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Independent Bank Corporation Reports 2016 Second Quarter Results

GRAND RAPIDS, Mich., July 28, 2016 (GLOBE NEWSWIRE) -- Independent Bank Corporation (NASDAQ:IBCP) reported second quarter 2016 net income of $6.4 million, or $0.30 per diluted share, versus net income of $5.6 million, or $0.24 per diluted share, in the prior-year period. For the six months ended June 30, 2016, the Company reported net income of $10.5 million, or $0.48 per diluted share, compared to net income of $9.4 million, or $0.40 per diluted share, in the prior-year period.

Second quarter 2016 highlights include:

  • Net income and diluted earnings per share increased 14.6% and 25.0%, respectively, over 2015;
  • A year-over-year increase in quarterly net interest income of $0.9 million, or 5.0%;
  • A year-over-year decrease in quarterly non-interest expense of $0.7 million, or 3.2%;
  • Continued improvement in asset quality metrics with net recoveries of $1.0 million on previously charged-off loans and a $0.8 million, or 4.5%, decline in non-performing assets;
  • Total adjusted net loan growth of $36.4 million, or 9.5% annualized.
  • A 2.4% increase in tangible book value per share to $11.49 at June 30, 2016 from $11.22 at Mar. 31, 2016.
  • The payment of an eight cent per share dividend on common stock on May 16, 2016.

The second quarter of 2016 also included a $0.65 million ($0.02 per diluted share, after tax) impairment charge on capitalized mortgage loan servicing rights as well as a $0.28 million income tax benefit ($0.01 per diluted share) resulting from the adoption of Financial Accounting Standards Board Accounting Standards Update 2016-09 “Compensation – Stock Compensation (718) Improvements to Employee Share-Based Payment Accounting” (“ASU 2016-09”).

William B. (“Brad”) Kessel, the President and Chief Executive Officer of Independent Bank Corporation, commented: “We are very pleased to report strong overall results for the second quarter of 2016. Solid loan growth, continued improvement in asset quality, a rise in net gains on mortgage loans, as well as our continuing efforts to reduce non-interest expenses, contributed to a 14.6% increase in our net income. Diluted earnings per share rose by 25.0%, reflecting both the increase in net income and the benefit from our share repurchase activity. Further, despite continued pressure from the low interest rate environment, we did achieve growth in net interest income on a quarterly and year-to-date basis compared to 2015. As we look ahead to the remainder of 2016 and beyond, we are focused on building on the momentum generated in the first half of 2016.”

Operating Results

The Company’s net interest income totaled $19.6 million during the second quarter of 2016, an increase of $0.9 million, or 5.0% from the year-ago period, but down slightly ($0.1 million, or 0.7%) from the first quarter of 2016. The Company’s tax equivalent net interest income as a percent of average interest-earning assets (the “net interest margin”) was 3.52% during the second quarter of 2016, compared to 3.62% in the year-ago period, and 3.61% in the first quarter of 2016. The year-over-year quarterly increase in net interest income is due to an increase in average interest-earning assets that was only partially offset by a decline in the net interest margin. The decrease in the net interest margin is primarily due to the prolonged low interest rate environment that has resulted in declining year-over-year average yields on the Company’s loan portfolio. Average interest-earning assets were $2.26 billion in the second quarter of 2016 compared to $2.08 billion in the year ago quarter and $2.21 billion in the first quarter of 2016. Net interest recoveries on previously charged-off loans totaled $0.13 million in both the second quarter of 2016 and 2015.

For the first six months of 2016, net interest income totaled $39.4 million, an increase of $2.6 million, or 7.1% from 2015. The Company’s net interest margin for the first six months of 2016 was 3.57% compared to 3.60% in 2015. The increase in net interest income for the first six months of 2016 is due to an increase in average interest-earning assets that was only partially offset by a decline in the net interest margin. Net interest recoveries on previously charged-off loans totaled $0.68 million and $0.18 million for the first six months of 2016 and 2015, respectively.

Non-interest income totaled $9.6 million and $17.4 million, respectively, for the second quarter and first six months of 2016, compared to $11.0 million and $19.9 million in the respective comparable year ago periods.

Interchange income totaled $2.0 million and $3.9 million for the second quarter and first six months of 2016, respectively, representing decreases of $0.3 million and $0.5 million, respectively, over the year ago comparative periods. The decrease in interchange income in 2016 as compared to 2015 primarily results from lower incentives under the Company’s Debit Brand Agreement. In addition, although transaction volumes increased for both the second quarter and first half of 2016 versus 2015, interchange income declined, primarily due to a higher mix of debit (PIN-based) versus credit (signature-based) transactions.

Net gains on mortgage loans were $2.5 million in the second quarter of 2016, compared to $1.8 million in the year-ago quarter. For the first six months of 2016, net gains on mortgage loans totaled $4.2 million compared to $3.9 million in 2015. Although mortgage loan origination and sales volumes have decreased in 2016 principally due to a decline in refinance volume, net gains on mortgage loans have increased due primarily to wider primary-to-secondary market pricing spreads that has resulted in improved profit margins on mortgage loan sales.

Mortgage loan servicing generated a loss of $0.3 million and income of $1.5 million in the second quarters of 2016 and 2015, respectively. The quarterly comparative variance is due primarily to the change in the impairment reserve (a $0.6 million impairment charge in the second quarter of 2016 as compared to a $1.2 million recovery of previously recorded impairment charges in the year-ago quarter). For the first six months of 2016, mortgage loan servicing generated a loss of $1.3 million compared to income of $1.0 million in 2015. The year-to-date comparative variance is also due primarily to the change in the impairment reserve. Capitalized mortgage loan servicing rights totaled $10.3 million at June 30, 2016 compared to $12.4 million at Dec. 31, 2015. As of June 30, 2016, the Company serviced approximately $1.64 billion in mortgage loans for others on which servicing rights have been capitalized.

Non-interest expenses totaled $20.9 million in the second quarter of 2016, compared to $21.6 million in the year-ago period. For the first six months of 2016, non-interest expenses totaled $42.9 million versus $43.7 million in 2015. Several categories of expenses declined in 2016 as compared to the year ago period, reflecting the Company’s ongoing efforts to reduce non-interest expenses and improve its efficiency ratio.

The Company recorded an income tax expense of $2.6 million and $4.6 million in the second quarter and first six months of 2016, respectively. This compares to an income tax expense of $2.6 million and $4.4 million in the second quarter and first six months of 2015, respectively. The second quarter and year-to-date 2016 income tax expense was reduced by a credit of approximately $0.3 million due to the adoption of ASU 2016-09.

Asset Quality

Commenting on asset quality, President and CEO Kessel added: “We continue to make progress in further improving asset quality, as evidenced by declines in non-performing assets and loan net charge-offs. In addition, thirty- to eighty-nine day delinquency rates at June 30, 2016 were 0.08% for commercial loans and 0.67% 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 Type6/30/201612/31/20156/30/2015
(Dollars in thousands)
Commercial$3,710 $3,572 $4,233
Consumer/installment 905 972 1,174
Mortgage 6,264 6,174 6,912
Payment plan receivables(2) 18 5 18
Total$10,897 $10,723 $12,337
Ratio of non-performing loans to total portfolio loans 0.69% 0.71% 0.85%
Ratio of non-performing assets to total assets 0.67% 0.74% 0.73%
Ratio of the allowance for loan losses to non-performing loans 208.42% 210.48% 199.29%

(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 are up slightly from Dec. 31, 2015 and have declined by $1.4 million, or 11.7%, since June 30, 2015. The year-over-year decline in non-performing loans primarily reflects loan net charge-offs, pay-offs, negotiated transactions and the migration of loans into ORE. ORE and repossessed assets totaled $5.6 million at June 30, 2016, compared to $7.2 million at Dec. 31, 2015.

The provision for loan losses was a credit of $0.7 million and $0.1 million in the second quarters of 2016 and 2015, respectively. The provision for loan losses was a credit of $1.3 million and $0.8 million in the first six months of 2016 and 2015, 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 mix, levels of non-performing and classified loans and loan net charge-offs. The Company recorded loan net recoveries of $0.95 million (0.24% annualized of average loans) and $0.04 million (0.01% annualized of average loans) in the second quarters of 2016 and 2015, respectively. For the first six months of 2016 and 2015, the Company recorded loan net recoveries of $1.4 million (0.18% annualized of average loans) and loan net charge-offs of $0.6 million (0.09% of average loans), respectively. The year-to-date improvement in 2016 was concentrated in commercial loans and mortgage loans. At June 30, 2016, the allowance for loan losses totaled $22.7 million, or 1.44% of portfolio loans, compared to $22.6 million, or 1.49% of portfolio loans, at Dec. 31, 2015.

Balance Sheet, Liquidity and Capital

Total assets were $2.45 billion at June 30, 2016, an increase of $43.6 million from Dec. 31, 2015. Loans, excluding loans held for sale, were $1.58 billion at June 30, 2016, compared to $1.52 billion at Dec. 31, 2015. The commercial loan total of $792.0 million at June 30, 2016, included $6.7 million of inadvertent commercial deposit customer overdrafts that were cleared on July 1, 2016.

Deposits totaled $2.13 billion at June 30, 2016, an increase of $42.3 million from Dec. 31, 2015. The increase in deposits is primarily due to growth in checking, savings and time account balances.

Cash and cash equivalents totaled $61.0 million at June 30, 2016, versus $85.8 million at Dec. 31, 2015. Securities available for sale totaled $599.8 million at June 30, 2016, versus $585.5 million at Dec. 31, 2015. This $14.3 million increase is primarily due to the purchase of corporate securities, asset-backed securities, and municipal securities during the first six months of 2016.

Total shareholders’ equity was $246.9 million at June 30, 2016, or 10.07% of total assets. Tangible common equity totaled $244.8 million at June 30, 2016, or $11.49 per share. The Company’s wholly owned subsidiary, Independent Bank, remains significantly above “well capitalized” for regulatory purposes with the following ratios:

Well
Capitalized
Regulatory Capital Ratios6/30/201612/31/2015Minimum
Tier 1 capital to average total assets 9.87% 10.23% 5.00%
Tier 1 common equity to risk-weighted assets 13.87% 14.43% 6.50%
Tier 1 capital to risk-weighted assets 13.87% 14.43% 8.00%
Total capital to risk-weighted assets 15.12% 15.69% 10.00%

Share Repurchase Plan

As previously announced, on Jan. 21, 2016, the Board of Directors of the Company authorized a share repurchase plan. Under the terms of the original 2016 share repurchase plan, the Company is authorized to buy back up to 5% of its outstanding common stock. Also as previously announced, on Apr. 26, 2016 the Board of Directors of the Company authorized a $5.0 million expansion of the 2016 share repurchase plan. The repurchase plan is authorized to last through Dec. 31, 2016.

Thus far in 2016 (through July 26, 2016), the Company had repurchased 1,153,136 shares of its common stock at a weighted average price of $14.62 per share. As of July 26, 2016, the Company had approximately $4.41 million remaining under the 2016 share repurchase plan. The Company did not have any share repurchases that settled in the second quarter of 2016.

Earnings Conference Call
Brad Kessel, President and CEO, and Rob Shuster, CFO, will review second quarter 2016 results in a conference call for investors and analysts beginning at 11:00 am ET on Thursday, July 28, 2016.

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 event site/URL: http://services.choruscall.com/links/ibcp160728.

A playback of the call can be accessed by dialing 1-877-344-7529 (Conference ID # 10088305). The replay will be available through Aug. 4, 2016.

About Independent Bank Corporation

Independent Bank Corporation (NASDAQ:IBCP) is a Michigan-based bank holding company with total assets of approximately $2.5 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 title services. 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: 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 “anticipates,” “believes,” “contemplates,” “feels,” “expects,” “estimates,” “seeks,” “strives,” “plans,” “intends,” “outlook,” “forecast,” “position,” “target,” “mission,” “assume,” “achievable,” “potential,” “strategy,” “goal,” “aspiration,” “opportunity,” “initiative,” “outcome,” “continue,” “remain,” “maintain,” “on course,” “trend,” “objective,” “looks forward” and variations of such words and similar expressions, or future or conditional verbs such as “will,” “would,” “should,” “could,” “might,” “can,” “may” or similar expressions, as they relate to Independent Bank Corporation or its management, are intended to identify forward-looking statements. These forward-looking statements are predicated on the beliefs and assumptions of Independent Bank Corporation's management 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 or past operations, products or services, and forecasts of Independent Bank Corporation's revenue, earnings or other measures of economic performance, including statements of profitability, business segments and subsidiaries, and estimates of credit trends. Such statements reflect the view of Independent Bank Corporation's management as of this date with respect to future events and are subject to risks and uncertainties. Should one or more of these risks materialize or should underlying beliefs or assumptions prove incorrect, Independent Bank Corporation's actual results could differ materially from those discussed. 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. Independent Bank Corporation cautions that the foregoing list of factors is not exclusive. For discussion of factors that may cause actual results to differ from expectations, please refer to our filings with the Securities and Exchange Commission. In particular, please refer to “Item 1A. Risk Factors” in Independent Bank Corporation's Annual Report on Form 10-K for the year ended December 31, 2015. 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
June 30, December 31,
2016 2015
(unaudited)
(In thousands, except share
amounts)
Assets
Cash and due from banks $34,542 $54,260
Interest bearing deposits 26,488 31,523
Cash and Cash Equivalents 61,030 85,783
Interest bearing deposits - time 8,560 11,866
Trading securities 212 148
Securities available for sale 599,755 585,484
Federal Home Loan Bank and Federal Reserve Bank stock, at cost 15,229 15,471
Loans held for sale, carried at fair value 31,713 27,866
Loans
Commercial 792,000 748,398
Mortgage 506,021 500,454
Installment 252,712 231,599
Payment plan receivables 31,389 34,599
Total Loans 1,582,122 1,515,050
Allowance for loan losses (22,712) (22,570)
Net Loans 1,559,410 1,492,480
Other real estate and repossessed assets 5,572 7,150
Property and equipment, net 41,044 43,103
Bank-owned life insurance 54,990 54,402
Deferred tax assets, net 35,257 39,635
Capitalized mortgage loan servicing rights 10,331 12,436
Vehicle service contract counterparty receivables, net 3,036 7,229
Other intangibles 2,106 2,280
Accrued income and other assets 24,451 23,733
Total Assets $2,452,696 $2,409,066
Liabilities and Shareholders' Equity
Deposits
Non-interest bearing $678,489 $659,793
Savings and interest-bearing checking 997,102 988,174
Reciprocal 49,355 50,207
Time 403,346 387,789
Total Deposits 2,128,292 2,085,963
Other borrowings 11,797 11,954
Subordinated debentures 35,569 35,569
Vehicle service contract counterparty payables 1,066 797
Accrued expenses and other liabilities 29,049 23,691
Total Liabilities 2,205,773 2,157,974
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:
21,315,881 shares at June 30, 2016 and 22,251,373 shares at December 31, 2015 324,268 339,462
Accumulated deficit (74,062) (82,334)
Accumulated other comprehensive loss (3,283) (6,036)
Total Shareholders’ Equity 246,923 251,092
Total Liabilities and Shareholders’ Equity $2,452,696 $2,409,066

INDEPENDENT BANK CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
Three Months Ended Six Months Ended
June 30, March 31, June 30, June 30,
2016 2016 2015 2016 2015
(unaudited)
Interest Income (In thousands, except per share amounts)
Interest and fees on loans $18,208 $18,556 $17,751 $36,764 $34,990
Interest on securities
Taxable 2,480 2,244 1,869 4,724 3,627
Tax-exempt 282 248 222 530 439
Other investments 297 306 289 603 627
Total Interest Income 21,267 21,354 20,131 42,621 39,683
Interest Expense
Deposits 1,152 1,114 967 2,266 1,974
Other borrowings 485 477 463 962 917
Total Interest Expense 1,637 1,591 1,430 3,228 2,891
Net Interest Income 19,630 19,763 18,701 39,393 36,792
Provision for loan losses (734) (530) (134) (1,264) (793)
Net Interest Income After Provision for Loan Losses 20,364 20,293 18,835 40,657 37,585
Non-interest Income
Service charges on deposit accounts 3,038 2,845 3,117 5,883 5,967
Interchange income 1,976 1,878 2,240 3,854 4,382
Net gains (losses) on assets
Mortgage loans 2,529 1,642 1,784 4,171 3,923
Securities 185 162 (33) 347 52
Mortgage loan servicing (334) (978) 1,452 (1,312) 1,032
Title insurance fees 253 288 337 541 593
Other 1,933 1,972 2,090 3,905 4,000
Total Non-interest Income 9,580 7,809 10,987 17,389 19,949
Non-Interest Expense
Compensation and employee benefits 12,000 11,881 11,791 23,881 23,576
Occupancy, net 1,856 2,207 2,040 4,063 4,459
Data processing 1,936 2,101 2,027 4,037 3,957
Furniture, fixtures and equipment 965 984 965 1,949 1,917
Communications 722 888 694 1,610 1,430
Loan and collection 571 825 967 1,396 2,122
Advertising 478 477 448 955 932
Legal and professional 345 413 453 758 833
FDIC deposit insurance 331 334 351 665 694
Interchange expense 267 266 289 533 580
Credit card and bank service fees 198 187 203 385 405
Vehicle service contract counterparty contingencies (1) 30 30 29 59
Provision for loss reimbursement on sold loans - (15) 45 (15) (24)
Costs (recoveries) related to unfunded lending commitments (80) 13 4 (67) 20
Net gains on other real estate and
repossessed assets (159) (6) (139) (165) (178)
Other 1,466 1,460 1,411 2,926 2,948
Total Non-interest Expense 20,895 22,045 21,579 42,940 43,730
Income Before Income Tax 9,049 6,057 8,243 15,106 13,804
Income tax expense 2,611 1,957 2,624 4,568 4,404
Net Income $6,438 $4,100 $5,619 $10,538 $9,400
Net Income Per Common Share
Basic $0.30 $0.19 $0.25 $0.49 $0.41
Diluted $0.30 $0.19 $0.24 $0.48 $0.40

INDEPENDENT BANK CORPORATION AND SUBSIDIARIES
Selected Financial Data
June 30, March 31, December 31, September 30, June 30,
2016 2016 2015 2015 2015
(unaudited)
(dollars in thousands except per share data)
Three Months Ended
Net interest income$19,630 $19,763 $19,353 $18,841 $18,701
Provision for loan losses (734) (530) (1,677) (244) (134)
Non-interest income 9,580 7,809 10,062 10,119 10,987
Non-interest expense 20,895 22,045 22,841 21,879 21,579
Income before income tax 9,049 6,057 8,251 7,325 8,243
Income tax expense 2,611 1,957 2,681 2,278 2,624
Net income$6,438 $4,100 $5,570 $5,047 $5,619
Basic earnings per share$0.30 $0.19 $0.25 $0.22 $0.25
Diluted earnings per share 0.30 0.19 0.25 0.22 0.24
Cash dividend per share 0.08 0.08 0.08 0.06 0.06
Average shares outstanding 21,280,926 21,751,108 22,314,319 22,673,033 22,899,040
Average diluted shares outstanding 21,639,077 22,061,937 22,629,107 23,132,682 23,440,478
Performance Ratios
Return on average assets 1.06 % 0.68 % 0.93 % 0.86 % 0.98 %
Return on average common equity 10.66 6.70 8.80 7.84 8.86
Efficiency ratio 71.27 79.67 76.77 78.22 71.97
As a Percent of Average Interest-Earning Assets
Interest income 3.81 % 3.90 % 3.84 % 3.85 % 3.90 %
Interest expense 0.29 0.29 0.28 0.27 0.28
Net interest income 3.52 3.61 3.56 3.58 3.62
Average Balances
Loans$1,577,026 $1,549,789 $1,492,687 $1,474,269 $1,453,416
Securities available for sale 591,648 563,815 598,961 553,909 560,742
Total earning assets 2,258,536 2,210,586 2,178,624 2,112,381 2,082,967
Total assets 2,447,910 2,420,855 2,385,459 2,322,111 2,293,446
Deposits 2,131,788 2,103,477 2,061,178 1,995,035 1,965,029
Interest bearing liabilities 1,506,335 1,497,584 1,459,837 1,409,499 1,409,309
Shareholders' equity 242,800 246,086 251,123 255,463 254,483
End of Period
Capital
Tangible common equity ratio 9.99 % 9.60 % 10.34 % 10.48 % 11.02 %
Average equity to average assets 9.92 10.17 10.93 11.07 11.11
Tangible book value per share$11.49 $11.22 $11.18 $11.11 $11.06
Total shares outstanding 21,315,881 21,261,830 22,251,373 22,548,562 22,769,416
Selected Balances
Loans$1,582,122 $1,538,982 $1,515,050 $1,467,999 $1,450,007
Securities available for sale 599,755 589,500 585,484 604,662 557,695
Total earning assets 2,264,079 2,285,331 2,187,408 2,179,714 2,078,444
Total assets 2,452,696 2,488,367 2,409,066 2,394,861 2,288,954
Deposits 2,128,292 2,154,706 2,085,963 2,060,962 1,961,417
Interest bearing liabilities 1,497,169 1,530,607 1,473,693 1,468,393 1,392,185
Shareholders' equity 246,923 240,792 251,092 252,980 254,375


Contact: William B. Kessel, President and CEO, 616.447.3933 Robert N. Shuster, Chief Financial Officer, 616.522.1765

Source:Independent Bank Corporation