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Independent Bank Corporation Reports 2018 Third Quarter Results

GRAND RAPIDS, Mich., Oct. 25, 2018 (GLOBE NEWSWIRE) -- Independent Bank Corporation (IBCP) reported third quarter 2018 net income of $11.9 million, or $0.49 per diluted share, versus net income of $6.9 million, or $0.32 per diluted share, in the prior-year period.  For the nine months ended Sept. 30, 2018, the Company reported net income of $29.9 million, or $1.27 per diluted share, compared to net income of $18.8 million, or $0.87 per diluted share, in the prior-year period.  The increases in third quarter and year to date 2018 earnings as compared to 2017 primarily reflect increases in net interest income and in non-interest income and a decrease in income tax expense that were partially offset by an increase in non-interest expense.

Significant items impacting comparable quarterly and year to date 2018 and 2017 results include the following:

  • 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 $343.5 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.
  • Positive changes in the fair value due to price of capitalized mortgage loan servicing rights 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, as compared to negative changes of $0.6 million ($0.02 per diluted share, after taxes) and $1.1 million ($0.03 per diluted share, after taxes) for the three- and nine-months ended Sept. 30, 2017, respectively.
  • The passage of the "Tax Cuts and Jobs Act" which, among other things, reduced the federal corporate income tax rate to 21% (from 35%) effective January 1, 2018.

Third quarter 2018 highlights include:

  • Year-over-year increases in net income and diluted earnings per share of 73.9% and 53.1%, respectively;
  • A year-over-year increase in quarterly net interest income of $6.8 million, or 29.6%;
  • Total portfolio loan net growth of $95.3 million, or 15.3% annualized;
  • Continued strong asset quality metrics; and
  • The payment of a 15 cent per share dividend on common stock on Aug. 15, 2018.

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.  The favorable impact of the TCSB Acquisition combined with strong loan origination activity led to meaningful loan growth and increased net interest income.  Net income and diluted earnings per share have increased significantly in 2018 as we gained greater operating leverage and efficiency as well as benefitting from a reduced corporate income tax rate.  As we look ahead to the remainder of 2018 and beyond, we are focused on building on the momentum generated in the first nine months of 2018.”

Operating Results

The Company’s net interest income totaled $29.7 million during the third quarter of 2018, an increase of $6.8 million, or 29.6% from the year-ago period, and up $0.7 million, or 2.5%, from the second quarter of 2018.  The Company’s tax equivalent net interest income as a percent of average interest-earning assets (the “net interest margin”) was 3.91% during the third quarter of 2018, compared to 3.66% in the year-ago period, and 3.93% in the second quarter of 2018.  The year-over-year quarterly increase in net interest income is due to increases in both average interest-earning assets and in the net interest margin.  Average interest-earning assets were $3.04 billion in the third quarter of 2018, compared to $2.52 billion in the year ago quarter and $2.96 billion in the second quarter of 2018.  Third quarter 2018 interest income on loans includes $0.6 million of accretion of the discount recorded on the TCSB loans acquired in the Merger.  The total discount initially recorded on the TCSB loans acquired in the Merger was $6.5 million (or approximately 2.2% of the total TCSB loans acquired in the Merger).

For the first nine months of 2018, net interest income totaled $82.6 million, an increase of $16.7 million, or 25.4% from the first nine months of 2017.  The Company’s net interest margin for the first nine months of 2018 was 3.86% compared to 3.65% in 2017.  Year-to-date 2018 interest income on loans includes $1.2 million of accretion of the discount recorded on the TCSB loans acquired in the Merger. The increase in net interest income for the first nine months of 2018 is due to increases in both average interest-earning assets and in the net interest margin.

Non-interest income totaled $11.8 million and $35.9 million, respectively, for the third quarter and first nine months of 2018, compared to $10.3 million and $31.1 million in the respective comparable year ago periods.  These increases were primarily due to growth in interchange income and mortgage loan servicing, net, as described below.

The Company adopted Financial Accounting Standards Board Accounting Standards Update 2014-09 “Revenue from Contracts with Customers (Topic 606)” (“ASU 2014-09”) on Jan. 1, 2018, using the modified retrospective approach.  Although ASU 2014-09 did not have any impact on Jan. 1, 2018 shareholders’ equity or 2018 net income, it did result in some classification changes in non-interest income and non-interest expense as compared to the prior year period.  Specifically, in the third quarter and first nine months of 2018, interchange income and interchange expense each increased by $0.4 million and $1.1 million, respectively, due to classification changes under ASU 2014-09.
                                                                                                                                 
Net gains on mortgage loans were $2.7 million and $3.0 million in the third quarters of 2018 and 2017, respectively.  For the first nine months of 2018, net gains on mortgage loans totaled $8.6 million compared to $8.9 million in 2017.  An increase in mortgage loan sales volume in 2018 was offset by margin compression due principally to competitive factors.

Mortgage loan servicing, net, generated income of $1.2 million and $0.001 million in the third quarters of 2018 and 2017, respectively. For the first nine months of 2018, mortgage loan servicing, net, generated income of $4.7 million as compared to income of $0.7 million in 2017. This activity is summarized in the following table:

                Three Months Ended                          Nine Months Ended
    9/30/2018 9/30/2017 9/30/2018 9/30/2017
Mortgage loan servicing, net:   (Dollars in thousands)          
  Revenue, net $   1,410   $     1,091   $     3,974   $     3,253  
  Fair value change due to price     610     (572 )     2,586     (1,075 )
  Fair value change due to pay-downs   (808 )   (518 )   (1,892 )   (1,510 )
Total $     1,212   $     1   $     4,668   $     668  

Non-interest expenses totaled $26.7 million in the third quarter of 2018, compared to $22.6 million in the year-ago period.  For the first nine months of 2018, non-interest expenses totaled $80.6 million compared to $68.9 million in 2017.  These year-over-year increases in non-interest expense are primarily due to the TCSB Acquisition (including the aforementioned Merger related expenses) as well as higher performance based compensation and health insurance costs. 

The Company recorded an income tax expense of $2.9 million and $7.0 million in the third quarter and first nine months of 2018, respectively.  This compares to an income tax expense of $3.2 million and $8.4 million in the third quarter and first nine months of 2017, respectively.  The decline in income tax expense is primarily due to a reduction in the statutory federal corporate income tax rate to 21% (from 35%) that became effective on Jan. 1, 2018, which was partially offset by an increase in income before income tax.

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, 2018 were 0.08% for commercial loans and 0.34% 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   9/30/2018 12/31/2017 9/30/2017
                                             (Dollars in thousands)
Commercial $   2,782   $   646   $   788  
Consumer/installment   756     543     525  
Mortgage   5,805     6,995     7,097  
  Total $   9,343   $ 8,184   $   8,410  
Ratio of non-performing loans to total portfolio loans   0.36 %   0.41 %   0.43 %
Ratio of non-performing assets to total assets   0.33 %   0.35 %   0.38 %
Ratio of the allowance for loan losses to non-performing loans   261.17 %     275.99 %   255.39 %

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

Non-performing loans increased $1.2 million from Dec. 31, 2017.  This increase primarily reflects a rise in non-performing commercial loans.  ORE and repossessed assets totaled $1.4 million at Sept. 30, 2018, compared to $1.6 million at Dec. 31, 2017. 

The provision for loan losses was a credit of $0.1 million compared to an expense of $0.6 million in the third quarters of 2018 and 2017, respectively.  The provision for loan losses was an expense of $0.9 million and $0.8 million in the first nine months of 2018 and 2017, 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 $1.0 million and $0.3 million in the third quarters of 2018 and 2017, respectively.  For the first nine months of 2018 and 2017, the Company recorded loan net recoveries of $0.9 million and $0.4 million, respectively.  At Sept. 30, 2018, the allowance for loan losses totaled $24.4 million, or 0.95% of total portfolio loans (1.06% when excluding the TCSB acquired loan balances), compared to $22.6 million, or 1.12% of total portfolio loans, at Dec. 31, 2017.

Balance Sheet, Liquidity and Capital

Total assets were $3.30 billion at Sept. 30, 2018, an increase of $507.8 million from Dec. 31, 2017, primarily reflecting the impact of the TCSB Acquisition as well as loan growth.  Loans, excluding loans held for sale, were $2.56 billion at Sept. 30, 2018, compared to $2.02 billion at Dec. 31, 2017.

Deposits totaled $2.80 billion at Sept. 30, 2018, an increase of $398.1 million from Dec. 31, 2017.  The increase in deposits is primarily due to the TCSB Acquisition and growth in reciprocal deposits and brokered time deposits.

Cash and cash equivalents totaled $53.2 million at Sept. 30, 2018, versus $54.7 million at Dec. 31, 2017. Securities available for sale totaled $437.0 million at Sept. 30, 2018, compared to $522.9 million at Dec. 31, 2017.

In the second quarter of 2018, the Company recorded $29.0 million of goodwill, a core deposit intangible (“CDI”) of $5.8 million and discounts of $6.5 million, $0.4 million and $1.5 million on loans, time deposits and borrowings (including subordinated debentures), respectively, related to the Merger.  These adjustments reflected the preliminary valuation of the assets acquired and liabilities assumed in the Merger.  In the third quarter of 2018, goodwill was reduced by $0.7 million (to $28.3 million) related to the collection of a TCSB acquired loan that had been charged off in full prior to the Merger.  Because of the status of the collection activities related to this loan at the time of the Merger, the Company determined that this transaction was a measurement period adjustment and reduced goodwill accordingly.  The goodwill is being periodically tested for impairment, and the CDI is being amortized over a ten year period ($0.2 million and $0.4 million of amortization for this CDI was recorded in the third quarter and first nine months of 2018, respectively).  The discounts will be accreted based on the lives of the related assets or liabilities.

Total shareholders’ equity was $345.2 million at Sept. 30, 2018, or 10.47% of total assets.  Tangible common equity totaled $310.2 million at Sept. 30, 2018, or $12.84 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 9/30/2018 12/31/2017 Well
Capitalized
Minimum
Tier 1 capital to average total assets 9.73% 9.78% 5.00%
Tier 1 common equity to risk-weighted assets 12.19% 12.95% 6.50%
Tier 1 capital to risk-weighted assets 12.19% 12.95% 8.00%
Total capital to risk-weighted assets 13.18% 14.10% 10.00%

Share Repurchase Plan

As previously announced, on Jan. 22, 2018, the Board of Directors of the Company authorized a share repurchase plan.  Under the terms of the 2018 share repurchase plan, the Company is authorized to buy back up to 5% of its outstanding common stock. The repurchase plan is authorized to last through Dec. 31, 2018.  Thus far in 2018, the Company has not repurchased any shares.

Earnings Conference Call
Brad Kessel, President and CEO, and Rob Shuster, CFO, will review the quarterly results in a conference call for investors and analysts beginning at 11:00 am ET on Thursday, Oct. 25, 2018.

To participate in the live conference call, please dial 1-866-200-8394. Also the conference call will be accessible through an audio webcast with user-controlled slides via the following site/URL: https://services.choruscall.com/links/ibcp181025.html.

   

A playback of the call can be accessed by dialing 1-877-344-7529 (Conference ID # 10124591). The replay will be available through Nov. 1, 2018.

About Independent Bank Corporation

Independent Bank Corporation (IBCP) is a Michigan-based bank holding company with total assets of approximately $3.3 billion.  Founded as First National Bank of Ionia in 1864, Independent Bank Corporation operates a branch network 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 insurance.  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 Web site at:  IndependentBank.com.

Forward-Looking Statements
This release may contain “forward-looking statements” within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. Any statements that are not historical facts, including statements about our expectations, beliefs, plans, strategies, predictions, forecasts, objectives, or assumptions of future events or performance, may be forward-looking. These statements are often, but not always, made through the use of words or phrases such as “anticipates,” “believes,” “expects,” “can,” “could,” “may,” “predicts,” “potential,” “opportunity,” “should,” “will,” “estimate,” “plans,” “projects,” “continuing,” “ongoing,” “expects,” “seeks,” “intends” and similar words or phrases. Accordingly, these statements involve estimates, known and unknown risks, assumptions, and uncertainties that could cause actual strategies, actions, or results to differ materially from those expressed in them, and are not guarantees  of timing, future results, events, or performance. Because forward-looking statements are necessarily only estimates of future strategies, actions, or results, based on management’s current expectations, assumptions, and estimates on the date hereof, there can be no assurance that actual strategies, actions or results will not differ materially from expectations. Therefore, readers are cautioned not to place undue reliance on such statements.  Factors that could cause or contribute to such differences are changes in general economic, political or industry conditions; changes in monetary and fiscal policies, including the interest rate policies of the Federal Reserve Board; volatility and disruptions in capital and credit markets; the interdependence of financial service companies; changes in regulation or oversight; unfavorable developments concerning credit quality; any future acquisitions or divestitures; the effects of more stringent capital or liquidity requirements; declines or other changes in the businesses or industries of Independent Bank Corporation's customers; the implementation of Independent Bank Corporation's strategies and business models; Independent Bank Corporation's ability to utilize technology to efficiently and effectively develop, market and deliver new products and services; operational difficulties, failure of technology infrastructure or information security incidents; changes in the financial markets, including fluctuations in interest rates and their impact on deposit pricing; competitive product and pricing pressures among financial institutions within Independent Bank Corporation's markets; changes in customer behavior; management's ability to maintain and expand customer relationships; management's ability to retain key officers and employees; the impact of legal and regulatory proceedings or determinations; the effectiveness of methods of reducing risk exposures; the effects of terrorist activities and other hostilities; the effects of catastrophic events; changes in accounting standards and the critical nature of Independent Bank Corporation's accounting policies.

In addition, factors that may cause actual results to differ from expectations regarding the April 1, 2018 acquisition of TCSB Bancorp, Inc. include, but are not limited to, the reaction to the transaction of the companies’ customers, employees and counterparties; customer disintermediation; inflation; expected synergies, cost savings and other financial benefits of the transaction might not be realized within the expected timeframes or might be less than projected; credit and interest rate risks associated with the parties' respective businesses, customers, borrowings, repayment, investment, and deposit practices; general economic conditions, either nationally or in the market areas in which the parties operate or anticipate doing business, are less favorable than expected; new regulatory or legal requirements or obligations; and other risks.

Certain risks and important factors that could affect Independent Bank Corporation's future results are identified in its Annual Report on Form 10-K for the year ended December 31, 2017 and other reports filed with the SEC, including among other things under the heading “Risk Factors” in such Annual Report on Form 10-K. Any forward-looking statement speaks only as of the date on which it is made, and Independent Bank Corporation undertakes no obligation to update any forward-looking statement, whether to reflect events or circumstances, after the date on which the statement is made, to reflect new information or the occurrence of unanticipated events, or otherwise.

 

INDEPENDENT BANK CORPORATION AND SUBSIDIARIES
Consolidated Statements of Financial Condition
    September 30,   December 31,
    2018   2017
                 
    (unaudited)
    (In thousands, except share
    amounts)
Assets
Cash and due from banks   $   35,180     $   36,994  
Interest bearing deposits       17,990         17,744  
Cash and Cash Equivalents       53,170         54,738  
Interest bearing deposits - time       593         2,739  
Equity securities at fair value       285         -  
Trading securities       -         455  
Securities available for sale       436,957         522,925  
Federal Home Loan Bank and Federal Reserve Bank stock, at cost       18,355         15,543  
Loans held for sale, carried at fair value       41,325         39,436  
Loans        
Commercial       1,112,101         853,260  
Mortgage       1,056,482         849,530  
Installment       393,995         316,027  
Total Loans       2,562,578         2,018,817  
Allowance for loan losses       (24,401 )       (22,587 )
Net Loans       2,538,177         1,996,230  
Other real estate and repossessed assets       1,445         1,643  
Property and equipment, net       39,012         39,149  
Bank-owned life insurance       54,811         54,572  
Deferred tax assets, net       8,449         15,089  
Capitalized mortgage loan servicing rights       23,151         15,699  
Goodwill       28,300       -  
Other intangibles       6,709         1,586  
Accrued income and other assets       46,385         29,551  
Total Assets   $   3,297,124     $   2,789,355  
         
Liabilities and Shareholders' Equity
Deposits        
Non-interest bearing   $ 880,932     $ 768,333  
Savings and interest-bearing checking     1,217,939       1,064,391  
Reciprocal       92,635         50,979  
Time       399,110         374,872  
Brokered time       208,027         141,959  
Total Deposits       2,798,643         2,400,534  
Other borrowings       79,688         54,600  
Subordinated debentures       39,371         35,569  
Accrued expenses and other liabilities       34,218         33,719  
Total Liabilities       2,951,920         2,524,422  
         
Shareholders’ Equity        
Preferred stock, no par value, 200,000 shares authorized; none issued or outstanding       -         -  
Common stock, no par value, 500,000,000 shares authorized; issued and outstanding:        
        24,150,341 shares at September 30, 2018 and 21,333,869 shares at December 31, 2017       389,689         324,986  
Accumulated deficit       (34,596 )       (54,054 )
Accumulated other comprehensive loss       (9,889 )       (5,999 )
Total Shareholders’ Equity       345,204         264,933  
Total Liabilities and Shareholders’ Equity   $   3,297,124     $   2,789,355  
         

 

...
INDEPENDENT BANK CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
                     
    Three Months Ended   Nine Months Ended
    September 30,   June 30,   September 30,   September 30,
    2018
  2018
  2017   2018
  2017
                                     
    (unaudited)
Interest Income   (In thousands, except per share amounts)
Interest and fees on loans   $   31,000     $   29,674     $   21,831   $   84,027     $   61,638
Interest on securities                    
Taxable       2,737         2,720       2,765       8,092         8,300
Tax-exempt       412         444       512       1,335         1,478
Other investments       303         265       263       898         867
Total Interest Income       34,452       33,103       25,371       94,352       72,283
Interest Expense                    
Deposits       3,976         3,209       1,833       9,472         4,754
Other borrowings and subordinated debentures       779         914       626       2,267         1,659
Total Interest Expense       4,755       4,123       2,459       11,739       6,413
Net Interest Income       29,697       28,980       22,912       82,613       65,870
Provision for loan losses       (53 )     650       582       912         806
Net Interest Income After Provision for Loan Losses       29,750       28,330       22,330       81,701       65,064
Non-interest Income                    
Service charges on deposit accounts       3,166         3,095       3,281       9,166         9,465
Interchange income       2,486         2,504       1,942       7,236         5,869
Net gains (losses) on assets                    
Mortgage loans       2,745         3,255       2,971       8,571         8,886
Securities       93         9       69       (71 )       62
Mortgage loan servicing, net       1,212         1,235       1       4,668         668
Other       2,134         2,217       2,040       6,294         6,139
Total Non-interest Income     11,836       12,315       10,304     35,864       31,089
Non-interest Expense                    
Compensation and employee benefits       16,169         15,869       13,577       46,506       41,104
Occupancy, net       2,233         2,170       1,970       6,667       6,032
Data processing       2,051         2,251       1,796       6,180       5,670
Merger related expenses       98         3,082         10       3,354         10
Furniture, fixtures and equipment       1,043         1,019       961       3,029       2,943
Communications       727         704       685       2,111       2,046
Interchange expense       715         661       294       1,974         869
Loan and collection       531         692       481       1,900         1,564
Advertising       594         543       526       1,578       1,551
Legal and professional       477         456       540       1,311       1,366
FDIC deposit insurance       270         250       208       750       608
Credit card and bank service fees       108         106       105       310       432
Net (gains) losses on other real estate and                    
   repossessed assets       (325 )       (4 )     30       (619 )     132
Other       2,049         1,962       1,433       5,585       4,619
Total Non-interest Expense       26,740       29,761       22,616       80,636       68,946
Income Before Income Tax       14,846       10,884       10,018       36,929       27,207
Income tax expense       2,921       2,067       3,159       7,026         8,443
Net Income   $   11,925     $   8,817     $