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Independent Bank Corporation Reports 2019 Third Quarter Results

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GRAND RAPIDS, Mich., Oct. 24, 2019 (GLOBE NEWSWIRE) -- Independent Bank Corporation (NASDAQ:IBCP) reported third quarter 2019 net income of $12.4 million, or $0.55 per diluted share, versus net income of $11.9 million, or $0.49 per diluted share, in the prior-year period.  For the nine months ended Sept. 30, 2019, the Company reported net income of $32.6 million, or $1.40 per diluted share, compared to net income of $29.9 million, or $1.27 per diluted share, in the prior-year period.  The increases in third quarter and year to date 2019 earnings as compared to 2018 primarily reflect an increase in net interest income that was partially offset by increases in non-interest expense and income tax expense, and for the year-to-date period, a decline in non-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 $2.2 million ($0.08 per diluted share, after taxes) and a negative $7.0 million ($0.24 per diluted share, after taxes) for the three- and nine-months ended Sept. 30, 2019, respectively, as compared to positive MSR Changes of $0.6 million ($0.02 per diluted share, after taxes) and $2.6 million ($0.09 per diluted share, after taxes) for the three- and nine-months ended Sept. 30, 2018, respectively.
  • A reduction in non-interest expense of $0.3 million ($0.01 per diluted share, after taxes) for the three- and nine-months ended Sept. 30, 2019 related to the Company's use of its Federal Deposit Insurance Corporation ("FDIC") Small Bank Assessment Credit (the "Assessment Credit").  After the application of the Assessment Credit against the Company's June 30, 2019 FDIC deposit insurance expense billing, approximately $0.4 million of Assessment Credit remains available to offset future expense.
  • 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 $0.1 million ($0.003 per diluted share, after taxes) and $3.4 million ($0.11 per diluted share, after taxes) for the three- and nine-months ended Sept. 30, 2018, respectively.

Third quarter 2019 highlights include:

  • Annualized return on average assets and return on average equity of 1.42% and 14.64%, respectively (these ratios increase to 1.58% and 16.34%, respectively, when excluding the after tax impact of the MSR Changes and the Assessment Credit);
  • Year-over-year increases in net income and diluted earnings per share of  4.4% and 12.2%, respectively;
  • A year-over-year increase in quarterly net interest income of $1.2 million, or 4.0%;
  • Total portfolio loan net growth of $15.9 million, or 2.3% annualized (the annualized growth rate increases to 7.7% when excluding the impact of $36.6 million of portfolio mortgage loans moved to held for sale as of Sept. 30, 2019);
  • Continued strong asset quality metrics; and
  • The payment of an 18 cent per share dividend on common stock on Aug. 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.  This performance reflects strong mortgage banking revenues, favorable asset quality metrics, and continued loan growth. Excluding the after-tax impacts of the MSR Changes, Assessment Credit and the Merger related expenses, net income and diluted earnings per share increased by 20.5% and 29.8%, respectively, in the third quarter of 2019 as compared to the third quarter of 2018.  As we look ahead to the last quarter of 2019 and beyond, we are focused on building on the momentum generated in the first nine months of the year."

Operating Results

The Company's net interest income totaled $30.9 million during the third quarter of 2019, an increase of $1.2 million, or 4.0% from the year-ago period, and up $0.1 million, or 0.4%, from the second quarter of 2019.  The Company's tax equivalent net interest income as a percent of average interest-earning assets (the "net interest margin") was 3.76% during the third quarter of 2019, compared to 3.91% in the year-ago period, and 3.87% in the second 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 $3.29 billion in the third quarter of 2019, compared to $3.04 billion in the year ago quarter and $3.19 billion in the second quarter of 2019.  Third 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 nine months of 2019, net interest income totaled $91.9 million, an increase of $9.3 million, or 11.2% from the first nine months of 2018.  The Company's net interest margin for the first nine months of 2019 was 3.83% compared to 3.86% in 2018.  The increase in net interest income for the first nine months of 2019 is due an increase in average interest-earning assets that was partially offset by a decline in the net interest margin.

The decline in the net interest margin in 2019 as compared to 2018 primarily reflects the impact of lower market interest rates and a flattening of the yield curve.

Non-interest income totaled $12.3 million and $32.1 million, respectively, for the third quarter and first nine months of 2019, compared to $11.8 million and $35.9 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 were $5.7 million and $2.7 million in the third quarters of 2019 and 2018, respectively.  For the first nine months of 2019, net gains on mortgage loans totaled $13.6 million compared to $8.6 million in 2018.  These increases were primarily due to higher mortgage loan origination and sales volumes in 2019 reflecting lower market interest rates, which have increased mortgage loan refinance activity.

Mortgage loan servicing, net, generated a loss of $1.6 million and income of $1.2 million in the third quarters of 2019 and 2018, respectively. For the first nine months of 2019, mortgage loan servicing, net, generated a loss of $4.7 million as compared to income of $4.7 million in 2018. This activity is summarized in the following table:

    Three Months Ended   Nine Months Ended
    9/30/2019 9/30/2018 9/30/2019 9/30/2018
Mortgage loan servicing, net:   (Dollars in thousands)  
Revenue, net $ 1,583   $ 1,410   $ 4,574   $ 3,974  
Fair value change due to price      (2,163 )     610       (7,036 )     2,586  
Fair value change due to pay-downs   (982 )   (808 )   (2,222 )   (1,892 )
Total $(1,562 ) $ 1,212   $(4,684 ) $ 4,668  

Non-interest expenses totaled $27.8 million in the third quarter of 2019, compared to $26.7 million in the year-ago period.  For the first nine months of 2019, non-interest expenses totaled $82.4 million compared to $80.6 million in 2018.  These year-over-year increases in non-interest expense are primarily due to higher compensation, health insurance, data processing and interchange costs as well as lower gains on other real estate and repossessed assets. 

The Company recorded an income tax expense of $3.1 million and $8.0 million in the third quarter and first nine months of 2019, respectively.  This compares to an income tax expense of $2.9 million and $7.0 million in the third quarter and first nine 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 Sept. 30, 2019 were 0.04% for commercial loans and 0.35% 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   9/30/2019 12/31/2018 9/30/2018
  (Dollars in thousands)
Commercial $   834   $ 2,220   $   2,782  
Consumer/installment   935     781     756  
Mortgage   5,355     6,033     5,805  
Total non-accrual loans   7,124     9,034     9,343  
Less – government guaranteed loans   475     460     279  
Total non-performing loans $   6,649   $ 8,574   $   9,064  
Ratio of non-performing loans to total portfolio loans   0.24 %   0.33 %   0.35 %
Ratio of non-performing assets to total assets   0.24 %   0.29 %   0.32 %
Ratio of the allowance for loan losses to non-performing loans   393.26 %     290.27 %   269.21 %

(1) Excludes loans that are classified as "troubled debt restructured" that are still performing.

Non-performing loans have decreased $1.9 million from Dec. 31, 2018.  This decrease principally reflects declines in non-performing commercial and mortgage loans due primarily to pay-downs, charge-offs and transfers to other real estate.  Other real estate and repossessed assets totaled $1.8 million at Sept. 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 a credit of $0.3 million and $0.1 million in the third quarters of 2019 and 2018, respectively.  The provision for loan losses was an expense of $1.0 million and $0.9 million in the first nine 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 recoveries of $0.5 million and $1.0 million in the third quarters of 2019 and 2018, respectively.  For the first nine months of 2019 and 2018, the Company recorded loan net recoveries of $0.2 million and $0.9 million, respectively.  At Sept. 30, 2019, the allowance for loan losses totaled $26.1 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 1.02% and 1.06% of portfolio loans at Sept. 30, 2019 and Dec. 31, 2018, respectively.

Balance Sheet, Liquidity and Capital

Total assets were $3.55 billion at Sept. 30, 2019, an increase of $197.6 million from Dec. 31, 2018, primarily reflecting loan growth.  Loans, excluding loans held for sale, were $2.72 billion at Sept. 30, 2019, compared to $2.58 billion at Dec. 31, 2018.  During the third quarter of 2019, approximately $36.6 million of portfolio mortgage loans were transferred to held for sale and were valued at the lower of cost or fair value at Sept. 30, 2019.  The Company expects to securitize/sell these loans on a non-recourse basis in Oct. 2019 and record a gain of approximately $1.1 million upon the completion of this transaction. 

Deposits totaled $3.05 billion at Sept. 30, 2019, an increase of $138.9 million from Dec. 31, 2018.  The increase in deposits is primarily due to growth in reciprocal deposits that was partially offset by a decline in brokered time deposits. 

Cash and cash equivalents totaled $82.4 million at Sept. 30, 2019, versus $70.2 million at Dec. 31, 2018. Securities available for sale totaled $439.6 million at Sept. 30, 2019, compared to $427.9 million at Dec. 31, 2018.

Total shareholders' equity was $340.2 million at Sept. 30, 2019, or 9.58% of total assets.  Tangible common equity totaled $306.3 million at Sept. 30, 2019, or $13.63 per share.  The Company's wholly owned subsidiary, Independent Bank, remains significantly above "well capitalized" for

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