Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
IBCP > SEC Filings for IBCP > Form 10-Q on 7-Nov-2013All Recent SEC Filings

Show all filings for INDEPENDENT BANK CORP /MI/ | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for INDEPENDENT BANK CORP /MI/


7-Nov-2013

Quarterly Report


MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following section presents additional information that may be necessary to assess our financial condition and results of operations. This section should be read in conjunction with our condensed consolidated financial statements contained elsewhere in this report as well as our 2012 Annual Report on Form 10-K. The Form 10-K includes a list of risk factors that you should consider in connection with any decision to buy or sell our securities.

Introduction. Our success depends to a great extent upon the economic conditions in Michigan's Lower Peninsula. We have in general experienced a difficult economy in Michigan since 2001, although economic conditions in the state began to show signs of improvement during 2010 and generally these improvements have continued into 2013, albeit at a slower pace, as evidenced, in part, by an overall decline in the unemployment rate. However, Michigan's unemployment rate has been consistently above the national average.

We provide banking services to customers located primarily in Michigan's Lower Peninsula. Our loan portfolio, the ability of the borrowers to repay these loans and the value of the collateral securing these loans has been and will be impacted by local economic conditions. The weaker economic conditions faced in Michigan have had and may continue to have adverse consequences as described below in "Portfolio Loans and asset quality." However, since early- to mid-2009, we have generally seen an improvement in asset quality metrics. In particular, since early 2012, we have experienced a decline in non-performing assets, reduced levels of new loan defaults and reduced levels of net loan charge-offs.
These factors have resulted in a more significant decline in the provision for loan losses over the past few quarters. Additionally, housing prices and other related statistics (such as home sales and new building permits) have generally been improving.

In July 2010, Congress passed and the President signed into law the "Dodd-Frank Wall Street Reform and Consumer Protection Act" (the "Dodd-Frank Act"). The Dodd-Frank Act included the creation of the Consumer Financial Protection Bureau with power to promulgate and enforce consumer protection laws; the creation of the Financial Stability Oversight Council chaired by the Secretary of the Treasury with authority to identify institutions and practices that might pose a systemic risk; provisions affecting corporate governance and executive compensation of all companies whose securities are registered with the SEC; a provision that broadened the base for Federal Deposit Insurance Corporation ("FDIC") insurance assessments; a provision under which interchange fees for debit cards are set by the Federal Reserve under a restrictive "reasonable and proportional cost" per transaction standard; a provision that requires bank regulators to set minimum capital levels for bank holding companies that are as strong as those required for their insured depository subsidiaries, subject to a grandfather clause for financial institutions with less than $15 billion in assets as of December 31, 2009; and new restrictions on how mortgage brokers and loan originators may be compensated. Certain provisions of the Dodd-Frank Act only apply to institutions with more than $10 billion in assets. The Dodd-Frank Act has had (and we expect it will continue to have) a significant impact on the banking industry, including our organization.


Index
On May 23, 2012 we executed a definitive agreement to sell 21 branches to another financial institution (the "Branch Sale"). The branches sold included six branch locations in the Battle Creek, Michigan market area and 15 branch locations in Northeast Michigan. The Branch Sale closed on December 7, 2012 and resulted in the transfer of approximately $403.1 million of deposits in exchange for our receipt of a deposit premium of approximately $11.5 million. We also sold approximately $48.0 million of loans at a discount of 1.75% and premises and equipment totaling approximately $8.1 million. The Branch Sale also resulted in our transfer of $336.1 million of cash to the purchaser. We recorded a net gain on the Branch Sale of approximately $5.4 million in the fourth quarter of 2012.

In addition to the Branch Sale, we have closed or consolidated a total of 15 other branch locations since 2011.

On July 2, 2013, the Federal Reserve Board approved a final rule that establishes an integrated regulatory capital framework (the "New Capital Rules"). The rule will implement in the United States the Basel III regulatory capital reforms from the Basel Committee on Banking Supervision and certain changes required by the Dodd-Frank Act.

In general, under the New Capital Rules, minimum requirements will increase for both the quantity and quality of capital held by banking organizations. Consistent with the international Basel framework, the New Capital Rules include a new minimum ratio of common equity tier 1 capital to risk-weighted assets of 4.5% and a common equity tier 1 capital conservation buffer of 2.5% of risk-weighted assets that will apply to all supervised financial institutions. The rule also raises the minimum ratio of tier 1 capital to risk-weighted assets from 4% to 6% and includes a minimum leverage ratio of 4% for all banking organizations. As to the quality of capital, the New Capital Rules emphasize common equity tier 1 capital, the most loss-absorbing form of capital, and implements strict eligibility criteria for regulatory capital instruments. The New Capital Rules also change the methodology for calculating risk-weighted assets to enhance risk sensitivity.

We are subject to the New Capital Rules beginning on January 1, 2015. The 2.5% capital conservation buffer is being phased in over a four-year period beginning in 2016. Also, under the New Capital Rules our existing trust preferred securities are grandfathered as qualifying regulatory capital. We believe that we currently exceed all of the capital ratio requirements of the New Capital Rules.

On July 26, 2013 we executed a Securities Purchase Agreement ("SPA") with the United States Department of the Treasury ("UST"). Under the terms of the SPA, we agreed to purchase from the UST for $81.0 million in cash consideration: (i) 74,426 shares of our Series B Fixed Rate Cumulative Mandatorily Convertible Preferred Stock, with an original liquidation preference of $1,000 per share ("Series B Preferred Stock"), including any and all accrued and unpaid dividends; and (ii) the Amended and Restated Warrant to purchase up to 346,154 shares of our common stock at an exercise price of $7.234 per share and expiring on December 12, 2018 (the "Amended Warrant").

We completed the following transactions during the third quarter relative to our capital plan initiatives:

On August 28, 2013 we sold 11.5 million shares of our common stock for gross proceeds of $89.1 million in a public offering and on September 10, 2013 we sold an additional 1.725 million shares of our common stock for gross proceeds of $13.4 million pursuant to the underwriters' overallotment option (collectively, the "Common Stock Offering"). The net proceeds from the Common Stock Offering were approximately $97.1 million.


Index
On August 29, 2013 we brought current the interest payments that we had previously been deferring (since the fourth quarter of 2009) on all of our subordinated debentures which permitted the resumption of interest payments on the trust preferred securities issued by IBC Capital Finance II, III, and IV and Midwest Guaranty Trust I.

On August 30, 2013 we closed the SPA transaction with the UST and we exited the Troubled Asset Relief Program (TARP).

On September 11, 2013 we announced that we would redeem all of the 8.25% trust preferred securities ($9.2 million) issued by IBC Capital Finance II. This redemption occurred on October 11, 2013 and will reduce our annual interest expense by approximately $0.8 million.

It is against this backdrop that we discuss our results of operations for the third quarter and first nine months of 2013 as compared to 2012 and our financial condition as of September 30, 2013.

RESULTS OF OPERATIONS

Summary. We recorded net income of $3.5 million and $6.4 million, respectively, and net income applicable to common stock of $10.3 million and $5.4 million, respectively, during the three months ended September 30, 2013 and 2012. The decline in net income on a comparative quarterly basis is due primarily to decreases in net interest income and non-interest income that were partially offset by decreases in the provision for loan losses and non-interest expenses.
Third quarter 2013 net income applicable to common stock included a $7.6 million benefit from the redemption of our Series B Preferred Stock at a discount.

We recorded net income of $72.7 million and $14.3 million, respectively, and net income applicable to common stock of $77.3 million and $11.0 million, respectively, during the nine months ended September 30, 2013 and 2012. The significant improvement in 2013 year-to-date results as compared to 2012 primarily reflects the income tax benefit associated with the reversal of substantially all of the valuation allowance on our deferred tax assets (see "Income tax benefit.") and decreases in the provision for loan losses and in non-interest expenses, which were partially offset by a decreases in net interest income and non-interest income.


Index
Key performance ratios
                                        Three months ended          Nine months ended
                                           September 30,              September 30,
                                         2013          2012          2013         2012
Net income (annualized) to(1)(2)
Average assets                              1.90 %       0.89 %         4.93 %      0.62 %
Average common shareholders' equity        25.64        62.71         110.70       52.38

Net income per common share(1)
Basic                                 $     0.73      $  0.61     $     7.03     $  1.28
Diluted                                     0.17         0.16           3.40        0.36

(1) These amounts are calculated using net income applicable to common stock.

(2) Income before tax less preferred stock dividends and discount accretion (annualized) to average assets and average common shareholders' equity were 0.86% and 19.38% for the nine months ended September 30, 2013, respectively.

Net interest income. Net interest income is the most important source of our earnings and thus is critical in evaluating our results of operations. Changes in our net interest income are primarily influenced by our level of interest-earning assets and the income or yield that we earn on those assets and the manner and cost of funding our interest-earning assets. Certain macro-economic factors can also influence our net interest income such as the level and direction of interest rates, the difference between short-term and long-term interest rates (the steepness of the yield curve) and the general strength of the economies in which we are doing business. Finally, risk management plays an important role in our level of net interest income. The ineffective management of credit risk and interest-rate risk in particular can adversely impact our net interest income.

Our net interest income totaled $19.5 million during the third quarter of 2013, a decrease of $1.9 million, or 9.0% from the year-ago period. The decrease in net interest income in 2013 compared to 2012 primarily reflects a $267.4 million decrease in average interest-earning assets that was partially offset by a 15 basis point increase in our tax equivalent net interest income as a percent of average interest-earning assets (the "net interest margin"). The decline in average interest-earning assets is a result of the Branch Sale. Our net interest margin was 4.10% during the third quarter of 2013, compared to 3.95% in the year-ago period. The increase in the net interest margin is due primarily to a reduction in our cost of funds.

Interest rates have generally been at extremely low levels over the past four to five years due primarily to the Federal Reserve's monetary policies and its efforts to stimulate the U.S. economy. This very low interest rate environment has had an adverse impact on our interest income and net interest income. Based on recent announcements by the Federal Reserve, short-term interest rates are expected to remain extremely low until late-2014 or early-2015 (until the U.S. unemployment rate declines to approximately 6.5%). However, during the second and third quarters of 2013, mid- to long-term interest rates began to increase (for example the ten year U.S. treasury yield increased from 1.87% at the end of the first quarter of 2013 to 2.64% at the end of the third quarter of 2013). Given the repricing characteristics of our interest-earning assets and interest-bearing liabilities (and our level of non-interest bearing demand deposits), our net interest margin will generally benefit on a long-term basis from rising interest rates.


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

Our net interest income is also adversely impacted by our level of non-accrual loans. In the third quarter and first nine months of 2013 non-accrual loans averaged $20.5 million and $25.4 million, respectively compared to $41.7 million and $48.5 million, respectively for the same periods in 2012. In addition, in the third quarter and first nine months of 2013 we had net recoveries of $0.2 million and $0.4 million, respectively, of accrued and unpaid interest on loans placed on or taken off non-accrual during each period compared to net recoveries of $0.2 million and $0.2 million, respectively, during the same periods in 2012.

Average Balances and Tax Equivalent Rates
                                                   Three Months Ended September 30,
                                          2013                                          2012
                          Average                                       Average
                          Balance        Interest       Rate(3)         Balance        Interest       Rate(3)
Assets (1)                                              (Dollars in thousands)
Taxable loans           $ 1,396,709     $   20,027           5.70 %   $ 1,532,773     $   23,312           6.06 %
Tax-exempt loans (2)          5,321             86           6.41           6,709            111           6.58
Taxable securities          337,299          1,109           1.30         217,427            655           1.20
Tax-exempt securities        35,242            433           4.87          26,116            398           6.06
(2)
Cash - interest             117,971             68           0.23         377,899            243           0.26
bearing
Other investments            21,496            242           4.47          20,494            189           3.67
     Interest Earning     1,914,038         21,965           4.57       2,181,418         24,908           4.55
               Assets
Cash and due from            46,069                                        56,289
banks
Other assets, net           188,705                                       161,971
         Total Assets   $ 2,148,812                                   $ 2,399,678

Liabilities
Savings and             $   910,422            294           0.13     $ 1,079,389            494           0.18
interest-bearing
checking
Time deposits               415,090          1,077           1.03         549,319          1,729           1.25
Other borrowings             67,578            884           5.19          67,994          1,059           6.20
     Interest Bearing     1,393,090          2,255           0.64       1,696,702          3,282           0.77
          Liabilities
Non-interest bearing        502,357                                       545,945
deposits
Other liabilities            37,143                                        40,477
Shareholders' equity        216,222                                       116,554
Total liabilities and   $ 2,148,812                                   $ 2,399,678
 shareholders' equity

  Net Interest Income                   $   19,710                                    $   21,626

  Net Interest Income
      as a Percent of
     Average Interest
       Earning Assets                                        4.10 %                                        3.95 %

(1) All domestic.

(2) Interest on tax-exempt loans and securities is presented on a fully tax equivalent basis assuming a marginal tax rate of 35%

(3) Annualized.


Index
Average Balances and Tax Equivalent Rates
                                                           Nine Months Ended
                                                             September 30,
                                          2013                                          2012
                          Average                                       Average
                          Balance        Interest       Rate(3)         Balance        Interest       Rate(3)
Assets (1)                                              (Dollars in thousands)
Taxable loans           $ 1,415,545     $   60,919           5.75 %   $ 1,557,164     $   71,209           6.11 %
Tax-exempt loans (2)          5,628            272           6.46           7,010            336           6.40
Taxable securities          274,002          2,772           1.35         221,245          2,246           1.36
Tax-exempt securities        28,873          1,164           5.39          26,563          1,220           6.13
(2)
Cash - interest             149,807            272           0.24         334,426            638           0.25
bearing
Other investments            21,274            694           4.36          20,628            572           3.70
     Interest Earning     1,895,129         66,093           4.66       2,167,036         76,221           4.70
               Assets
Cash and due from            44,866                                        54,619
banks
Other assets, net           157,038                                       163,058
         Total Assets   $ 2,097,033                                   $ 2,384,713

Liabilities
Savings and             $   906,046            864           0.13     $ 1,071,169          1,452           0.18
interest-bearing
checking
Time deposits               418,193          3,499           1.12         565,731          5,500           1.30
Other borrowings             67,716          2,625           5.18          73,714          3,351           6.07
     Interest Bearing     1,391,955          6,988           0.67       1,710,614         10,303           0.80
          Liabilities
Non-interest bearing        496,777                                       524,615
deposits
Other liabilities            39,292                                        39,810
Shareholders' equity        169,009                                       109,674
Total liabilities and   $ 2,097,033                                   $ 2,384,713
 shareholders' equity

  Net Interest Income                   $   59,105                                    $   65,918

  Net Interest Income
         as a Percent
  of Average Interest
       Earning Assets                                        4.17 %                                        4.06 %

(1) All domestic.

(2) Interest on tax-exempt loans and securities is presented on a fully tax equivalent basis assuming a marginal tax rate of 35%

(3) Annualized.

Provision for loan losses. The provision for loan losses was a credit of $0.4 million and an expense of $0.3 million during the three months ended September 30, 2013 and 2012, respectively. During the nine-month periods ended September 30, 2013 and 2012, the provision was a credit of $3.2 million and an expense of $6.4 million, respectively. The provision reflects our 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. While we use relevant information to recognize losses on loans, additional provisions for related losses may be necessary based on changes in economic conditions, customer circumstances and other credit risk factors. The decrease in the provision for loan losses in the third quarter and first nine months of 2013 primarily reflects reduced levels of non-performing loans, lower total loan balances and a decline in loan net charge-offs. See "Portfolio Loans and asset quality" for a discussion of the various components of the allowance for loan losses and their impact on the provision for loan losses in the third quarter and first nine months of 2013.


Index
Non-interest income. Non-interest income is a significant element in assessing our results of operations. We regard net gains on mortgage loans as a core recurring source of revenue but they are quite cyclical and thus can be volatile. We regard net gains (losses) on securities as a "non-operating" component of non-interest income.

Non-interest income totaled $9.8 million during the three months ended September 30, 2013, a decrease of $4.7 million from the comparable period in 2012. For the first nine months of 2013 non-interest income totaled $33.9 million, an $8.3 million decrease from the comparable period in 2012. These declines are primarily due to decreases in service charges on deposit accounts, interchange income, net gains on mortgage loans, net gains on securities, and in other non-interest income that were partially offset by an increase in mortgage loan servicing income.

Non-Interest Income
                                              Three months ended            Nine months ended
                                                 September 30,                September 30,
                                              2013           2012           2013          2012
                                                               (In thousands)
Service charges on deposit accounts        $    3,614      $   4,739     $   10,603     $  13,492
Interchange income                              1,852          2,324          5,542         7,053
Net gains (losses) on assets:
Mortgage loans                                  1,570          4,602          8,415        12,041
Securities                                         14            301            205         1,154
Other than temporary loss on securities
available for sale:
Total impairment loss                               -            (70 )          (26 )        (332 )
Recognized in other comprehensive loss              -              -              -             -
Net impairment loss in earnings                     -            (70 )          (26 )        (332 )
Mortgage loan servicing                           338           (364 )        2,614          (716 )
Investment and insurance commissions              447            491          1,280         1,586
Bank owned life insurance                         353            398          1,028         1,221
Title insurance fees                              409            482          1,261         1,479
(Increase) decrease in fair value of                -            (32 )       (1,025 )        (211 )
U.S. Treasury warrant
Other                                           1,240          1,671          4,019         5,401
   Total non-interest income               $    9,837      $  14,542     $   33,916     $  42,168

Service charges on deposit accounts declined on both a comparative quarterly and year-to-date basis in 2013 as compared to 2012. The decrease in such service charges in 2013 principally results from the Branch Sale. In addition, even after considering the Branch Sale, we have generally experienced a decline in non-sufficient funds ("NSF") occurrences and related NSF fees. We believe the decline in NSF occurrences is principally due to our customers managing their finances more closely in order to reduce NSF activity and avoid the associated fees.


Index
Interchange income declined on both a comparative quarterly and year-to-date basis in 2013 as compared to 2012. The decrease in interchange income primarily results from the Branch Sale. As described earlier, the Dodd-Frank Act includes a provision under which interchange fees for debit cards are set by the FRB under a restrictive "reasonable and proportional cost" per transaction standard. On June 29, 2011 the FRB issued final rules (that were effective October 1, 2011) on interchange fees for debit cards. Overall, these final rules established price caps for debit card interchange fees that were approximately 50% lower than previous averages. However, debit card issuers with less than $10 billion in assets (like us) are exempt from this rule. On a long-term basis, it is not clear how competitive market factors may impact debit card issuers who are exempt from the rule. However, we have been experiencing some reduction in interchange income due to certain transaction routing changes, particularly at large merchants.

Net gains on mortgage loans decreased on both a quarterly and a year to date basis. Mortgage loan activity is summarized as follows:

Mortgage Loan Activity

                                              Three months ended           Nine months ended
                                                September 30,                September 30,
                                              2013          2012          2013          2012
                                                          (Dollars in thousands)
Mortgage loans originated                  $   97,391     $ 135,263     $ 347,177     $ 384,896
Mortgage loans sold                            96,989       128,196       340,318       367,350
Mortgage loans sold with servicing             16,017        21,942        46,250        59,837
rights released
Net gains on the sale of mortgage loans         1,570         4,602         8,415        12,041
Net gains as a percent of mortgage loans         1.62 %        3.59 %        2.47 %        3.28 %
sold ("Loan Sales Margin")
Fair value adjustments included in the          (0.89 )        0.29         (0.58 )        0.45
Loan Sales Margin

The volume of loans sold is dependent upon our ability to originate mortgage loans as well as the demand for fixed-rate obligations and other loans that we choose to not put into portfolio because of our established interest-rate risk parameters. (See "Portfolio Loans and asset quality.") Net gains on mortgage loans are also dependent upon economic and competitive factors as well as our ability to effectively manage exposure to changes in interest rates and thus can often be a volatile part of our overall revenues. The declines in mortgage loan originations and sales in 2013 is due primarily to an increase in mortgage loan . . .

  Add IBCP to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for IBCP - All Recent SEC Filings
Sign Up for a Free Trial to the NEW EDGAR Online Pro
Detailed SEC, Financial, Ownership and Offering Data on over 12,000 U.S. Public Companies.
Actionable and easy-to-use with searching, alerting, downloading and more.
Request a Trial Sign Up Now


Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.