion
Net Income (Loss) Applicable to Common Stock
INDEPENDENT BANK CORPORATION AND SUBSIDIARIES
Selected Financial Data
Three Months Ended
Nine Months Ended
Per Common Share Data
Net Income (Loss) Per Common Share (A)
Cash dividends declared per common share
Selected Ratios (D)
As a Percent of Average Interest-Earning Assets
Net interest income
Net Income (Loss) to (A)
Average common shareholders' equity
(A) These amounts are calculated using net income (loss) applicable to common stock. For any period in which net income is recorded, dividends on convertible preferred stock are added back in the diluted per share calculation.
(B) Average shares of common stock for basic net income (loss) 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. For any period in which a loss is recorded, the assumed conversion of convertible preferred stock, assumed exercise of common stock warrants, assumed exercise of stock options, restricted stock units and stock units for a deferred compensation plan for non-employee directors would have an anti-dilutive impact on the loss per share and are thus ignored in the diluted per share calculation.
(D) Ratios have been annualized.
SOURCE Independent Bank Corporation