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Independent Bank Corporation Reports 2019 Second Quarter Results

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GRAND RAPIDS, Mich., July 25, 2019 (GLOBE NEWSWIRE) -- Independent Bank Corporation (NASDAQ:IBCP) reported second quarter 2019 net income of $10.7 million, or $0.46 per diluted share, versus net income of $8.8 million, or $0.36 per diluted share, in the prior-year period.  For the six months ended June 30, 2019, the Company reported net income of $20.1 million, or $0.85 per diluted share, compared to net income of $18.0 million, or $0.78 per diluted share, in the prior-year period.  The increases in second quarter and year to date 2019 earnings as compared to 2018 primarily reflect an increase in net interest income.

Significant items impacting comparable quarterly and year to date 2019 and 2018 results include the following:

  • Changes in the fair value due to price of capitalized mortgage loan servicing rights (the "MSR Changes") of a negative $2.7 million ($0.09 per diluted share, after taxes) and a negative $4.9 million ($0.16 per diluted share, after taxes) for the three- and six-months ended June 30, 2019, respectively, as compared to positive MSR Changes of $0.5 million ($0.02 per diluted share, after taxes) and $2.0 million ($0.07 per diluted share, after taxes) for the three- and six-months ended June 30, 2018, respectively.
  • The acquisition of TCSB Bancorp, Inc. ("TCSB"), and its subsidiary, Traverse City State Bank, on Apr. 1, 2018 (referred to as the "Merger" or "TCSB Acquisition") and the associated data processing systems conversions in June 2018.  The total assets, loans and deposits acquired in the Merger were approximately $342.8 million, $295.8 million (including $1.3 million of loans held for sale) and $287.7 million, respectively.
  • Merger related expenses of $3.1 million ($0.10 per diluted share, after taxes) and $3.3 million ($0.11 per diluted share, after taxes) for the three- and six-months ended June 30, 2018, respectively.

Second quarter 2019 highlights include:

  • Return on average assets and return on average equity of 1.27% and 12.72%, respectively (these ratios increase to 1.52% and 15.22%, respectively, when excluding the after tax impact of the MSR Change);
  • A year-over-year increase in quarterly net interest income of $1.8 million, or 6.1%;
  • Total portfolio loan net growth of $87.7 million, or 13.4% annualized;
  • Continued strong asset quality metrics; and
  • The payment of an 18 cent per share dividend on common stock on May 15, 2019.

William B. ("Brad") Kessel, the President and Chief Executive Officer of Independent Bank Corporation, commented: "We are pleased to report another quarter of solid financial performance.  Excluding the after-tax impacts of the MSR Changes and the Merger related expenses, net income and diluted earnings per share increased by 18.4% and 25.0%, respectively, in the second quarter of 2019 as compared to the second quarter of 2018.  As we look ahead to the last half of 2019 and beyond, we are focused on building on the momentum generated in the first half of the year."

Operating Results

The Company's net interest income totaled $30.8 million during the second quarter of 2019, an increase of $1.8 million, or 6.1% from the year-ago period, and up $0.5 million, or 1.7%, from the first quarter of 2019.  The Company's tax equivalent net interest income as a percent of average interest-earning assets (the "net interest margin") was 3.87% during the second quarter of 2019, compared to 3.93% in the year-ago period, and 3.88% in the first quarter of 2019.  The year-over-year quarterly increase in net interest income is due to an increase in average interest-earning assets that was partially offset by a decline in the net interest margin.  Average interest-earning assets were $3.19 billion in the second quarter of 2019, compared to $2.96 billion in the year ago quarter and $3.15 billion in the first quarter of 2019.  Second quarter 2019 and 2018 interest income on loans includes $0.4 million and $0.6 million, respectively, of accretion of the discount recorded on the TCSB loans acquired in the Merger. 

For the first six months of 2019, net interest income totaled $61.0 million, an increase of $8.1 million, or 15.3% from the first half of 2018.  The Company's net interest margin for the first six months of 2019 was 3.88% compared to 3.83% in 2018.  The increase in net interest income for the first six months of 2019 is due to increases in both average interest-earning assets and in the net interest margin.

Non-interest income totaled $9.9 million and $19.9 million, respectively, for the second quarter and first six months of 2019, compared to $12.3 million and $24.0 million in the respective comparable year ago periods.  These changes were primarily due to variances in mortgage banking related revenues (net gains on mortgage loans and mortgage loan servicing, net).
                                                                                                                                
Net gains on mortgage loans in the second quarters of 2019 and 2018, were approximately $4.3 million and $3.3 million, respectively.  For the first six months of 2019, net gains on mortgage loans totaled $7.9 million compared to $5.8 million in 2018.  The increase in net gains on mortgage loans was primarily due to an increase in mortgage loan sales volume in 2019 as well as fair value adjustments on the mortgage loan pipeline.

Mortgage loan servicing, net, generated a loss of $1.9 million and income of $1.2 million in the second quarters of 2019 and 2018, respectively. For the first six months of 2019, mortgage loan servicing, net, generated a loss of $3.1 million as compared to income of $3.5 million in 2018.  The significant variances in mortgage loan servicing, net are primarily due to changes in the fair value of capitalized mortgage loan servicing rights associated with changes in mortgage loan interest rates (a decline in 2019 as compared to an increase in 2018) and expected future prepayment levels. Mortgage loan servicing, net activity is summarized in the following table:

  Three Months Ended Six Months Ended
  6/30/2019 6/30/2018 6/30/2019 6/30/2018
Mortgage loan servicing, net: (Dollars in thousands)
Revenue, net $ 1,515   $ 1,372   $ 2,991   $ 2,564  
Fair value change due to price   (2,670 )   518     (4,873 )   1,976  
Fair value change due to pay-downs   (752 )   (655 )   (1,240 )   (1,084 )
Total $ (1,907 ) $ 1,235   $ (3,122 ) $ 3,456  

Non-interest expenses totaled $26.6 million in the second quarter of 2019, compared to $29.8 million in the year-ago period.  For the first six months of 2019, non-interest expenses totaled $54.6 million versus $53.9 million in 2018.  These year-over-year changes in non-interest expense are primarily due to the TCSB Acquisition (including the aforementioned Merger related expenses) as well as higher compensation and health insurance costs. 

The Company recorded an income tax expense of $2.7 million and $4.9 million in the second quarter and first six months of 2019, respectively.  This compares to an income tax expense of $2.1 million and $4.1 million in the second quarter and first six months of 2018, respectively.  The increase in income tax expense is primarily due to higher pre-tax earnings in 2019.

Asset Quality

Commenting on asset quality, President and CEO Kessel added:  "Non-performing loans and assets as well as loan net charge-offs remain at low levels.  In addition, thirty- to eighty-nine day delinquency rates at June 30, 2019 were 0.02% for commercial loans and 0.43% for mortgage and consumer loans.  These early stage delinquency rates continue to be well-managed."

A breakdown of non-performing loans(1) by loan type is as follows:

Loan Type 6/30/2019 12/31/2018 6/30/2018
  (Dollars in thousands)
Commercial $ 900   $ 2,220   $ 2,889  
Consumer/installment   901     781     671  
Mortgage   5,997     6,033     5,522  
Total non-accrual loans   7,798     9,034     9,082  
Less – government guaranteed loans   436     460     224  
Total non-performing loans $ 7,362   $ 8,574   $ 8,858  
Ratio of non-performing loans to total portfolio loans   0.27 %   0.33 %   0.36 %
Ratio of non-performing assets to total assets   0.27 %   0.29 %   0.33 %
Ratio of the allowance for loan losses to non-performing loans   351.85 %   290.27 %   265.34 %
 
(1)   Excludes loans that are classified as "troubled debt restructured" that are still performing.

Non-performing loans have decreased $1.2 million from Dec. 31, 2018.  This decrease principally reflects a decline in non-performing commercial loans due primarily to pay-downs, charge-offs and a transfer to other real estate.  Other real estate and repossessed assets totaled $2.0 million at June 30, 2019, compared to $1.3 million at Dec. 31, 2018.  This increase is primarily due to the addition of a $0.6 million commercial office building located in Grand Rapids during the second quarter of 2019. 

The provision for loan losses was an expense of $0.7 million in both the second quarters of 2019 and 2018, respectively.  The provision for loan losses was an expense of $1.3 million and $1.0 million in the first six months of 2019 and 2018, 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 growth, loan mix, levels of non-performing and classified loans and loan net charge-offs.  The Company recorded loan net charge-offs of $0.003 million and $0.217 million in the second quarters of 2019 and 2018, respectively.  For the first six months of 2019 and 2018, the Company recorded loan net charge-offs of $0.301 million and $0.048 million, respectively.  At June 30, 2019, the allowance for loan losses totaled $25.9 million, or 0.96% of total portfolio loans, compared to $24.9 million, or 0.96% of total portfolio loans, at Dec. 31, 2018. Excluding the remaining TCSB acquired loan balances, the allowance for loan losses was equal to 1.03% and 1.06% of portfolio loans at June 30, 2019 and Dec. 31, 2018, respectively.

Balance Sheet, Liquidity and Capital

Total assets were $3.44 billion at June 30, 2019, an increase of $85.0 million from Dec. 31, 2018.  Loans, excluding loans held for sale, were $2.71 billion at June 30, 2019, compared to $2.58 billion at Dec. 31, 2018.  Deposits totaled $2.98 billion at June 30, 2019, an increase of $65.5 million from Dec. 31, 2018.  The increase in total deposits is primarily due to growth in reciprocal deposits. 

Cash and cash equivalents totaled $55.1 million at June 30, 2019, versus $70.2 million at Dec. 31, 2018. Securities available for sale totaled $430.3 million at June 30, 2019, versus $427.9 million at Dec. 31, 2018. 

Total shareholders' equity was $330.8 million at June 30, 2019, or 9.62% of total assets.  Tangible common equity totaled $296.7 million at June 30, 2019, or $13.19 per share.  The Company's wholly owned subsidiary, Independent Bank, remains significantly above "well capitalized" for regulatory purposes with the following ratios:

Regulatory Capital Ratios 6/30/2019 12/31/2018 Well Capitalized
Minimum

       
Tier 1 capital to average total assets 9.50% 9.44% 5.00%
Tier 1 common equity  to risk-weighted assets 11.80% 11.94% 6.50%
Tier 1 capital to risk-weighted assets 11.80% 11.94%
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